UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 (Mark
One)
 
 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
 
 Or
 
  ̈ 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: 000-26027
 
 SMART ENERGY SOLUTIONS, INC.
 
 (Exact
Name of Registrant as Specified in its Charter)
 
 Nevada
                
                20-3353835(State
      or Other Jurisdiction of Incorporation)
                
                (IRS
      Employer Identification No.)
 
 210 West Parkway, #7, Pompton Plains, NJ
07444
 
 (Address
of Principal Executive Offices, Zip Code)
 
 (973) 248-8008
 
 (Registrant’s
Telephone Number)
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to section 12(g) of the Act:  Common Stock, $0.001
par value
 
 Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.                                                                                                                                                    
Yes  ̈No x
 
 Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.                                                                                                                                   
     
          Yes  ̈No
x
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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
xNo  ̈
 
 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.                           
x
  
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
 
 Large
      accelerated filer  ̈
                    Accelerated
      filer  ̈Non-accelerated
      filer ̈
                    Small
      reporting companyx
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).                                                                                                                                                            
Yes  ̈No x
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of March 31, 2009 was $3,305,079. [aggregate
market value of common stock held by non-affiliates computed by reference to
price last sold, or the average bid and ask, as of the last day of
3/331/09
 The
number of shares outstanding of the Registrant’s common stock as of March 31,
2009 was 112,036,585.
 
 Documents
Incorporated By
Reference:       None
  ii
  TABLE
OF CONTENTS
 
 Need page
numbers
 PagePART
      I
                  1Item
      1. Business
                  1Item
      1A.  Risk Factors
                  5Item
      1B.  Unresolved Staff CommentsItem
      2. Properties
                  5Item
      3. Legal Proceedings
                  5Item
      4. Submission of Matters to a Vote of Security Holders
                  5PART
      II
                  6Item
      5.  Market for Common Equity, Related Stockholder Matters and
      Purchases of Equity Securities
                  6Item
      6. Selected Financial Data
                  13Item
      7. Management’s Discussion and Analysis or Financial Condition and Results
      of Operations
                  13Item
      8.  Financial Statements and Supplementary Data
                  16Item
      9.  Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
                  16Item
      9A. Controls and Procedures
                  16Item
      9A(T). Controls and Procedures
                  18Item
      9AB.  Other Information
                  19PART
      III
                  19Item
      10. Directors, Executive Officers and Corporate Governance
                  19Item
      11. Executive Compensation
                  21Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                  27Item
      13. Certain Relationships and Related Transactions and Director
      Independence.
                  29Item
      14. Principal Accountant Fees and Services
                  32PART
      IVItem
      15.  Exhibits, Financial Statement Schedules
                  33
  iii
  PART
I.
 
 As used
in this Form 10-K, references to the "Company," the "Registrant," "we," “our” or
"us" refer to Smart Energy Solutions, Inc. unless the context otherwise
indicates.
 
 Forward-Looking
Statements
 
 This Annual Report on Form 10-K
contains forward-looking information. Forward-looking information includes
statements relating to future actions, prospective products, future performance
or results of current or anticipated products, sales and marketing efforts,
costs and expenses, interest rates, outcome of contingencies, financial
condition, results of operations, liquidity, business strategies, cost savings,
objectives of management of the Company and other matters.  The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking information to encourage companies to provide prospective
information about themselves without fear of litigation so long as that
information is identified as forward-looking and is accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the information.
Forward-looking information may be included in this Annual Report on
Form 10-K or may be incorporated by reference from other documents filed
with the Securities and Exchange Commission by the Company. You can find many of
these statements by looking for words including, for example, “believes,”
“expects,” “anticipates,” “estimates” or similar expressions in this Annual
Report on Form 10-K or in documents incorporated by reference in this
Annual Report on Form 10-K.  Except as otherwise required by
applicable law, the Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information or
future events.
 
 The Company has based the
forward-looking statements relating to the Company’s operations on management’s
current expectations, estimates and projections about the Company and the
industry in which it operates. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that we cannot
predict. In particular, we have based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
the Company’s actual results may differ materially from those contemplated by
these forward-looking statements. Any differences could result from a variety of
factors, including, but not limited to the following:
 -
              the
      Company’s ability to manufacture, market, and price the Battery Brain
      product;-
              the
      Company’s ability to hire and maintain the personnel necessary to run the
      operations of the Company;-
              the
      level of consumer spending for the Company’s product;-
              the
      success of the Company’s marketing and promotion programs in obtaining
      market acceptance for its product;-
              market
      conditions affecting the prices of the Company’s product;
    and-
              responsiveness
      of both the trade and consumers to the Company’s new product and marketing
      and promotion programs.
 
 Item
1.  Business
 
 Our
History
 
 The
Company was initially formed in 1999 as a Utah corporation under the name
Datigen.com, Inc.  On August 25, 2005, the Company changed its state
of incorporation from Utah to Nevada by the merger of the Company with and into
its wholly owned subsidiary, Smart Energy Solutions, Inc., a Nevada
corporation.  As a result of such merger, the Company’s name was
changed to Smart Energy Solutions, Inc. in order to better reflect the Company’s
business operations.
  1
  Until
November 24, 2004, the Company had been involved in various activities,
including development and marketing of various internet and internet related
products and services, investment in trust deed notes secured by real property,
and providing concrete cutting and finishing services to persons seeking to
comply with certain provisions of the American Disability Act of 1991 that
require the removal of “trips hazards” from public sidewalks and
ramps.  On November 24, 2004, a majority of the Company’s outstanding
common stock was purchased by Amir Uziel and six unaffiliated foreign
individuals from certain of the Company’s shareholders, including its then Chief
Executive Officer, Joseph Ollivier.
 
 Following
such change in control, the Company ceased all of its prior business
operations.  From November 24, 2004 until March 23, 2005, the Company
did not have any business operations.
 
 On March
23, 2005, the Company acquired from Purisys, Inc., a New Jersey corporation, the
intellectual property rights and certain other assets relating to a product
known as the Battery Brain.  The Battery Brain is a device that is
attached to a motor vehicle battery for the purpose of protecting the vehicle
from battery failure and theft.  On such date, the Company, Purisys
and Aharon Y. Levinas executed an Asset Purchase Agreement (the “Agreement”)
pursuant to which the Company purchased all the intellectual property relating
to the Battery Brain product and the goodwill associated therewith and certain
of the equipment relating to the product. The purchased assets did not include
the inventory which existed as of March 23, 2005 or the molds for the Battery
Brain (which were located in Italy and China), which were purchased by us for
$66,487.
  The
consideration paid by the Company for the Battery Brain assets included (i) the
issuance to Mr. Levinas, the sole shareholder of Purisys, of shares of our
common stock representing twenty (20%) percent of the issued and outstanding
shares of common stock, assuming new investments in the Company in the aggregate
amount of $1,000,000, and (ii) a payment of $100,000. Pursuant to the Agreement,
10,421,750 shares of our common stock were issued to Mr. Levinas in August
2005.  Pursuant to the Agreement, we agreed that if we raised $400,000
prior to June 23, 2005 we would issue to Mr. Levinas additional shares of our
common stock in an amount equal to 20% of the issued and outstanding shares of
the Company; and if less than $400,000 is raised, then such share amount shall
be pro rated based on the actual amount invested. Since we successfully raised
more than the $400,000 in a private placement of units of our securities we were
not required to issue additional shares to Mr. Levinas. Pursuant to the
Agreement, we also agreed to use our best efforts within the next two years to
(a) consummate an equity raise of not less than $1,500,000 dollars at a
post-money valuation of not less than $12,000,000; provided, that all equity
raises within 120 days after March 23, 2005 which are based on a post-money
valuation which is $10,500,000 or greater, shall be counted toward the
$1,500,000; or (b) generate revenue from the Battery Brain product in an
aggregate amount of at least $2,000,000. If we failed to achieve either (a) or
(b) at any time on or prior to March 23, 2007, then Mr. Levinas would be
entitled to receive additional shares of common stock equal to 20% of the
outstanding share capital on a fully-diluted basis (calculated as of said
date).  As further discussed below, by November 2005 we had raised an
aggregate of $2,749,000 in a private placement of units of our securities;
therefore, we achieved our obligation to consummate an equity raise of not less
than $1,500,000 and Mr. Levinas is no longer entitled to receive the additional
shares pursuant to the Agreement.
 
 We agreed
with Mr. Levinas to negotiate, in good faith, an agreement regarding the
registration rights associated with the shares issued to Mr. Levinas pursuant to
the Agreement, providing that Mr. Levinas is entitled to equal registration
rights with our controlling shareholders, pro rata in accordance with their
holdings, subject to a lock-up agreement, but have not executed a registration
rights agreement with Mr. Levinas with respect to these shares as of the date of
this report.
 
 Pursuant
to the terms of our March 23, 2005 asset purchase agreement with Purisys, Inc.
and Mr. Levinas, our Board of Directors shall consist of five (5) members, and
Mr. Levinas is entitled to appoint 40% of the directors.   If for
any reason we cease to manufacture, sell or otherwise cease to be involved in
the Battery Brain product, then Mr. Levinas shall have the right to purchase the
Battery Brain product from us; the price and other terms of such right shall be
negotiated.
  2
  The only
liabilities we assumed in the transaction are (i) the warranties and service of
any Battery Brain products sold prior to the execution and delivery of the
Agreement, (ii) any potential claims made by a person who alleges that he
assisted in developing the Battery Brain product and (iii) any taxes incurred as
a result of the Agreement.
 Following
the purchase of the Battery Brain assets, the Company focused on building a
management team, establishing operations, and entering into contractual
arrangements for the manufacture and distribution of Battery Brain
products.  The Company presently engages in the manufacturing,
distribution, and sale of Battery Brain products.
 
 Our Principal Products and
Markets
 
 The
Company’s only products are its Battery Brain products.  The Battery
Brain is a small, box-shaped device, whose size and weight is comparable to that
of a cellular phone.  It is attached to the battery of a motor vehicle
and performs two principal functions for the motor vehicle: prevention of
battery failure and protection from theft.  If the Battery Brain is
attached to a car battery, and the car’s operator leaves the lights on while the
car is turned off, the Battery Brain will prevent the battery from failing, so
that the car can be started again without having to recharge its
battery.  It works by preventing a battery from becoming drained below
the level necessary for it to function.  The Battery Brain is able to
detect when the battery has reached such point and, upon such detection, it
automatically disconnects the power from the battery so that the battery will
not be drained any further.  In addition, the Battery Brain protects
the vehicle from being stolen by stopping the battery from powering the engine
while the car is turned off, thereby preventing a potential thief from “hot
wiring” the engine, a procedure commonly used by thieves to turn on the
vehicle’s engine without an ignition key.
 Different
versions of the Battery Brain are available, each of which is intended to be
used with a different type of motor vehicle.  As a result, the Battery
Brain can be used on all types of motor vehicles, from passenger cars to light
trucks to heavy trucks, buses, tractors, RVs, motorcycles, boats, handicap
vehicles or any other motor vehicles that rely on batteries.
 
 Our
R&D has develop software and switching applications that can be used to
monitor energy storage for alternative energy applications in wind, solar and
hydrogen generation as well as a controlled interface to the power grid. This
application uses our processor and high capacity switching technology to provide
a intelligent switching capability for energy storage and
generation.
 
 We have
also developed an application that allows our technology to used as an
intelligent circuit breaker providing enhanced safety against electrical shorts
that are responsible for vehicle fires. This application monitors the current
being used in vehicles when they are moving or when they are parked and will
alert the driver to a short condition immediately or if the vehicle is parked
disconnect the source of energy before an electrical fire can
start.
 
 Sources and Availability of
Raw Materials; Manufacturing Operations;
 
 The
Company is not dependent upon a small number of suppliers for the raw materials
used in the production of the Battery Brain as it expects to have alternative
sources available and not to encounter any difficulties in obtaining such raw
materials. The Battery Brain is manufactured on behalf of the Company by third
party manufacturers.  The Company has expanded its manufacturing
capabilities by engaging additional third party manufacturing facilities in
China and Israel. Such third party arrangements give the Company access to state
of the art manufacturing facilities, they maintain strict protection of our
proprietary property, they enable the Company to meet the strictest regulation,
and they provide the necessary flexibility to meet the growing demands in each
market segment.
  3
 
 Markets; Distribution
Methods
 
 We will
not be dependent upon a small number of customers, as we intend to market the
Battery Brain to all users of motor vehicles.  The Company’s
activities have been focused on the following nine market segments, each of
which have unique requirements: Automotive Retail; Automotive Dealers;
Automotive Original Equipment Manufacturers; Automotive Specialty; Fleets;
Military; Heavy Truck/Bus; Motor Home/Recreational Vehicle; and
Marine.
 
 The
Company has contracted with various distributors for distribution of the Battery
Brain products in the United States, Canada, United Kingdom, France, Mexico,
Asia and Israel.
 
 The
Company has been approved as a supplier to the U.S. General Services
Administration and was awarded a GSA contract on February 1, 2007. This
contract authorizes the Company to sell products electronically via the
Internet to all executive agencies of the US government, contractors working for
the Federal government, fleet managers and the District of Columbia. On
January 31, 2007 the Company and the U.S. Department of Defense announced that
the U.S. Army has begun testing the Battery Brain on their Striker Tactical
Vehicle.  The military designed Battery Brain has passed all phases of
testing to date and the U.S. Army is scheduled to complete testing in the
2nd
quarter of 2009
 
 On
October 25, 2007 the Company executed a distributorship agreement with All Start
Battery. Pursuant to this agreement, All Start was appointed as the exclusive
distributor of the Battery Brain products to new car dealers located in
California.  The term of the agreement is for a three year period
expiring on October 24, 2010 and may be terminated if minimum sales targets are
not achieved.  The term shall be automatically renewed for successive
two year periods unless terminated by the parties.  Either party may
terminate the agreement without cause upon 30 days’ prior notice. This agreement
is still in effect with 13,000 units scheduled for delivery in April
2009.
 
 On March
17, 2008 we executed a distributorship agreement with OnGuard Dealer Services,
LLC. Pursuant to the agreement, OnGuard was appointed as the exclusive
distributor of the Battery Brain products to new and used car dealers in all of
the United States other than California.  The agreement has a term of
ten years and renews automatically for successive one year
periods.  Either party may terminate the agreement in the event of a
breach or a change in the majority ownership of the Company.  The
agreement establishes sales targets and allows us to terminate the exclusivity
of the distributorship if these targets are not met and take other remedial
actions.  The agreement also provides that we will grant OnGuard
1,000,000 warrants at an exercise price of $.50 with a term of five years, if
OnGuard achieves the minimum sales threshold of one hundred fifty thousand units
in the first year of the term. An additional 1,000,000 warrants will be granted
if OnGuard achieves minimum sales threshold of three hundred thousand units over
two years from the date of the agreement. OnGuard will be granted a total of
3,000,000 warrants should it achieve a sales threshold of seven hundred fifty
thousand units over two years. Agreement is terminated On Guard was unable to
make payments on their orders and the produt was returned to Smart Energy
Solutions Inc.
 
 The
Company also sells units of the Battery Brain to other commercial enterprises,
including the following; automotive retail distributors
like  Keystone, Crutchfield and O’Reilly Auto Parts; marine
distributors, including , Overton and Keller Marine;  recreational
vehicle and motor home distributors, including Coast and Stag Parkway; truck
distributors, including Camping World,  Truck Pro and ; and
international distributors in Italy, Belgium, the Netherlands, Sweden, Mexico,
Israel, the Philippines and the United Kingdom.
  4
 
 Competition
 
 The
Company believes that it has a competitive advantage over the producers of
products which the market might consider similar to the Battery
Brain.  We feel that the Battery Brain is differentiated from similar
products offered by such competitors in various important ways.  The
Battery Brain is the only product of its kind that will protect vehicles from
battery failure due to the operation of any electrical accessory, including
headlights, radios, trunk lights, interior lights, door lights, or due to shorts
circuits in the electrical system, and also provide vehicle anti-theft
capability.  Similar products offered by competitors protect vehicles
from battery failure due only to the operation of the headlights.  The
Battery Brain is also easier to install than other competitive
products.  Further, in order to reset the load (the energy source),
most other competitive products require the operator of the vehicle to lift the
hood, locate the device, and press a reset knob located on the device. The
Battery Brain can be operated via remote control. New products being delivered
in the First Quarter 2009 have programmable capability so that unique setting
can be set for fleet applications or vehicle specific requirements.
 
 Intellectual
Property
 
 Our
intellectual property rights in the Battery Brain products are protected by a US
patent, which was issued on June 1, 2004 and expires on July 23,
2022.  On December 7, 2007 we applied for a provisional patent with
respect to our new Battery Switch products, which incorporate electronic circuit
technology and will enhance our current product line. We have also applied for
provisional patents on additional battery applications and for a World Wide
patent covering some of our new proprietary electronic recognition
software.
 
 Employees
 
 As of
March 25, 2009 the Company had Three employees, of which all are employed full
time.
 
 Item
1A.  Risk Factors
 Smaller
reporting companies are not required to provide the information required by this
item.
 Item
2.  Properties
 
 The
Company leases its executive offices and warehouse facilities, which together
consist of approximately 5,000 square feet, at 210 West Parkway, #7, Pompton
Plains, NJ 07444, pursuant to a lease with a term of one year commencing on 1,
2007.  The rent due under the lease is $5,500 per
month.  The initial term of the lease will be automatically renewed
for an additional two year term unless, at least 90 days prior to the expiration
of the initial term, the Company notifies the landlord that it does not desire
to renew the term.  The Company believes that its current office and
warehouse space will be adequate for the foreseeable future.
 
 Item
3.  Legal Proceedings
 
 The
Company is not a party to, and the Company’s property is not the subject of, any
pending legal proceedings involving claims for damages which, exclusive of
interest and costs, exceed 10% of the current assets of the
Company.  There are no pending legal proceedings in which any
director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or any associate of any such director, officer, affiliate of the Company, or
security holder is a party adverse to the Company or has a material interest
adverse to the Company.
 
 The
Company suit against Superior Automotive Company was settled on December 5,
2007. The agreement with Superior was terminated all product held by Superior
Automotive was returned and Superior was released from any obligations to pay
outstanding charges.
 
 Item
4.  Submission of Matters to a Vote of Security Holders
 
 No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
  5
 
 PART
II
 
 Item
5.  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
 
 Market
Information
 
 The
Company’s common stock has been traded on the Over-The-Counter Bulletin Board
sponsored by the Financial Industry Regulatory Authority, Inc., Inc. under the
symbol SMGY.OB.  The following table sets forth the range of quarterly
high and low closing bids for the common stock as reported on
http://finance.yahoo.com during the years ending December 31, 2008 and December
31, 2007:
 
 Financial Quarter
                                    
                                    Bid Information*Year
                                    
                                    Quarter
                                    
                                    High Bid
                                    
                                    
                                    Low Bid2008
                                    
                                    Fourth
      Quarter
                                    
                                    $
                                    0.10
                                    
                                    
                                    $
                                    0.01Third
      Quarter
                                    
                                    $
                                    0.17
                                    
                                    
                                    $
                                    0.07Second
      Quarter
                                    
                                    $
                                    0.23
                                    
                                    
                                    $
                                    0.14First
      Quarter
                                    
                                    $
                                    0.33
                                    
                                    
                                    $
                                    0.172007
                                    
                                    Fourth
      Quarter
                                    
                                    $
                                    0.50
                                    
                                    
                                    $
                                    0.25Third
      Quarter
                                    
                                    $
                                    0.60
                                    
                                    
                                    $
                                    0.49Second
      Quarter
                                    
                                    $
                                    0.62
                                    
                                    
                                    $
                                    0.54First
      Quarter
                                    
                                    $
                                    0.65
                                    
                                    
                                    $
                                    0.41
 
 *The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
 
 Holders
 
 On March
25, 2009, there were approximately 189 holders of record of the Company’s common
stock.
 
 Dividends
 
 The
Company has not declared or paid any cash dividends on its common stock nor does
it anticipate paying any in the foreseeable future. Furthermore, the Company
expects to retain any future earnings to finance its operations and expansion.
The payment of cash dividends in the future will be at the discretion of its
Board of Directors and will depend upon its earnings levels, capital
requirements, any restrictive loan covenants and other factors the Board
considers relevant.
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
 
 The
following table presents certain information as of the end of December 31, 2008
with respect to compensation plans under which equity securities of the Company
are authorized for issuance:
 
 Plan Category
                
                Number
      of Securities to
                  beIssued
      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 Approved by Security Holders
                
                
                0
                
                
                
                0
                
                
                
                0Equity
      Compensation Plans Not Approved by Security Holders
                
                
                11,334,665
                
                
                $
                0.17
                
                
                
                1,000,000Total
                
                
                11,334,665
                
                
                $
                0.17
                
                
                
                1,000,000
  6
 
 2005 Stock Incentive
Plan
 
 On
November 28, 2005, the board of directors resolved to adopt the 2005 Stock
Incentive Plan (the "2005 Stock Plan").  In connection with the
adoption of the 2005 Stock Plan, the Company reserved 1,000,000 shares of common
stock of the Company for future issuance under the plan.  The 2005
Stock Plan superseded all previous equity compensation plans of the
Company.  No equity compensation was awarded under any previous equity
compensation plans.
 
 The
purpose of the 2005 Stock Plan is to provide incentives to attract, retain, and
motivate eligible persons whose present and potential contributions are
important to the success of our Company by offering them an opportunity to
participate in our future performance through awards of restricted stock and
stock bonuses.   The Stock Plan offers directors, officers and
selected key employees, advisors and consultants of the Company an opportunity
to acquire a proprietary interest in the success of the Company, or to increase
such interest, by purchasing shares of the Company’s common
stock.  The 2005 Stock Plan provides both for the direct award or sale
of shares.
 
 The 2005
Stock Plan is to be interpreted and applied by a committee of our Board of
Directors.  The Board’s principal responsibilities are the following:
(i) designate participants; (ii) determine the type or types of stock awards to
be granted to an eligible employee or other individual under the 2005 Stock
Plan; (iii) determine the number of common shares to be covered by awards; (iv)
determine the terms and conditions of any award; (v) determine whether, to what
extent, and under what circumstances awards may be settled or exercised, or
canceled, forfeited or suspended, and the method or methods by which awards may
be settled, exercised, canceled, forfeited or suspended; (vi) determine
requirements for the vesting of awards or performance criteria to be achieved in
order for awards to vest; (vii) determine whether, to what extent and under what
circumstances common shares payable with respect to an award under the 2005
Stock Plan shall be deferred either automatically or at the election of the
holder thereof or of the Board; (viii) interpret and administer the 2005 Stock
Plan and any instrument or agreement relating to, or award made under, the 2005
Stock Plan; (ix) establish, amend, suspend or waive such rules and regulations
and appoint such agents as it shall deem appropriate for the proper
administration of the 2005 Stock Plan; and (x) make any other determination and
take any other action that the Board deems necessary or desirable for the
administration of the 2005 Stock Plan. Unless otherwise expressly provided in
the 2005 Stock Plan, all designations, determinations, interpretations and other
decisions under or with respect to the 2005 Stock Plan or any award shall be
within the sole discretion of the Board, may be made at any time and shall be
final, conclusive and binding upon all persons, including the Company, any
affiliate, any participant, any holder or beneficiary of any award, any
stockholder and any employee. No awards under the 2005 Stock Plan shall be
granted after December 31, 2014.
 
 The 2005
Stock Plan provides that 1,000,000 shares of the Company’s common stock are
reserved for stock awards thereunder.  Stock awards may be granted
only to employees or independent contractors (including, officers and directors
who are also employees) of the Company or of an affiliate of the Company. How
many currently issued, vested, etc?
  7
 
 Individual Equity
Compensation Arrangements
 
 Pursuant
to a Consulting Agreement, dated October 3, 2005 and amended on October 3, 2006,
between the Company and Peter Mateja, our Chief Executive Officer and Director,
the Company granted to Mr. Mateja 3,000,000 stock options, each of which gives
Mr. Mateja the right to purchase one share of the Company's common stock for
$0.15.  Such stock options shall vest pro ratably every three months
over the three year period commencing three months from October 3, 2005. The
vested stock options shall be exercisable until the earlier of five years after
vesting or 365 days after Mr. Mateja's termination.  All remaining
stock options shall automatically vest upon the Company's change in
control.  In lieu of a $50,000 cash bonus he was entitled to pursuant
to the consulting agreement, the Company agreed, on October 3, 2006, to issue to
Mr. Mateja 150,000 shares of common stock and 66,666 stock purchase options,
each of which entitles the holder thereof to purchase one share of common stock
at $0.45.  On July 3, 2008 the company signed a termination agreement
with Peter Mateja that terminated the company’s obligations to Mr. Mateja at the
end of his contract term October 2008. Mr. Mateja would be paid his
salary,expenses and retain his contract options.
 
 On July
29, 2005, the Company issued options to each of its directors - Joseph Bahat,
Jacob Enoch, Amir Uziel, Tamir Levinas, and Aharon Y. Levinas.  Such
options were issued pursuant to a separate letter agreement entered into between
the Company and each director on July 29, 2005.  The terms of each
letter agreement are identical.  Pursuant to the Letter Agreements,
each director agreed to serve as a director of the Company until the next Annual
Meeting of Shareholders.  As compensation for his services, each
director received options to purchase 345,000 shares of the common stock of the
Company for a price of $0.15 per share, exercisable for three years after the
date that the stock options vest.  Such stock options shall vest
quarterly over the three year period commencing three months from the date of
the Letter Agreement, so that 28,750 stock options shall vest every three
months.  In addition, each director shall be paid $4,000 for each year
that he serves as director, payable quarterly in arrears. Each director also
shall be paid $1,000 for each board or committee meeting at which he is
physically present.
 
 On
November 9, 2006, the Company granted an additional 195,000 stock options,
subject to vesting as described below, to each of the following directors:
Aharon Y. Levinas, Tamir Levinas, Jacob Enoch, Joseph Bahat, and Amir
Uziel.  Each such stock option entitles the holder thereof to purchase
one share of common stock for a price of $0.15, exercisable for three years
after the date that the stock option vests.  Such stock options shall
vest quarterly over three years, commencing on November 9, 2006. Mr. Bahat and
Mr. Enoch resigned from the Board of Directors on January 12, 2009 due to time
constraints and other obligations.
 
 Pursuant
to an Employment Agreement, dated May 24, 2005 and amended and restated on
October 25, 2006, between the Company and Edward Braniff, our Chief Financial
Officer, the Company issued to Mr. Braniff options to purchase 1,000,000 shares
of the Company’s common stock at an exercise price of $0.05 per
share.  Such options shall vest pro ratably every three (3) months
over three (3) year period commencing on May 24, 2005.  The vested
options shall be exercisable until the earlier of 5 years after vesting or 365
days after termination of Mr. Braniff’s employment with the
Company.  In addition, during the fiscal year ended December 31, 2006,
Mr. Braniff received a bonus consisting of the following awards: 100,000 shares
of common stock, granted on October 25, 2006; 50,000 stock options (each
entitling Mr. Braniff to purchase one share of common stock for $0.30), granted
on October 25, 2006; and 33,333 stock options (each entitling Mr. Braniff to
purchase one share of common stock for $0.45), granted on December 31, 2006. Mr.
Braniff was also granted 50,000 stock options a month, (each entitling Mr.
Braniff to purchase one share of common stock for $0.25), as an extension of his
employment contract from June 1, 2008.
 
 Pursuant
to an employment agreement, dated March 23, 2005, between the Company and Aharon
Y. Levinas, our Chief Technology Officer, as amended on April 18, 2005 and May
18, 2005, the Company issued to Mr. Levinas 2,650,000 shares of common stock,
which shall vest pro ratably every 3 months over a 3-year period commencing on
April 4, 2005. Upon a change of control of the Company, all such shares shall
automatically be issued simultaneously upon the effective date of the change of
control.   The agreement is for a 4-year term, with a base salary
of $160,000, $200,000 and $240,000 for each year of the term.  All
benefits to be granted to the individual who will be appointed as our Chief
Executive Officer shall be granted to Mr. Levinas as well, including bonuses and
stock options.  The agreement with Mr. Levinas provides that if Mr.
Levinas is terminated during the 4-year term, or is no longer employed by us for
any reason during said period, including termination for cause or death, we
remain obligated to pay the full amount of payment due Mr. Levinas
thereunder.
  8
 
 Recent Sales of Unregistered
Securities; Use of Proceeds from Registered
Securities.
 
 Between
December 21, 2006 and January 3, 2007, the Company executed subscription
agreements with eight non-US investors providing for the issuance of 4,453,410
shares of common stock, at a purchase price of $0.30 per share for aggregate
consideration of $1,336,023.  In addition the Company issued 500,000
shares of common stock to a non-US person as payment of commissions earned in
connection with the sale of these shares. The shares were offered and sold
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Securities Act”) under Regulation S promulgated
under the Securities Act. The Company did not make any offers in the United
States, each of the purchasers was outside the United States, and there were no
selling efforts in the United States.
 
 In August
and September of 2006, the Company issued and sold 184,458 shares of common
stock to non-US investors at a purchase of $0.35 per share for aggregate
consideration of $225,000.  No commissions were paid in connection
with the sale of these shares. The shares were offered and sold pursuant to an
exemption from the registration requirements of the Securities Act under
Regulation S promulgated under the Securities Act.  The Company did
not make any offers in the United States, each of the purchasers was outside the
United States, and there were no selling efforts in the United
States.
 
 During
the three months ended September 30, 2006, the Company issued 142,857 shares of
common stock to EGFE, Ltd. These shares were issued in connection with the
promissory note, dated May 22, 2006 and amended on March 6, 2007, in the
principal amount of $500,000.  The shares were issued pursuant to an
exemption from the registration requirements of the Securities Act under
Regulation D promulgated under the Securities Act.  EGFE represented
that it was an accredited investor, as defined in Regulation D, and made
customary representations regarding its intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
September 14, 2006, the Company issued a promissory note to EGFE in the
principal amount of $500,000.  The note is payable on demand and
accrues interest at the rate of 12% per annum.  On March 6, 2007 this
note was amended to provide that the entire outstanding principal and all
accrued interest would be repaid on September 30, 2007. The note was offered and
sold pursuant to an exemption from the registration requirement of the
Securities Act under Regulation D promulgated under the Securities
Act.  EGFE represented that it was an accredited investor, as defined
in Regulation D, and made customary representations regarding its intention to
acquire the shares for investment only and not with view to or for sale in
connection with any distribution thereof.
 
 In May
2006, the Company issued and sold 1,357,142 shares of common stock to non-U.S.
investors, at a purchase price of $0.35 per share for aggregate consideration of
$475,000. No commissions were paid in connection with the sale of these shares.
The shares were offered and sold pursuant to an exemption from the registration
requirements of the Securities Act under Regulation S promulgated under the
Securities Act. The Company did not make any offers in the United States, each
of the purchasers was outside the United States, and there were no selling
efforts in the United States.
 
 In May
2006, the Company issued and sold 100,000 units, each consisting of one share of
common stock, one class A warrant and one class B warrant, at a purchase price
of $0.25 per unit for aggregate consideration of $25,000.  Each class
A warrant entitles the holder to purchase one share of common stock at a
purchase price of $0.45 at any time on or before the first anniversary of the
date on which the warrant was issued.  Each class B warrant entitles
the holder to purchase one share of common stock at a purchase price of $0.75 at
any time on or before the third anniversary of the date on which the warrant was
issued.  No commissions were paid in connection with the sale of the
units. The units were offered and sold pursuant to an exemption from the
registration requirement of the Securities Act under Regulation S promulgated
under the Securities Act. The Company did not make any offers in the United
States, each of the purchasers was outside the United States, and there were no
selling efforts in the United States.
  9
  On May
22, 2006, the Company issued two convertible promissory notes to EGFE, each in
the principal amount of $500,000.  One of these notes is payable June
4, 2008 and the other is payable on May 24, 2008.  Both notes accrue
interest at the rate of 15% per annum. Both notes and all accrued and unpaid
interest are convertible into shares of the Company’s common stock, at the
holder’s option, at a conversion price equal to 95% of the average of the
closing bid and ask prices for the common stock as quoted on the
Over-The-Counter-Bulletin-Board for the five trading days preceding
conversion.  If the Company is in default under the terms of the notes
the conversion price shall be 50% of the average of the closing bid and ask
price for of the common stock for the five trading days preceding
conversion.  The notes were issued pursuant to an exemption from the
registration requirements of the Securities Act under Regulation D promulgated
the Securities Act.  EGFE represented that it was an accredited
investor, as defined in Regulation D, and made customary representations
regarding its intention to acquire the shares for investment only and not with
view to or for sale in connection with any distribution
thereof.
 
 In March
2006, the Company issued 200,000 shares of common stock upon the exercise of
warrants, at an exercise price of $0.45 per share for aggregate proceeds of
$90,000. No commissions were paid in connection with the exercise of the
warrants.  The shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Regulation S promulgated
under the Securities Act. The Company did not make any offers in the United
States, each of the purchasers was outside the United States, and there were no
selling efforts in the United States.
 
 On
January 24, 2006, the Company issued 60,000 shares to each of Amir Uziel, Tamir
Levinas, Shiri Levinas, Yoram Drucker, Lavi Krasney and David
Lubin.  These shares were issued as consideration for consulting
services provided to the Company.  The shares were issued pursuant to
an exemption from the registration requirements of the Securities Act under
Regulation D promulgated under the Securities Act.  The recipients of
these shares were our officers, directors and consultants and each represented
that he or she was an accredited investor, as defined in Regulation D, and made
customary representations regarding his or her intention to acquire the shares
for investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
January 9, 2006, the Company issued 26,250 shares of common stock to Yair Alon,
50,000 shares to Guy Bahat, 40,000 shares to Daniel Levi and 143,750 shares to
Dov Resnik.  These shares were issued as consideration for services
provided to the Company.  The shares were issued pursuant to an
exemption from the registration requirements of the Securities Act under
Regulation D promulgated under the Securities Act.  The recipients of
these shares were our officers, directors and consultants and each represented
that he was an accredited investor, as defined in Regulation D, and made
customary representations regarding his intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
January 24, 2007, the Company issued 250,000 shares of common stock to Joseph
Oliver in exchange for consulting services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On March
9, 2007, the Company issued 25,000 shares of common stock to Richard Wexler in
exchange for corporate advisory services provided by Mr. Wexler to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On March
14, 2007, the Company issued 166,000 shares of common stock to BR Eood in
exchange for consulting services provided to the Company.  These
shares were issued pursuant to an exemption from the registration requirements
of the Securities Act under Section 4(2) thereof.  The recipients of
these shares made customary representations regarding his or her intention to
acquire the shares for investment only and not with view to or for sale in
connection with any distribution thereof.
  10
 
 On March
20, 2007, the Company issued 350,000 shares of common stock to Lion Partners
Ltd. in exchange for Investor Relations services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On May
11, 2007, the Company issued 40,000 shares of common stock to Stern/Ferbman in
exchange for consulting services provided to the Company.  These
shares were issued pursuant to an exemption from the registration requirements
of the Securities Act under Section 4(2) thereof.  The recipients of
these shares made customary representations regarding his or her intention to
acquire the shares for investment only and not with view to or for sale in
connection with any distribution thereof.
 
 On May
17, 2007, the Company issued 1,333,333 shares of common stock to Michael
Ben-Ari, a director of the Company, in exchange for consulting services provided
to the Company.  These shares were issued pursuant to an exemption
from the registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On May
23, 2007, the Company issued 350,000 shares of common stock to Joji Mangubat in
exchange for Investor Relation services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On June
19, 2007, the Company issued 350,000 shares of common stock to American Cap in
exchange for Investor Relations services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On July
2, 2007, the Company issued 45,000 shares of common stock to Michael Ben-Ari, a
director of the Company.  These shares were issued upon exercise of
options granted to Mr. Ben-Ari, as consideration for his service on the
Company’s board of directors, for an aggregate exercise price of
$15,750.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipient of these shares made customary representations
regarding his intention to acquire the shares for investment only and not with
view to or for sale in connection with any distribution
thereof.
 
 On August
17, 2007, the Company issued 100,000 shares of common stock to Edward Braniff, a
bonus granted on October 25, 2006.  These shares were issued pursuant
to an exemption from the registration requirements of the Securities Act under
Section 4(2) thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On August
17, 2007, the Company issued 35,000 shares to Amir Uziel and 35,000 share to
Lavi Krasney for consulting services. These shares were issued pursuant to an
exemption from the registration requirements of the Securities Act under Section
4(2) thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
September 23, 2007, the Company issued 31,000 shares of common stock to
Friedland Corporate Investor Services  LLC, in connection with the
settlement of a dispute relating to a consulting agreement between the Company
and Friedland Corporate Investor Services.  These shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act under Section 4(2) thereof.  The recipients of these shares made
customary representations regarding his or her intention to acquire the shares
for investment only and not with view to or for sale in connection with any
distribution thereof.
  11
 
 On
September 23, 2007, the Company issued 750,000 shares of common stock to Eyal
Gohar in exchange for consulting services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
September 27, 2007, the Company issued 300,000 shares of common stock to TENA
Holdings and 300,000 shares of common stock to Black Velvet Ltd. in exchange for
consulting services provided to the Company.  These shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act under Section 4(2) thereof.  The recipients of these shares made
customary representations regarding his or her intention to acquire the shares
for investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
October 1, 2007, the Company issued 110,000 shares of common stock to Lieber
McDonald in exchange for public relations services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 On
October 15, 2007, the Company issued 250,000 units, each consisting of one share
of common stock and one warrant, to Lighthouse Capital Insurance Company for
total consideration of $100,000.  Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $0.75 until August 1,
2009.  These units, the shares of common stock and the warrants
included in the units were issued pursuant to an exemption from the registration
requirements of the Securities Act under Section 4(2) thereof.  The
recipients of these shares made customary representations regarding his or her
intention to acquire the shares for investment only and not with view to or for
sale in connection with any distribution thereof.
 
 On
October 15, 2007, the Company issued 168,750 units, each consisting of one share
of common stock and one warrant, to Ofliam LLC for total consideration of in
exchange for consulting services provided to the Company.  These
shares were issued pursuant to an exemption from the registration requirements
of the Securities Act under Section 4(2) thereof.  The recipients of
these shares made customary representations regarding his or her intention to
acquire the shares for investment only and not with view to or for sale in
connection with any distribution thereof.
 
 On
December 10, 2007, the Company issued 151,937 shares of common stock to
Strauss/Shinder in exchange for consulting services provided to the
Company.  These shares were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2)
thereof.  The recipients of these shares made customary
representations regarding his or her intention to acquire the shares for
investment only and not with view to or for sale in connection with any
distribution thereof.
 
 May 19,
2008 EGFE converted three, (3) notes of convertible debt and accrued interest,
each for $500,000 plus interest into 19,852,271 shares at $.11 per
share.
 
 During
the year ended December 31, 2008, the Company issued 3,736,363 shares of its
common stock to unrelated investors for an aggregate cash inflow of
$775,000.  The Company also issued 19,852,271 shares of common stock
in the conversion of $2,183,750.  Additionally, the Company issued
1,565,282 shares of common stock as payment for $242,311 of services
rendered.
  12
 
 Purchases of equity
securities by the issuer and affiliated purchasers.
 
 None.
 
 Item
6.  Selected Financial Data
 
 Not
applicable.
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 The
following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our audited financial
statements and notes thereto contained elsewhere in this report.
 
 Results
of Operation
 
 Fiscal Year Ended December
31, 2008 Compared to Fiscal Year Ended December 31, 2007
 
 The
Company recorded revenues of $1,272,810 in 2008, compared to $1,244,108 in
2007.  Cost of sales was $879,842 in 2008, compared to $933,836 in
2007.  The Company expects to continue to expand its customer base in
2009 as a result of its extensive marketing programs, including its
participation in trade shows and private label programs.
 
 The
Company's 2008 general and administrative expenses of $1,659,943 consisted
primarily of bad debt expenses of $146,538, travel costs of $200,178, research
and development of $394,188 and administrative payroll of
$433,246.  The Company paid or accrued professional fees, including
legal and accounting fees, of $194,375 in connection with audits and SEC
reporting. The Company incurred consulting fees of $2,731,083 in connection with
the development of its business strategy, recruiting of key executives and
interim managers and completing the roll out of the Battery Brain
products.  The Company also paid $144,802 in marketing and advertising
expenses during the year.  The marketing and advertising costs were
related to the development of a marketing plan and marketing materials for the
Company.
 
 The
Company's 2007 general and administrative expenses of $2,687,557 consisted
primarily of bad debt expenses for Superior Automotive Company and Carter Group
Inc. of $253,163, travel costs of $439,837, and administrative payroll of
$800,987.  The Company paid or accrued professional fees, including
legal and accounting fees, of $350,190 in connection with audits and SEC
reporting. The Company incurred consulting fees of $4,644,482 in connection with
the development of its business strategy, recruiting of key executives and
interim managers and completing the roll out of the Battery Brain
products.  The Company also paid $350,190 in marketing and advertising
expenses during the year.  The marketing and advertising costs were
related to the development of a marketing plan and marketing materials for the
Company.  The Company cut administrative staff, travel, Marketing and
consulting services in 2008 by 45% and spent more on research and development.
We changed our distribution model starting in July to work with strong partners
in target segments using their existing sales and distribution systems rather
then incurring the cost of our own.
 
 The
Company recorded a net loss of $5,544,232 or $0.06 per share for the year of
2008, compared to a net loss of $7,896,679 or $0.10 per share in 2007. Excluding
non-cash expenses incurred through common stock and option grants, the Company
would have incurred a net loss of $3,097,698 or $0.03 per share, and $3,660,888,
or $0.05 per share, in 2008 and 2007, respectively. The Company expects to
continue granting common stock and options as consideration for services in
2009.
 
 Fiscal Year Ended December
31, 2007 Compared to Fiscal Year Ended December 31, 2006
 
 The
Company recorded revenues of $1,244,108 in 2007, compared to $1,818,973 in
2006.  Cost of sales was $933,836 in 2007, compared to $1,184,889 in
2006.  In 2006 one transaction accounted for 42% of total sales, while
the Company’s sales in 2007 were to a broader base of
customers.
  13
 
 The
Company's 2007 general and administrative expenses of $2,687,557 consisted
primarily of bad debt expenses for Superior Automotive Company and Carter Group
Inc. of $253,163, travel costs of $439,837, and administrative payroll of
$800,987.  The Company paid or accrued professional fees, including
legal and accounting fees, of $350,190 in connection with audits and SEC
reporting. The Company incurred consulting fees of $4,644,482 in connection with
the development of its business strategy, recruiting of key executives and
interim managers and completing the roll out of the Battery Brain
products.  The Company also paid $350,190 in marketing and advertising
expenses during the year.  The marketing and advertising costs were
related to the development of a marketing plan and marketing materials for the
Company.
 
 The
Company's 2006 general and administrative expenses of $1,520,223 consisted
primarily of research and development expenses of $128,296, travel costs of
$401,734, and administrative payroll of $500,714, incurred in connection with
the Company’s efforts to increase public awareness of its products and prepare
for increased sales. The Company incurred consulting fees of $3,517,992 in 2006
in connection with the development of its business strategy, recruiting key
executives and interim managers and completing the roll out of the Battery Brain
products. These consulting fees are primarily paid in shares of the Company’s
common stock or in stock purchase options because the Company has limited cash
for such expenditures.  The Company also paid $437,125 in marketing
and advertising expense in 2006.  The marketing and advertising costs
were related to development of a marketing plan and marketing materials for the
Company.
 
 The
Company recorded a net loss of $7,896,679 or $0.10 per share for the year of
2007, compared to a net loss of $5,162,631 or $0.08 per share in 2006. Excluding
non cash expenses incurred through common stock and option grants, the Company
would have incurred a net loss of $3,660,888, or $0.05 per share, and
$2,189,849, or $0.04 per share, in 2007 and 2006, respectively.
 
 Liquidity
and Capital Resources
 
 The
Company believes that it will need approximately $2,000,000 to fund its
operations through December 31, 2009.  As of December 31, 2008, the
Company had $132,687 in cash and believes that such funds will not be
sufficient to satisfy the Company's cash requirements for the next twelve (12)
months.
 
 Between
January 21, 2008 and March 6, 2008, we issued and sold an aggregate of 2,600,000
shares of our common stock and warrants to purchase 2,600,000 additional shares
of our common stock, at $0.40 per share at any time on or before January 30,
2011. The aggregate consideration paid to the Company for these securities was
$650,000 and they were sold to one accredited investor (as that term is defined
in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the
“Securities Act”)) and seven non-US investors, in a private placement that was
exempt from the registration requirements of the Securities Act pursuant to
Regulation D and Regulation S promulgated thereunder.
 
 On May
19, 2008 we executed an agreement providing for the conversion of five
outstanding promissory notes into an aggregate of 19,852,271 shares of our
common stock and 4,963,068 common stock purchase warrants.  The
aggregate principal amount of the promissory notes was $2 million and $183,750
in interest was accrued and unpaid at the time of conversion.  The
conversion price was $0.11 for each share and one-quarter
warrant.  Ever Green Fields Enterprises, Ltd. was the holder of three
of the notes with an aggregate principal amount of $1.5 million, Bank Julius
Baer & Co. Ltd. held the fourth note with an aggregate principal amount of
$250,000, and five individuals held the fifth note with an aggregate principal
amount of $250,000.  The warrants issued upon conversion of the notes
have a term of five years and an exercise price per share of $0.11. The
securities were issued in a private transaction exempt from registration under
the Securities Act of 1933, in reliance of Section 4(2) and Regulation D of that
Act.  The individual subscribers represented that they are accredited
investors, as defined in Regulation D, that they acquired the securities for
their own accounts as principals, not as nominees or agents, for investment
purposes only and not with a view to or for resale or
distribution.
  14
  The
Company has an aggregate of 11,334,675 options outstanding, with an aggregate
exercise price of $ $2,036,699.  However, there can be no assurance
that the outstanding option will be exercised or that the required funds will be
raised.  In order to raise the funds required in order to pursue our
business plan we may raise additional capital through the issuance of our
securities or enter into a strategic alliance with a third
party.  There can be no assurance that we will be successful in
raising additional capital or creating a strategic alliance. There can be no
assurance that we will be able to obtain additional financing if and when needed
or that, if available, financing will be on acceptable terms. Additional equity
financings may be dilutive to holders of our common stock and debt securities,
if available, and may involve significant payment obligations and covenants that
restrict how we operate our business.
 
 On March
9, 2009, the board of directors of the Company determined that it was in its
best interest to raise up to $1,000,000 in fund by effectuating a private
placement of the issuance of secured convertible promissory notes. In accordance
with the authorization given by the board, the Company entered into subscription
agreements  with each of Aharon Levinas, Edward Braniff and Tamir
Levinas and EGFE, for the purchase and sale of Secured Convertible Promissory
Notes of the Company.
 
 The Notes
to Aharon Levinas, Edward Braniff and Tamir Levinas for the purchase price of
$291,767, 103,985 and $72,376, respectively, represent prior salaries owed that
have been deferred pending available funds.  On March 9, 2009, the
Company entered into another subscription Agreement with Edward Braniff for the
purchase and sale of a Note in the amount of $50,000 and on March 13, 2009, the
Company entered into Subscription Agreements with EFGE and Aharon Levinas for
each for the purchase and sale of a Note in the amount of $50,000.
 
 The
principal amount of each Note bears an interest rate of 15% per annum,
calculated on a 365 day calendar year. The accrued interest on the outstanding
balance is due and payable on August 3, 2009 and the maturity date, which is
December 31, 2009. Each Note contains default events which, if triggered and not
timely cured the purchaser may declared the outstanding principal and all
accrued interest thereon due and payable immediately.
 
 All
principal and accrued interest on the Notes is convertible into shares of our
common stock at the election of the purchasers or the Company at any time at the
conversion price of $0.05 per share.
 
 On
January 18, 2009, the Company issued 2,000,000 shares to consultants for
investor relation services to be performed.
 
 Going
Concern
 
 The
Company has incurred a net loss of $ 5,544,232. The Company has incurred
significant losses and had negative cash flow from operations and has an
accumulated deficit of $ 22,039,294 at  December 31, 2008. In
addition, as of December 31, 2008, the Company has working capital deficiency of
$186,603. These factors raised substantial doubt about the Company’s ability to
continue as going concern.
 
 There can
be no assurance that sufficient funds will be generated during the next twelve
months or thereafter from the Company’s current operations, or that funds will
be available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital could force the Company to
curtail or cease operations and would, therefore, have a material adverse effect
on its business. Furthermore, there can be no assurance that any such required
funds, if available, will be available on attractive terms or that they will not
have a significant dilutive effect on the Company’s existing
stockholders.
  15
 
 There can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all. In the event we are unable to
continue as a going concern, we may elect or be required to seek protection from
our creditors by filing a voluntary petition in bankruptcy or may be subject to
an involuntary petition in bankruptcy. To date, management has not considered
this alternative, nor does management view it as a likely
occurrence.
 
 The
accompanying consolidated financial statements do not include any adjustments
related to the recoverability or classification of asset-carrying amounts or the
amounts and classifications of liabilities that may result should the Company be
unable to continue as a going concern.
 
 Off
Balance Sheet Arrangements
 
 None
 
 Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk
 
 Not
applicable.
 
 Item
8.   Financial Statements and Supplementary Data
 
 The
financial statements are set forth immediately following the signature page and
are incorporated herein by reference.
 
 Item
9.   Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
 
 None.
 
 Item
9A.  Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. As defined in Rules 13a-15(f) under the
Securities Exchange Act of 1934, internal control over financial reporting is a
process designed by, or under the supervision of, the Company’s principal
executive, principal operating and principal financial officers, or persons
performing similar functions, and effected by the Company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. The Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records, that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of the Company’s management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.
  16
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 The
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008. In making this assessment,
management used the framework in “Internal Control – Integrated Framework”
promulgated by the Committee of Sponsoring Organizations of the Treadway
Commission, commonly referred to as the “COSO” criteria. Based on the assessment
performed, management believes that as of December 31, 2008, the Company’s
internal control over financial reporting was effective based upon the COSO
criteria. Additionally, based on management’s assessment, the Company determined
that there were no material weaknesses in its internal control over financial
reporting as of December 31, 2008.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
 
 Changes
in Internal Controls
 
 During
the year ended December 31, 2008, there was no change in internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.
 
 The
Company’s management, including the chief executive officer and chief financial
officer, do not expect that its disclosure controls or internal controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In addition, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake.
 
 Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management’s override of the control. The
design of any systems of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of these inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Individual persons perform multiple tasks which normally would be allocated to
separate persons and therefore extra diligence must be exercised during the
period these tasks are combined. Management is aware of the risks associated
with the lack of segregation of duties at the Company due to the small number of
employees currently dealing with general administrative and financial matters.
Although management will periodically reevaluate this situation, at this point
it considers the risks associated with such lack of segregation of duties and
that the potential benefits of adding employees to segregate such duties do not
justify the substantial expense associated with such increases. It is also
recognized Pay88 has not designated an audit committee and no member of the
board of directors has been designated or qualifies as a financial expert. The
Company should address these concerns at the earliest possible
opportunity.
  17
 
 Item
9A(T) Controls and Procedures
 
 Pursuant
to SEC rules implementing Section 404(a) of the Sarbanes-Oxley Act of 2002, non
accelerated filers with fiscal years ending on or after December 15, 2007 must
begin to comply with the management report requirement in Item 308(a) of
Regulation S-K. Under this rule, management is responsible for establishing and
maintaining adequate internal control over financial reporting, as well as an
assessment of the effectiveness of those internal controls.
 
 An
overall purpose of internal control over financial reporting is to foster the
preparation of reliable financial statements. Reliable financial statements must
be materially accurate. Therefore, a central purpose of the assessment of
internal control over financial reporting is to identify material weaknesses
that have, as indicated by their very definition, more than a remote likelihood
of leading to a material misstatement in the financial statements. While
identifying control deficiencies and significant deficiencies represents an
important component of management's assessment, the overall focus of internal
control reporting should be on those items that could result in material errors
in the financial statements.
 
 Management
is not required by Section 404 of Sarbanes-Oxley to assess other internal
controls, such as controls solely implemented to meet a company’s operational
objectives. Further, “reasonable assurance” does not mean absolute assurance.
ICFR cannot prevent or detect all misstatements.
 
 The
assessment of internal control over financial reporting will be more effective
if it focuses on controls related to those processes and classes of transactions
for financial statement accounts and disclosures that are most likely to have a
material impact on the company's financial statements. Employing such a top-down
approach requires that management apply in a reasonable manner its cumulative
knowledge, experience and judgment to identify the areas of the financial
statements that present significant risk that the financial statements could be
materially misstated and then proceed to identify relevant controls and design
appropriate procedures for documentation and testing of those controls. For
instance, the application of judgment by management and the auditor will
typically impact the nature, extent and timing of control testing such that the
level of testing performed for a low risk account will likely be different than
it will be for a high risk account. In performing these steps, management and
auditors should keep the "reasonable assurance" standard in mind.
 
 Based on
the top down approach mentioned above and performed within the internal control
framework set out by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), we identified the following business cycles for internal
control evaluation:
 
 1)
              Financial Reporting,
      which covers the entire process from data capturing to financial statement
      preparation and reporting;
  18
 
 2)
              Purchase and
      disbursement, which covers the purchase of inventory, the approval
      process, the payment and any related liabilities
  accrued;
 
 3)
              Revenue Recognition,
      which covers the sales to the receivable to the cash
    cycles;
 
 4)
              Payroll cycle, which
      covers employee hiring and termination, time sheet submission and payroll
      calculation;
 
 5)
              Fraud: this is a pervasive
      risk, not associated with any particular business cycle, but rather
      associated with embezzlement of firm assets and fraudulent financial
      reporting; and
 
 6)
              Entity level control,
      which covers the control environment from firm culture and management
      integrity and styles, codes of ethics
etc.
 
 7)
              Tax compliance, which
      covers the capturing of tax related data, preparation of tax returns and
      compliance with regulatory tax
rules.
 
 Chisholm,
Bierwolf, Nilson & Morrill advised the Board of Directors that the lack of
sufficient resources to identify and properly address technical SEC and
reporting issues is a material weakness.
 
 We
understand control assurance is not absolute assurance; rather it is
“reasonable” assurance. Management firmly believes in setting up proper control
and complying with regulatory requirements. However due to the nature of small
business, certain control will not be implemented due to constraints of
costs.
 
 Item 9B. Other
Information
 
 None.
 
 PART
III
 
 Item 10.
                Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
 
 Directors,
Executive Officers, Promoters, and Control Persons
 
 The
following table sets forth the names, ages, and positions with the Company for
each of the current directors and officers of the Company.
 
 Name
                
                Age
                
                Positions and OfficesEdward
      Braniff
                
                59
                
                Interim
      CEO and CFOAharon
      Y. Levinas
                
                62
                
                CTO
      and DirectorTamir
      Levinas
                
                37
                
                DirectorMichael
      Ben-Ari
                
                49
                
                DirectorGuy
      Moshe
                
                57
                
                Director
  19
  The
directors of the Company have been elected to serve until the next annual
meeting of stockholders and until their successor(s) have been elected and
qualified.  Officers are appointed by the Board of Directors and serve
at the discretion of the Board.  Aharon Y. Levinas is the father of
Tamir Levinas.  There are no proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than 5% of any class of voting securities of the Company, or security holder is
a party adverse to the Company or has a material interest adverse to the
Company.  None of our directors or officers has been affiliated with
any company that has filed for bankruptcy within the last five
years.
 
 The
following is a brief account of the education and business experience of each of
our directors and executive officers, including any other directorships held by
our directors in other companies that file reports with the SEC pursuant to the
Exchange Act:
 
 Edward
Braniff.  Mr. Braniff has been our Chief Financial Officer
since May 24, 2005.  He
worked  for  AT&T  for  27  years,  he  has
a  strong  operational background,  having held
finance  positions in
Regulatory  reporting,  Assistant
Treasurer,  Assistant  Controller and the CFO
for  International and Operational Divisions.  Since leaving
AT&T in 1998 Mr. Braniff has worked as a consultant to major
corporations.  He has been the CFO and then the COO for The Global
TeleExchange in Virginia, (1999-2000). The Cedar Group PLC (2001-2003), a
British based Public Company providing global software and consulting
services.
 
 Aharon Y.
Levinas.  Mr. Levinas was appointed as the Chief Technology
Officer and a director of the Company as of March 23, 2005. Mr. Levinas is the
sole shareholder of Purisys, Inc., a New Jersey corporation which Mr. Levinas
established over 10 years ago. Mr. Levinas’ sole business activity for the last
10 years has been the development and establishment of the Battery Brain
product.
 
 Tamir Levinas.  Mr.
Levinas was appointed as a director of the Company as of March 23,
2005.  Since 1998 he has been the head of Technical Development of
Internet Gold (Nasdaq: IGLD), where he is responsible for managing all aspects
of the technical department activities, project management and engineering, as
well as being responsible for technical vendor relations and procurement. Mr.
Levinas received a B.A. in Business and Information Technology Management from
Inter-Disciplinary Center in Herzelia, Israel in 2004.
 
 Guy Moshe.  Mr.
Moshe was appointed as our director on February 26, 2007.  He obtained
his BSC in Electrical Engineering from Technion, Israel Institute of Technology
in Haifa, Israel. From 2004 until 2007, he served as the Executive Director of
Mentor Graphics, based in Wilsonville, Oregon. Mr. Moshe also served as
Executive Director for the Mentor Development Center in Israel, where he
established the Mentor Design Center and managed the ESL business in the DCS
division. From 2002 until 2004, he was President and CEO of Summit Design, Inc.,
of Burlington, MA, and General Manager of Summit Israel and Acting Vice
President for World Wide Sales.
 
 Michael
Ben-Ari.  Mr. Ben-Ari was appointed as our director on February
26, 2007.  He holds an MBA in finance and marketing from Tel Aviv
University and a BA from Brandeis University. He has over 15 years experience in
the international financial services industry, and brings extensive management
experience, including financing, banking and marketing skills developed in
previously held positions. Mr. Ben-Ari is presently a director of Brainstorm
Cell Therapeutics Inc., an SEC reporting company. In 1999, he established EGFE,
Ltd., a company specializing in alternative investments for international
clients, and has been its sole owner and manager since such date. Prior to
founding EGFE, he held management positions in Bank Leumi, Israel's second
largest bank, and in Supersol, Israel's second largest supermarket
chain.
 
 Audit
Committee Financial Expert
 
 The Board
of Directors has not established an audit committee and does not have an audit
committee financial expert.  The entire Board of Directors acts as the
Company’s audit committee.
  20
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Securities Exchange Act of 1934 requires officers and directors of
the Company and persons who own more than ten percent of a registered class of
the Company's equity securities to file reports of ownership and changes in
their ownership with the Securities and Exchange Commission, and forward copies
of such filings to the Company.  We believe, based solely on our
review of the copies of such forms and other written representations to us, that
during the fiscal year ended December 31, 2008, all reporting persons
complied with all applicable Section 16(a) filing
requirements.
 
 Code
of Ethics
 
 The
Company has not adopted a code of ethics.
 
 Item
11.  Executive Compensation
 
 Summary
Compensation
 
 Pete
Mateja
 
 Pete
Mateja served as our Chief Executive Officer from October 3, 2005 through July
3, 2008, and as a director from February 26, 2007 until July
3,2008.  The terms of his compensation are set forth in his consulting
agreement, dated October 3, 2005, which was renewed and amended upon its
expiration as of October 3, 2006.  Prior to the renewal of such
consulting agreement, Mr. Mateja was entitled to the following as compensation
for his services: an annual base salary of $150,000; an annual bonus of up to
$50,000 based on the Company's performance and meeting established objectives;
and 3,000,000 stock options, each of which gives Mr.  Mateja the right
to purchase one share of the Company's common stock for $0.15.  Such
stock options shall vest pro ratably every three months over the three year
period commencing January 3, 2006. The vested stock options shall be exercisable
until the earlier of five years after vesting or 365 days after Mr. Mateja's
termination.  All remaining stock options shall automatically vest
upon the Company's change in control.
 
 Following
the renewal and amendment of the consulting agreement on October 3, 2006, Mr.
Mateja’s annual base salary has been increased to $170,000.  In
addition, commencing as of October 3, 2006, he is entitled to $700 per month as
reimbursement for accommodation expenses incurred by him.  The Company
also agreed that, if the Company terminates Mr. Mateja’s engagement without
cause it will continue to pay him under normal payroll practices for the six
months immediately following such termination.  Mr. Mateja’s
consulting agreement expired on October 2, 2007.
 
 During
the fiscal year ending December 31, 2008, Mr. Mateja received
$150,000
 
 During
the fiscal year ending December 31, 2007 Mr. Mateja received
$170,000.   In addition, 1,000,000 of the stock options granted
to him pursuant to the consulting agreement dated October 3, 2005 vested during
the fiscal year ending December 31, 2007. During the fiscal year ended December
31, 2006, Mr. Mateja received $155,000 in salary.  He also received
$2,100 as reimbursement for accommodation expenses.  In lieu of the
$50,000 cash bonus he was entitled to pursuant to the consulting agreement, the
Company agreed, on October 3, 2006, to issue to Mr. Mateja 150,000 shares of
common stock and 66,666 stock purchase options, each of which entitles the
holder thereof to purchase one share of common stock at $0.45 until
2011.  In addition, 1,000,000 of the stock options granted to him
pursuant to the consulting agreement dated October 3, 2005 vested during the
fiscal year ended December 31, 2006.
 
 During
the fiscal year ended December 31, 2005, Mr. Mateja received $37,500 in
salary.  He received no other compensation during such fiscal
year.
  21
 
 Edward
Braniff
 
 During
the fiscal year ending December 31, 2008 Mr. Braniff received $160,000. From
July 3, 2008 until the present Mr. Braniff has served as the acting CEO. Mr.
Braniff‘s employment agreement has been extended from May 2008. Mr. Braniff will
receive 50,000 stock options a month with a strike price of $.25.
 
 During
the fiscal year ending December 31, 2007 Mr. Braniff  received
$145,000.  From June 27, 2005 until October 2, 2005, the Company did
not have a Chief Executive Officer and Edward Braniff, our Chief Financial
Officer, was the most senior executive officer of our Company.  Mr.
Braniff has been serving as our Chief Financial Officer since May 24, 2005
pursuant to an Employment Agreement, dated May 24, 2005 and amended and restated
as of October 25, 2006.  Prior to the amendment and restatement of
such employment agreement, Mr. Braniff was entitled to the following as
compensation for services: $140,000, as base salary; an annual bonus of $50,000
based on performance; and options to purchase 1,000,000 shares of the Company’s
common stock at an exercise price of $0.05 per share.  Such options
shall vest shall vest pro ratably every three months over three year period
commencing on May 24, 2005.  The vested options shall be exercisable
until the earlier of 5 years after vesting or 365 days after the termination of
Mr. Braniff’s employment with the Company.
 
 Following
the amendment and restatement of Mr. Braniff’s employment agreement on October
25, 2006, his salary has been increased to $145,000.  Mr. Braniff
continues to be entitled to a bonus of up to $50,000 based on
performance.  In addition, Mr. Braniff is entitled to an additional
bonus as follows: for each $1,000,000 in revenues above $1,200,000 earned by the
Company during the fiscal year ended December 31, 2006, the Company shall pay to
Mr. Braniff the following: (a) 50,000 stock options, each of which shall give
him the right to purchase one share of common stock for $0.45; (b) a cash
payment equal to $10,000; and (c) a cash payment equal to 2.5% of the Company’s
EBIT for the fiscal year ending December 31, 2006.  Mr. Braniff’s
consulting agreement expired on May 23, 2008.
 
 During
the fiscal year ended December 31, 2006, Mr. Braniff received $143,000 in salary
and a bonus consisting of the following awards: 100,000 shares of common stock,
granted on October 25, 2006; 50,000 stock options (each entitling Mr. Braniff to
purchase one share of common stock for $0.30), granted on October 25, 2006; and
33,333 stock options (each entitling Mr. Braniff to purchase one share of common
stock for $0.45), granted on December 31, 2006.  In addition, during
the fiscal year ended December 31, 2006, 333,333 of the stock options granted on
May 24, 2005 vested.
 
 Aharon Y.
Levinas
 
 Aharon Y.
Levinas has been our Chief Technology Officer since March 23, 2005 pursuant to
an employment agreement, dated as of such date, as amended on April 18, 2005 and
May 18, 2005.  The agreement is for a 4-year term, with a base salary
of $160,000, $200,000, $240,000 and $240,000 for each year of the
term.  In addition, the Company granted to Mr. Levinas 2,650,000
shares of common stock, which shall vest pro ratably every 3 months over a
3-year period commencing on April 4, 2005. Upon a change of control of the
Company, all such shares shall automatically be issued simultaneously upon the
effective date of the change of control.  All benefits to be granted
to the individual who will be appointed as our Chief Executive Officer shall be
granted to Levinas as well, including bonuses and stock options.  The
agreement with Levinas provides that if Levinas is terminated during the 4-year
term, or is no longer employed by us for any reason during said period,
including termination for cause or death, we remain obligated to pay the full
amount of payment due Levinas thereunder.  During the fiscal year
ended December 31, 2006, Mr. Levinas received $190,000 in salary and 66,666
stock options (each entitling the holder thereof to purchase one share of common
stock for $0.45).  In addition, during the fiscal year ended December
31, 2006, 833,333 shares of common stock granted to Mr. Levinas on April 4, 2005
vested.  During the fiscal year ending December 31, 2007 Mr. Levinas
received $230,000 in salary. In addition, during the fiscal year ended December
31, 2007, 833,333 shares of common stock which were granted to Mr. Levinas on
April 4, 2005 vested.  Mr. Levinas has also been a Director of the
Company since March 23, 2005 and has received additional compensation for his
services rendered in his capacity as Director, as discussed below in the section
entitled “Compensation of Directors.” During 2008 Mr. Levinas received $252,000
in compensation per his contracts as CTO and Director.
  22
 
 The
following table sets forth information concerning the compensation paid or
earned during the fiscal years ended December 31, 2008 and 2007 for services
rendered to our Company in all capacities by the following persons: (i) all
individuals who served as the principal executive officer or acting in a similar
capacity during the fiscal year ended December 31, 2008, regardless of
compensation level; (ii) our two most highly compensated executive officers
other than our principal executive officer, who were serving as executive
officers at the end of 2008; and (iii) up to two additional individuals who have
served as the Company’s highest paid executives but were not serving as such at
the end of 2007.
 
 SUMMARY
      COMPENSATION TABLEName
                                  and
                                  principal
                                  position
                                  (a)
                                
                                Year
                                  (b)
                                
                                Salary
                                  ($)
                                  (c)
                                
                                
                                Bonus($)
                                  (d)
                                
                                
                                Stock
                                  Awards
                                  ($)
                                  (e)
                                
                                
                                Option
                                  Awards
      ($)
                                  (f)
                                
                                
                                Non-Equity
                                  Incentive
      Plan
                                  Compensation
                                  ($)
                                  (g)
                                
                                
                                Nonqualified
                                  Deferred
                                  Compensation
                                  Earnings
      ($)
                                  (h)
                                
                                
                                All
      Other
                                  Compensation
                                  ($)
                                  (i)
                                
                                
                                Total
      ($)
                                  (j)Pete
      Mateja,
                                
                                2008
                                
                                
                                150,000
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                431,264
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                581,264CEO(1)
                                
                                2007
                                
                                
                                170,000
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                517,042
                                (4)
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                687,042Edward
      Braniff,
                                
                                2008
                                
                                
                                160,000
                                
                                
                                
                                35,000
                                
                                
                                
                                0
                                
                                
                                
                                109,333
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                304,333CFO(5)
                                
                                2007
                                
                                
                                145,000
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                134,379
                                (7)
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                279,379Aharon
      Y. Levinas,
                                
                                2008
                                
                                
                                252,000
                                
                                
                                
                                0
                                
                                
                                
                                
                                
                                
                                
                                205,434
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                457,434CTO(8)
                                
                                2007
                                
                                
                                230,000
                                
                                
                                
                                
                                
                                
                                
                                0
                                
                                
                                
                                379,042
                                (10)
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                609,042
 
 (1) Mr.
Mateja has been serving as our Chief Executive Officer since October 3,
2005.
 (2)
Represents the value of 150,000 shares of common stock and 66,666 stock purchase
options (each of which entitles the holder thereof to purchase one share of
common stock at $0.45), which were granted to Mr. Mateja in lieu of a cash bonus
on October 3, 2006.  The value of such shares and stock options was
based on the following assumptions: $.30 per share on the share grant and a
Black-Scholes Model value of $19,025.
 (3)
Pursuant to Mr. Mateja’s consulting agreement, from and after October 3, 2006,
he is entitled to $700 per month as reimbursement for accommodation expenses
incurred by him.
 (4)
Represents the value of 3,000,000 stock options granted to Mr. Mateja on October
3, 2005, subject to vesting as described below.  Each option gives
Mr.  Mateja the right to purchase one share of the Company's common
stock for $0.15.  Such stock options shall vest pro ratably every
three months over the three year period commencing three months from October 3,
2005. The vested stock options shall be exercisable until the earlier of five
years after vesting or 365 days after Mr.  Mateja's
termination.  All remaining stock options shall automatically vest
upon the Company's change in control.  The value of such stock options
was based on the following assumptions: a Black-Scholes Model value of
$517,515.
 (5) Mr.
Braniff has been serving as our Chief Financial Officer since May 24,
2005.
 (6)
During the fiscal year ended December 31, 2006, Mr. Braniff received a bonus
consisting of the following awards: 100,000 shares of common stock, granted on
October 25, 2006; 50,000 stock options (each entitling Mr. Braniff to purchase
one share of common stock for $0.30), granted on October 25, 2006; and 33,333
stock options (each entitling Mr. Braniff to purchase one share of common stock
for $0.45), granted on May 31, 2006.  The value of such shares and
stock options was based on the following assumptions:  $.30 per share
on the share grant and a Black-Scholes Model value of $ 9,513.
  23
 
 (7)
Represents the value of 1,000,000 stock options granted to Mr. Braniff on May
24, 2005, subject to vesting as described below.  Each stock option
entitles Mr. Braniff to purchase one share of the Company’s common stock at an
exercise price of $0.05.  Such options shall vest pro ratably every
three months over a three year period commencing on May 24, 2005.  The
vested options shall be exercisable until the earlier of 5 years after vesting
or 365 days after the termination of Mr. Braniff’s employment with the
Company.  The value of such stock options was based on the following
assumptions: a Black-Scholes Model value of $ 134,390.
 (8) Mr.
Levinas has been serving as our Chief Technology Officer since March 23,
2005.
 (9)
Represents the value of 66,666 stock options (each entitling the holder thereof
to purchase one share of common stock for $0.45), which were granted to Mr.
Levinas on October 3, 2006.  The value of such stock options was based
on the following assumptions: a Black-Scholes Model value of $
19,025.
 (10)
Represents the value of 2,650,000 shares of common stock granted to Mr. Levinas,
which vest pro ratably every 3 months over a 3-year period commencing on April
4, 2005.  Such shares were issued in consideration for services
rendered by Mr. Levinas pursuant to his employment agreement with the Company,
dated March 23, 2005, as amended on April 18, 2005 and May 18,
2005.  The value of such shares was based on the following
assumptions: a Black-Scholes Model value of $ 379,042.
 
 Outstanding
Equity Awards
 
 The table
set forth below presents certain information concerning unexercised options,
stock that has not vested, and equity incentive plan awards for each named
executive officer above outstanding as of December 31, 2008.
 
 OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOPTION
      AWARDS
                                                
                                                
                                                STOCK
      AWARDSName
                                                  (a)
                                                
                                                Number
      of
                                                  Securities
                                                  Underlying
                                                  Unexercised
                                                  Options
                                                  (#)
                                                  Exercisable
                                                  (b)
                                                
                                                
                                                Number
      of
                                                  Securities
                                                  Underlying
                                                  Unexercised
                                                  Options
                                                  (#)
                                                  Unexer-
                                                  cisable
                                                  (c)
                                                
                                                
                                                Equity
                                                  Incentive
                                                  Plan
                                                  Awards:
                                                  Number
      of
                                                  Securities
                                                  Underlying
                                                  Unexercised
                                                  Unearned
                                                  Options
                                                  (#)
                                                  (d)
                                                
                                                
                                                Option
                                                  Exer-
                                                  cise
                                                  Price
                                                  ($)
                                                  (e)
                                                
                                                
                                                Option
                                                  Expira-
                                                  tion
                                                  Date
                                                  (f)
                                                
                                                
                                                Number
      of
                                                  Shares
      or
                                                  Units
      of
                                                  Stock
      That
                                                  Have
      Not
                                                  Vested
                                                  (#)
                                                  (g)
                                                
                                                
                                                Market
                                                  Value
                                                  of
                                                  Shares
                                                  or
                                                  Units
                                                  of
                                                  Stock
                                                  That
                                                  Have
                                                  Not
                                                  Vested
                                                  ($)
                                                  (h)
                                                
                                                
                                                Equity
                                                  Incentive
                                                  Plan
                                                  Awards:
                                                  Number
                                                  of
                                                  Unearned
                                                  Shares,
                                                  Units
      or
                                                  Other
                                                  Rights
                                                  That
                                                  HaveNot
                                                  Vested
                                                  (#)
                                                  (i)
                                                
                                                
                                                Equity
                                                  Incentive
                                                  Plan
                                                  Awards:
                                                  Market
      or
                                                  Payout
                                                  Value
      of
                                                  Unearned
                                                  Shares,
                                                  Units
      or
                                                  Other
                                                  Rights
      That
                                                  Have
      Not
                                                  Vested
                                                  (#)
                                                  (j)Pete
                                                
                                                
                                                3,000,000
                                                (1)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.15
                                                
                                                
                                                
                                                *
                                                (1)
                                                
                                                
                                                1,000,000
                                                
                                                
                                                __
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Mateja
                                                
                                                
                                                66,666
                                                (2)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.45
                                                
                                                
                                                —
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Edward
                                                
                                                
                                                1,000,000
                                                (3)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.05
                                                
                                                
                                                
                                                *
                                                (3)
                                                
                                                
                                                166,667
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Braniff
                                                
                                                
                                                50,000
                                                (4)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.30
                                                
                                                
                                                —
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                033,333
                                                (5)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.45
                                                
                                                
                                                —
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0350,000
                                                (6)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.25
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Aharon
      Y.
                                                
                                                
                                                66,666
                                                (7)
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0.45
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Levinas
                                                
                                                
                                                2,650,000
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                441,666
                                                (8)
  24
  (1) Pursuant to an Employment
Agreement, dated October 3, 2005 and amended on October 3, 2006, between our
Company and Pete Mateja, our Chief Executive Officer and Director, we granted to
Mr. Mateja 3,000,000 stock options, subject to vesting as described
below.  Each option gives Mr.  Mateja the right to purchase
one share of the Company's common stock for $0.15.  Such stock options
vest pro ratably every three months over the three year period commencing
January 3, 2006 and are exercisable until the earlier of five years after
vesting or 365 days after Mr.  Mateja's termination.  All
remaining stock options shall automatically vest upon the Company's change in
control.  As of December 31, 2007, 2,000,000 of such stock options had
vested.
 (2) On
October 3, 2006, the Company granted to Mr. Mateja 66,666 stock purchase
options, each of which entitles the holder thereof to purchase one share of
common stock at $0.45.
 (3)
Pursuant to an Employment Agreement, dated May 24, 2005, between our Company and
Edward Braniff, our Chief Financial Officer, we granted to Mr. Braniff 1,000,000
stock options, subject to vesting as described below.  Each stock
option entitles Mr. Braniff to purchase one share of the Company’s common stock
at an exercise price of $0.05.  Such options shall vest pro ratably
every three months over a three year period commencing on May 24,
2005.  The vested options shall be exercisable until the earlier of 5
years after vesting or 365 days after the termination of Mr. Braniff’s
employment with the Company. All remaining stock options shall automatically
vest upon the Company's change in control.  As of December 31, 2007,
843,333 of the stock options had vested.
 (4) On
October 25, 2006, we issued 50,000 stock options to Mr. Braniff (each entitling
Mr. Braniff to purchase one share of common stock for $0.30) in lieu of a cash
bonus.
 (5) On
December 31, 2006, we issued 33,333 stock options to Mr. Braniff (each entitling
Mr. Braniff to purchase one share of common stock for $0.45) as a bonus pursuant
to his employment agreement, dated May 24, 2005 and amended and restated on
October 25, 2006.
 (6) On
June 1, 2008 50,000 monthly stock options (each entitling Mr. Braniff to
purchase one share of common stock for $0.24) were granted to Mr.
Braniff.
 (7)  On
October 3, 2006, the Company granted to Mr. Levinas 66,666 stock options (each
entitling the holder thereof to purchase one share of common stock for
$0.45).
 (8)
Pursuant to an Employment Agreement, dated March 23, 2005, between our Company
and Aharon Y. Levinas, our Chief Technology Officer, as amended on April 18,
2005 and May 18, 2005, we granted to Mr. Levinas 2,650,000 shares of common
stock, which shall vest pro ratably every 3 months over a 3-year period
commencing on April 4, 2005.  Upon a change of control of the Company,
all such shares shall automatically be issued simultaneously upon the effective
date of the change of control.  As of December 31, 2007, 2,208,333 of
such shares had vested.
 
 Compensation
of Directors
 
 The terms
of the compensation paid to each director of the Company are set forth in a
letter agreement which is separately entered into between the Company and each
of its directors.  All of the following individuals, who served as a
director of the Company during the fiscal year ended December 31, 2006, entered
into their letter agreements on July 29, 2005:  Aharon Y. Levinas,
Tamir Levinas, Jacob Enoch, Joseph Bahat, and Amir Uziel.  The terms
of each such letter agreement are identical.  Pursuant to such letter
agreement, each director agreed to serve as a director of the Company until the
next Annual Meeting of Shareholders.  The director may be removed from
his position at any time by the affirmative vote of the majority of the
directors or the affirmative vote of the majority of the Company's shareholders.
The director may resign at any time.  As compensation for his
services, each director shall be paid $4,000 for each year that he serves as
director, payable quarterly in arrears. In addition, each director shall be paid
$1,000 for each board or committee meeting at which he is physically
present.  Each director shall also receive options to purchase 345,000
shares of the common stock of the Company for a price of $0.15 per share,
exercisable for three years after the date that the stock options
vest.  Such stock options shall vest quarterly over three years,
commencing from the date of the letter agreement, so that 28,750 stock options
shall vest every three months.   If the Company undergoes a
change in control, all stock options shall vest automatically upon the date of
such change in control.
  25
  Each of
the following directors entered into their letter agreements on February 26,
2007, the date that they were appointed as directors: Pete Mateja, Guy Moshe,
and Michael Ben-Ari.  Pursuant to their letter agreements, each
director agreed to serve as a director of the Company until the next annual
meeting of the Company’s shareholders.  As compensation for his
services, each such director shall be paid $4,000 for each year that he serves
as director. In addition, he shall be paid $1,000 for each board or committee
meeting at which he is physically present. He shall also receive 540,000 common
stock purchase options, which shall vest in quarterly increments of 45,000 over
a three year period. Each such common stock purchase option shall entitle the
holder thereof to purchase one share of the common stock of the Company for a
price of $0.35 per share, and it shall be exercisable for three years after the
date of vesting. If the Company undergoes a change in control, all stock options
shall vest automatically upon the date of such change in control.
 
 On
November 9, 2006, we also granted an additional 195,000 stock options, subject
to vesting as described below, to each of the following directors: Aharon Y.
Levinas, Tamir Levinas, Jacob Enoch, Joseph Bahat, and Amir
Uziel.  Each such stock option entitles the holder thereof to purchase
one share of common stock for a price of $0.15, exercisable for three years
after the date that date of vesting.  Such stock options shall vest
quarterly over three years, commencing on November 9, 2006.
 
 The
following table sets forth certain information regarding the compensation paid
to our Directors during the fiscal year ended December 31, 2007.  In
determining the value of the stock options described below, we made the
following assumptions: The value of the stock options shares was based on a
Black-Scholes Model value of $ 168,203 for each Director.
 
 COMPENSATION
      OF DIRECTORSName
                                                    (a)
                                                  
                                                  Fees
                                                    Earnedor
                                                    Paid
      in
                                                    Cash
                                                    ($)
                                                    (b)
                                                  
                                                  
                                                  Stock
                                                    Awards
                                                    ($)
                                                    (c)
                                                  
                                                  
                                                  Option
                                                    Awards
                                                    ($)
                                                    (d)
                                                  
                                                  
                                                  Non-Equity
                                                    Incentive
                                                    Plan
                                                    Compensation
                                                    ($)
                                                    (e)
                                                  
                                                  
                                                  Non-Qualified
                                                    Deferred
                                                    Compensation
                                                    Earnings
                                                    ($)
                                                    (f)
                                                  
                                                  
                                                  All
                                                    Other
                                                    Compensation
                                                    ($)
                                                    (g)
                                                  
                                                  
                                                  Total
      ($)
                                                    (j)Aharon
      Y. Levinas
                                                  
                                                  
                                                  12,000
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  71,982
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  83,982Joseph
      Bahat
                                                  
                                                  
                                                  12,500
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  71,982
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  79,48284,482Jacob
      Enoch
                                                  
                                                  
                                                  12,500
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  71,982
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  84,482Tamir
      Levinas
                                                  
                                                  
                                                  72,000
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  71,982
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  142,982PeterMateja
                                                  
                                                  
                                                  4,000
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  86,176
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  90,176MikeBen
      Ari
                                                  
                                                  
                                                  12,000
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  75,436
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  87,436GuyMoscha
                                                  
                                                  
                                                  12,000
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  75,436
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  87,436
  26
 
 Item
12.   Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
 
 The
following table lists, as of March 26, 2009, the number of shares of Common
Stock beneficially owned by (i) each person or entity known to the Company to be
the beneficial owner of more than 5% of the outstanding common stock; (ii) each
officer and director of the Company; and (iii) all officers and directors as a
group. Information relating to beneficial ownership of common stock by our
principal stockholders and management is based upon information furnished by
each person using “beneficial ownership” concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. Except as noted below, each person has sole
voting and investment power.
 
 The
percentages below are calculated based on 112,036,595 shares of Common Stock
issued and outstanding as of March 26, 2009.  Unless otherwise
provided, the address of each person listed in the following table is c/o Smart
Energy Solutions, Inc., 210 West Parkway, #7, Pompton Plains, NJ
07444.
 
 Name of Beneficial Owner
                        
                        Title Of Class
                        
                        Amount and Nature of
                          Beneficial Ownership
                        
                        
                        Percent of Class5%
      Owners:EGFE,
      Ltd.
                        
                        Common
                        
                        
                        18,378,490
                        (1)
                        
                        
                        16.4
                        %Directors
      and Executive Officers:Peter
      Mateja
                        
                        Common
                        
                        
                        3,756,666
                        (2)(3)(4)
                        
                        
                        4.9
                        %Edward
      Braniff
                        
                        Common
                        
                        
                        2,295,282
                        (5)(6)(7)
                        
                        
                        2.0
                        %Michael
      Ben-Ari
                        
                        Common
                        
                        
                        6,413,824
                        ()(8)(9)(10)
                        
                        
                        8.3
                        %Moshe
      Guy
                        
                        NA
                        
                        
                        540,000
                        (9)(10)
                        
                        Less
      than 1
                        %Joseph
      Bahat
                        
                        Common
                        
                        
                        655,000
                        (9)(10)
                        
                        Less
      than 1
                        %Jacob
      Enoch
                        
                        Common
                        
                        
                        655,000
                        (9)(10)
                        
                        Less
      than 1
                        %Aharon
      Y. Levinas
                        
                        Common
                        
                        
                        13,678,466
                        (9)(11)(12)
                        
                        
                        17.8
                        %Tamir
      Levinas
                        
                        Common
                        
                        
                        2,600,000
                        (9)(10)
                        
                        
                        3.4
                        %All
      directors andexecutive
      officers as agroup
      (6 persons)
                        
                        Common
                        
                        
                        30,594,238
                        (2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
                        
                        
                        27.3.4
                        %
  27





(1)
Includes 15,306,818 shares of common stock issued upon conversion of three
convertible promissory notes issued in 2006 by the Company to EGFE, Ltd., each
in the principal amount of $500,000.  The sole owner and manager of
EGFE, Ltd. is Michael Ben-Ari, our director.  In consideration
therefor, EGFE agreed to pay to the Company an aggregate of
$1,500,000.  Pursuant to each promissory note, EGFE has the right, at
its option, to convert the outstanding principal and interest due under the
promissory notes to shares of the Company's common stock. The number of shares
of common stock were issued upon conversion at a price of $.11 per
share


(2)
Includes 3,000,000 shares of common stock issuable upon exercise of 3,000,000
stock options granted to Mr. Mateja pursuant to a Consulting Agreement, dated
October 3, 2005, between the Company and Peter Mateja.  Each stock
option provides to Mr.  Mateja the right to purchase one share of the
Company's common stock for $0.15.  Such stock options shall vest pro
ratably every three months over the three year period commencing three months
from October 3, 2005.


(3)
Includes 150,000 shares and shares of common stock issuable upon exercise of
66,666 stock purchase options, each of which entitles the holder thereof to
purchase one share of common stock at $0.45, which were granted to Mr. Mateja on
October 3, 2006.


(4)
Includes shares of common stock issuable upon exercise of 540,000 stock options
granted to Mr. Mateja pursuant to a letter agreement, dated February 26, 2007,
as partial compensation for services rendered by such person in his capacity as
a director of the Company.  Each option entitles the holder thereof to
purchase one share of common stock of the Company for a price of $0.35 per
share.  The options are exercisable for three years after the date
that the stock options vest.  Such stock options shall vest quarterly
over the three year period commencing on the date of the letter
agreement.


(5)
Includes 1,000,000 shares of common stock issuable upon exercise of 1,000,000
stock options granted to Mr. Braniff pursuant to an Employment Agreement, dated
May 24, 2005, between the Company and Edward Braniff.  Each stock
option provides to Mr. Braniff the right to purchase one share of the Company’s
common stock at an exercise price of $0.05 per share.  Such options
shall vest shall vest pro ratably every three months over three year period
commencing on May 24, 2005.  The vested options shall be exercisable
until the earlier of 5 years after vesting or 365 days after termination of Mr.
Braniff’s employment with the Company.  The options were issued in
consideration for Mr. Braniff’s services rendered to the Company in his capacity
as Chief Financial Officer.


(6)
Includes 100,000 shares and  50,000 stock options (each entitling Mr.
Braniff to purchase one share of common stock for $0.30), granted on October 25,
2006, and 33,333 stock options (each entitling Mr. Braniff to purchase one share
of common stock for $0.45), granted on May 31, 2006.


(7)
Includes 350,000 stock options issued to Mr. Braniff in 2008 as an extention of
his employment agreement.


(8)
Includes 3,320,802 shares of common stock issuable upon conversion of three
convertible promissory notes issued in 2006 by the Company to EGFE, Ltd., each
in the principal amount of $500,000.  The sole owner and manager of
EGFE, Ltd. is Michael Ben-Ari, our director.  See Note 1
above.


(9)
Includes shares of common stock issuable upon exercise of 345,000 stock options
granted to such person pursuant to a letter agreement entered into with such
person on July 29, 2005, as partial compensation for services rendered by such
person in his capacity as a Director of the Company.  Each option
entitles the holder thereof to purchase one share of common stock of the Company
for a price of $0.15 per share.  The options are exercisable for three
years after the date that the stock options vest.  Such stock options
shall vest quarterly over the three year period commencing three months from the
date of the Letter Agreement, so that 28,750 stock options shall vest every
three months.


28





(10)
Includes shares of common stock issuable upon exercise of 195,000 stock options
granted to such person pursuant to a Board Meeting on November 9, 2006, as
partial compensation for services rendered by such person in his capacity as a
Director of the Company.  Each option entitles the holder thereof to
purchase one share of common stock of the Company for a price of $0.35 per
share.  The options are exercisable for three years after the date
that the stock options vest.  Such stock options shall vest quarterly
over the three year period commencing three months from the date of the board
meeting, so that 16,250 stock options shall vest every three
months.


(11)
Includes 2,650,000 shares of common stock granted to Mr. Levinas, which shall
vest pro ratably every 3 months over a 3-year period commencing on April 4,
2005.  Such shares were issued in consideration for services rendered
by Mr. Levinas pursuant to his employment agreement with the Company, dated
March 23, 2005, as amended on April 18, 2005 and May 18, 2005.


(12)
Includes 66,666 stock options (each entitling the holder thereof to purchase one
share of common stock for $0.45) granted to Mr. Levinas on October 3,
2006.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





Related
Transactions





On May
19, 2008 the company executed an agreement providing for the conversion of three
outstanding promissory notes with Ever Green Fund, EGFE.  The
conversion price was $0.11 for each share and one-quarter
warrant.  Ever Green Fields Enterprises, Ltd. was the holder of three
of the notes with an aggregate principal amount of $1.5 million The warrants
issued upon conversion of the notes have a term of five years and an exercise
price per share of $0.11. The securities were issued in a private transaction
exempt from registration under the Securities Act of 1933, in reliance of
Section 4(2) and Regulation D of that Act.  The individual subscribers
represented that they are accredited investors, as defined in Regulation D, that
they acquired the securities for their own accounts as principals, not as
nominees or agents, for investment purposes only and not with a view to or for
resale or distribution.





During
the three months ended September 30, 2006, the Company issued 142,857 shares of
common stock to EGFE, Ltd.  EGFE is the beneficial owner of more than
5% of the Company’s outstanding common stock, and its sole owner and manager is
Michael Ben-Ari, who has been our director since February 26,
2007.   Such shares were issued in connection with the promissory
note, dated May 22, 2006 and amended on March 6, 2007, in the principal amount
of $500,000, issued by the Company to EGFE.





On
September 14, 2006, the Company issued to EGFE a demand promissory note, in the
principal amount of $500,000.  In consideration therefor, EGFE loaned
$500,000 to the Company. Interest on such promissory note will accrue at the
rate of 12% per year.  On March 6, 2007, such note was amended and
restated for the purpose of providing that the entire principal sum and all
accrued interest due under the promissory note shall be paid on September 30,
2007.





On May
22, 2006, the Company issued to EGFE two convertible promissory notes, each in
the principal amount of $500,000.  In consideration therefor, EGFE
agreed to pay to the Company an aggregate of $1,000,000. Interest on each note
will accrue at the rate of 15% per annum. The entire principal sum and all
accrued interest due under each note shall be paid on the maturity date of the
respective note.  The maturity date of one of the notes was originally
June 4, 2007, but such note was amended on March 6, 2007 for the purpose of
extending the maturity date to June 4, 2008.  The maturity date of the
other Note was originally May 24, 2007, but such note was amended on March 6,
2007 for the purpose of extending the maturity date to May 24,
2008.  Pursuant to each promissory note, EGFE has the right, at its
option, to convert the outstanding principal and interest due under the
promissory notes to shares of the Company's common stock. The number of shares
of common stock that shall be issued upon conversion will be calculated by
dividing the amount of outstanding principal and interest that EGFE elects to
convert by the conversion price specified therein. The conversion price will be
calculated as follows: (1) if the Company is not in default under the terms of
the note, the conversion price shall be equal to 95% of the average of the last
bid and ask price of the common stock as quoted on the Over-The-Counter-Bulletin
-Board or such other exchange where the common stock is quoted or listed for the
five trading days preceding EGFE's election to convert; or (2) if the Company is
in default under the terms of the Note, the conversion price shall be equal to
50% of the of the average of the last bid and ask price of the common stock as
quoted on the Over-The-Counter-Bulletin -Board or such other exchange where the
common stock is quoted or listed for the five trading days preceding EGFE,
Ltd.'s election to convert.


29





As of
March 6, 2006, the Company has received a lock-up agreement from each of 29
shareholders with respect to an aggregate of 37,029,528 shares (representing
51%) of the Company's outstanding common stock. Each lock-up agreement prohibits
the shareholder from selling the shares which are specified in
such  shareholder's  lock-up  agreement until
April 2008, except as follows: (1) after April 2006,
the  shareholder  may sell 20% of the
shares  specified in such shareholder's lock-up agreement; (2) after
April 2007, the  shareholder  may sell 30% of the
shares  specified in such shareholder's lock-up agreement; (3) after
April 2008, the balance remaining may be sold by the
shareholder.  Notwithstanding the foregoing, the shares held by the
shareholder may be sold at anytime  as long as such sale does
not  involve  the  shares  being  sold
on the Over-The-Counter  Bulletin  Board (or
any  other  exchange  or medium  where
the securities of the Company are listed or quoted), provided that any
transferee agrees to be bound by the terms of the lock-up
agreement.





On February 1, 2006, the Company
entered into a consulting agreement with Shiri Levinas.  Ms. Levinas
is the daughter of Aharon Y. Levinas, our Chief Technology Officer and Director,
and the sister of Tamir Levinas, our Director.  Pursuant to such
agreement, Ms. Levinas agreed to provide consulting services related to our
human resource needs.  Shiri Levinas has received $30,000 for her
services and received 60,000 stock options, each of which entitles the holder
thereof to purchase one share of common stock at $0.15 per share.This can be deleted,
because it does not involve (i) any transaction since the beginning of 2007, or
(ii) any transaction exceeding the lesser of $120,000 or 1% of average total
assets at the end of 2006 and 2007.





On
January 24, 2006, the Company issued 60,000 shares to each of the following
persons: Amir Uziel, a director; Tamir Levinas, a director; and Shiri Levinas,
the daughter of Ahraon Y. Levinas, who is a director.  Such shares
were issued in consideration for consulting services rendered to the
Company.  The shares were offered and issued pursuant to an exemption
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.





On October 3, 2005, the Company entered
into a Consulting Agreement with Peter Mateja, pursuant to which Mr. Mateja was
engaged as the Chief Executive Officer of the Company.  As
compensation for his services, Mr. Mateja will receive an annual base salary of
$150,000 and an annual bonus of up to $50,000 based on the Company's performance
and meeting established objectives which shall be submitted by
Mr.  Mateja and approved by the Company's board of
directors.  In addition, the Company granted to Mr. Mateja 3,000,000
stock options, each of which gives Mr. Mateja the right to purchase one share of
the Company's common stock for $0.15.  Such stock options shall vest
pro ratably every three months over the three year period commencing three
months from October 3, 2005. The vested stock options shall be exercisable until
the earlier of five years after vesting or 365 days after Mr. Mateja's
termination.  All remaining stock options shall automatically vest
upon the Company's change in control.  The term of the Consulting
Agreement was for one year, commencing on the date thereof.On October 3, 2006 Mr. Mateja’s
consulting agreement was renewed and amended, to provide for an annual base
salary of $170,000 and $700 per month as reimbursement for accommodation
expenses incurred by him.  The Company also agreed that, if the
Company terminates Mr. Mateja’s engagement without cause it will continue to pay
him under normal payroll practices for the six months immediately following such
termination.  Mr. Mateja’s consulting agreement expired on October 2,
2007.





On August
31, 2005, the Company issued 10,421,750 shares to Aharon Y. Levinas. Such shares
were issued pursuant to the Asset Purchase Agreement, dated March 23, 2005,
between the Company,  Purisys, Inc., and Mr. Levinas, as partial
consideration for the sale of the Battery Brain to the Company by Purisys, Inc.,
a company  wholly  owned by Mr. Levinas.  This can be deleted, because it does
not involve any transaction since the beginning of 2007.


30





On July
29, 2005, the Company entered into a separate Letter Agreement with each of its
five directors (the "Letter Agreements"): Joseph Bahat, Jacob Enoch, Amir Uziel,
Tamir Levinas, and Aharon Y. Levinas. The terms of each Letter Agreement are
identical.  Pursuant to the Letter Agreements, each director agreed to
serve as a director of the Company until the Annual Meeting of Shareholders that
is to be held in 2006.  The director may be removed from his position
at any time by the affirmative vote of the majority of the directors or the
affirmative vote of the majority of the Company's shareholders. The director may
resign at any time.  As compensation for his services, each director
shall be paid $4,000 for each year that he serves as director, payable quarterly
in arrears. In addition, each director shall be paid $1,000 for each board or
committee meeting at which he is physically present. Each director shall also
receive options to purchase 345,000 shares of the common stock of the Company
for a price of $0.15 per share, exercisable for three years after the date that
the stock options vest.  Such stock options shall vest every quarterly
over the next three years commencing three months from the date of the Letter
Agreement, so that 28,750 stock options shall vest every three months. If the
Company undergoes a change in control, all stock options shall vest
automatically upon the date of such change in control.





Each of
the following directors entered into their letter agreements on February 26,
2007, the date that they were appointed as directors: Pete Mateja, Guy Moshe,
and Michael Ben-Ari.  Pursuant to their letter agreements, each
director agreed to serve as a director of the Company until the next annual
meeting of the Company’s shareholders.  As compensation for his
services, each such director shall be paid $4,000 for each year that he serves
as director. In addition, he shall be paid $1,000 for each board or committee
meeting at which he is physically present. He shall also receive 540,000 common
stock purchase options, which shall vest in quarterly increments of 45,000 over
a three year period. Each such common stock purchase option shall entitle the
holder thereof to purchase one share of the common stock of the Company for a
price of $0.35 per share, and it shall be exercisable for three years after the
date of vesting. If the Company undergoes a change in control, all stock options
shall vest automatically upon the date of such change in control.





On July
1, 2005, the Company entered into a Consulting Agreement with Tamir Levinas,
which was thereafter amended in February, 2006.  Mr. Levinas manages
our research and development facility in Israel and is also a principal of Aniam
Engineering. Aniam Engineering is responsible for our research and development
laboratory and also manages our relationships with some of our component
manufacturing suppliers in Israel.  As compensation for his services,
he is entitled to a consulting fee of $5,000 per month plus reimbursement of
reasonable costs incurred on behalf of the Company.





On May
24, 2005, the Company and Edward Braniff entered into an employment agreement
pursuant to which Braniff was employed by the Company as its Chief Financial
Officer with an annual base salary of $140,000, an annual bonus of $50,000 based
on performance, and options for 1,000,000 shares at $0.05.  On October
25, 2006 Mr. Braniff’s employment agreement was amended and restated to provide
for an annual base salary of $145,000.  Mr.
Braniff continues to be entitled to a bonus of up to $50,000 based on
performance.  In addition, Mr. Braniff is entitled to an additional
bonus as follows: for each $1,000,000 in revenues above $1,200,000 earned by the
Company during the fiscal year ended December 31, 2006, the Company shall pay to
Mr. Braniff the following: (a) 50,000 stock options, each of which shall give
him the right to purchase one share of common stock for $0.45; (b) a cash
payment equal to $10,000; and (c) a cash payment equal to 2.5% of the Company’s
EBIT for the fiscal year ending December 31, 2006.  Mr. Braniff’s
employment agreement was amended and restated on October 25, 2006 to provide for
an annual base salary of $145,000.  Mr. Braniff continues to be
entitled to a bonus of up to $50,000 based on performance.  In
addition, Mr. Braniff is entitled to an additional bonus as follows: for each
$1,000,000 in revenues above $1,200,000 earned by the Company during the fiscal
year ended December 31, 2006, the Company shall pay to Mr. Braniff the
following: (a) 50,000 stock options, each of which shall give him the right to
purchase one share of common stock for $0.45; (b) a cash payment equal to
$10,000; and (c) a cash payment equal to 2.5% of the Company’s EBIT for the
fiscal year ending December 31, 2006.  Mr. Braniff’s employment
agreement expired on May 24, 2008 and has been extended until July 1, 2009. Mr.
Braniff was granted 50,000 monthly stock options (each entitling Mr. Braniff to
purchase one share of common stock for $0.24) were granted to Mr.
Braniff.


31





We have an agreement with Aharon Y.
Levinas, who became the Chief Technology Officer and a director as of March 23,
2005. The agreement is for a 4-year term, with a base salary of $160,000,
$200,000, $240,000 and $240,000 for each year of the term.  All
benefits to be granted to the individual who will be appointed as our Chief
Executive Officer shall be granted to Levinas as well, including bonuses and
stock options. Mr. Levinas shall receive a cell phone and a car allowance. The
consulting agreement with Mr. Levinas provides that if Mr. Levinas is terminated
during the 4-year term, or is no longer employed by us for any reason during
said period, including termination for cause or death, we remain obligated to
pay the full amounts due Mr. Levinas thereunder.  Mr. Levinas’
agreement was amended on April 18 and May 18 of 2005 to provide, among other
things, for a grant of 2,650,000 shares of common stock, which shall vest pro
ratably every 3 months over a 3-year period commencing on April 4, 2005. Upon a
change of control of the Company, all such shares shall automatically be issued
simultaneously upon the effective date of the change of control. Mr. Levinas’
employment agreement was extended until July 1,
2009.





On April
22, 2005, the Company entered into a Consulting Agreement with Amir Uziel, a
director and also our Chief Executive Officer from November 24, 2004 until April
17, 2005.  As compensation for services rendered thereunder, Mr. Uziel
was entitled to receive a monthly cash payment of $2,700 and 5,000 shares of
common stock of the Company during each month of the agreement’s term,
commencing as of January 1, 2005.  The Consulting Agreement was
terminated on December 31, 2005.





On April
22, 2005, the Company entered into a Consulting Agreement with Shiri Levinas,
which was thereafter cancelled by the Company.





Director
Independence





We
believe that the following of our directors currently meet the definition of
“independent” as promulgated by the rules and regulations of NASDAQ: Guy Moshe
and Michael Ben-Ari.





Item 14.  Principal Accounting Fees and
Services





Chisholm,
Bierwolf,  Nilson & Morrill, LLC has been serving as the Company’s
auditor since May 17, 2005.  Squire & Company, PC served as the
Company’s auditors from June 10, 2002 until May 17, 2005.  Their
pre-approved fees billed to the Company are set forth below:




Fiscal year ending
                    December 31, 2008
                  
                  
                  Fiscal year ending
                    December 31, 2007Audit
      Fees
                  
                  $
                  46,263
                  
                  
                  $
                  22,686Audit
      Related Fees
                  
                  $
                  26,000
                  
                  
                  $
                  8,158Tax
      Fees
                  
                  $
                  0
                  
                  
                  $
                  0All
      Other Fees
                  
                  $
                  0
                  
                  
                  $
                  0





As of
December 31, 2008, the Company did not have a formal documented pre-approval
policy for the fees of the principal accountant.





Add(i) a description of the
pre-approval procedures used, despite the absence of a formal documented policy,
(ii) the percentage of audit related services that were pre-approved, and (iii)
a description of the nature of the services in the audit related
category.


32





Item
15.  Exhibits, Financial Statement Schedules





(a)
Financial Statements:





Our
financial statements, as indicated by the Index to Consolidated Financial
Statements set forth below, begin on page F-1 of this Form 10-K, and
are hereby incorporated by reference. Financial statement schedules have been
omitted because they are not applicable or the required information is included
in the financial statements or notes thereto.




Report
      of Independent Registered Public Accounting Firms
              
              F-3Balance
      Sheet
              
              F-4Statements
      of Operations
              
              F-5Statements
      of Stockholders' Equity
              
              F-6Statements
      of Cash Flows
              
              F-7
      – F-8Notes
      to the Financial Statements
              
              F-9
      – F-23





(b)
Exhibits:





Exhibit No.
                
                Description
                
                Where Found3.1
                
                Articles
      of Incorporation
                
                Previously
      filed with the Company’s Definitive Proxy Statement on Schedule 14A, filed
      with the SEC on July 19, 20053.2
                
                Bylaws
                
                Previously
      filed with the Company’s Definitive Proxy Statement on Schedule 14A, filed
      with the SEC on July 19, 200510.1
                
                Letter
      of Intent
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      December 17, 200410.2
                
                Letter,
      dated February 28, 2005, between Purisys, Inc. and the
    Company
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      March 1, 200510.3
                
                Asset
      Purchase Agreement dated as of March 23, 2005 among the Company, Purisys,
      Inc. and Aharon Y. Levinas
                
                Previously
      filed with the Company’s Current Report on Form  8-K, filed with
      the SEC on March 28, 200510.4
                
                Consulting
      Agreement dated as of March 23, 2005 between the Company and Aharon Y.
      Levinas
                
                Previously
      filed with the Company’s Current Report on Form  8-K, filed with
      the SEC on March 28, 200510.5
                
                Distribution
      Agreement, dated January 15, 2006, between the Company and Elcart
      Distribution S.P.A.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      January 23, 200610.6
                
                Distribution
      Agreement, dated November 30, 2005, between the Company and Superior
      Automotive Company
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      January 23, 200610.7
                
                15%
      Convertible Promissory Note Due May 24, 2007, made by the Company in favor
      of EGFE, Ltd.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      May 25, 2006


33





10.8
                
                15%
      Convertible Promissory Note Due June 4, 2007, made by the Company in favor
      of EGFE, Ltd.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      May 25, 200610.9
                
                Distributorship
      Agreement, dated June 22, 2006, by and between the Company and Carter
      Group, Inc.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      June 28, 200610.10
                
                Profit
      Sharing and Internet Distribution Agreement, dated June 22, 2006, by and
      between Company and Carter Group, Inc.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      June 28, 200610.11
                
                Finder’s
      Agreement, dated June 22, 2006, by and between Company and Carter Group,
      Inc.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      June 28, 200610.12
                
                Demand
      Promissory Note, dated September 14, 2006, made by the Company in favor of
      EGFE, Ltd.
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      September 19, 200610.13
                
                Letter
      Agreement, dated March 19, 2007, between the Company and Moshe
      Guy
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      March 23, 200710.14
                
                Letter
      Agreement, dated March 19, 2007, between the Company and Pete
      Mateja
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      March 23, 200710.15
                
                Letter
      Agreement, dated March 19, 2007, between the Company and Michael
      Ben-Ari
                
                Previously
      filed with the Company’s Current Report on Form 8-K, filed with the SEC on
      March 23, 200710.16
                
                Distributorship
      Agreement and Addendum to Distributorship Agreement, dated March 17, 2008,
      between the Company and OnGuard Dealer Services, LLC
                
                Previously
      filed with the Company’s Current Report on Form 8-K/A, filed with the SEC
      on March 24, 200810.17
                
                Distributorship
      Agreement, dated September 13, 2007, between the Company and Breeze
      Overseas Ltd.
                
                Previously
      filed31.
                
                Rule
      13a-14(a)/15d14(a) Certification
                
                Attached
      Hereto32.
                
                Section
      1350 Certification
                
                Attached
      Hereto


34


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





SMART
      ENERGY SOLUTIONS, INC.Dated:
      April 13, 2009
                        By:
                        /s/ Edward BraniffName:
      Edward BraniffTitle:
      Chief Financial OfficerActing
      Chief Executive
Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.





SIGNATURE
                                  
                                  TITLE
                                  
                                  DATE/s/ Edward Braniff
                                  
                                  Chief
      Financial Officer, Acting Chief
                                  
                                  April
      13, 2009Edward
      Braniff
                                  
                                  Executive
      Officer/s/ Aharon Y. Levinas
                                  
                                  Chief
      Technology Officer
                                  
                                  April
      13, 2009Aharon
      Y. Levinas
                                  
                                  and
      Director/s/ Tamir Levinas
                                  
                                  Director
                                  
                                  April
      13, 2009Tamir
      Levinas/s/ Guy Moshe
                                  
                                  Director
                                  
                                  April
      13, 2009Guy
      Moshe/s/ Michael Ben-Ari
                                  
                                  Director
                                  
                                  April
      13, 2009Michael
      Ben-Ari


35




SMART
ENERGY SOLUTIONS, INC.





FINANCIAL
STATEMENTS





December
31, 2008 and 2007







CONTENTS





Report
      of Independent Registered Public Accounting Firm
                F-3Balance
      Sheets
                F-4Statements
      of Operations
                F-5Statements
      of Stockholders' Equity  (Deficit)
                F-6Statements
      of Cash Flows
                F-7Notes
      to the Financial Statements
                F-9




F-2




CHISHOLM, BIERWOLF, NILSON & MORRILL, LLC
                              Certified Public Accountants
                              Phone (801) 292-8756 • Fax (801) 292-8809 •wwwcbnmcpa.com
                            Todd D. Chisholm
                              Nephi J. Bierwolf
                              Troy F. Nilson
                              Douglas W. Morrill
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  To The
Board of Directors and Shareholders
 Smart
Energy Solutions, Inc.
 Pompton
Plains, New Jersey
  We have
audited the accompanying balance sheets of Smart Energy Solutions, Inc.as of December 31, 2008 and 2007, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing our 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. As such we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Smart Energy Solutions, Inc. 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 financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred substantial losses from operations, has
negative working capital, negative cash flows from operations and has limited
sales of its product which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 
 Chisholm,
Bierwolf & Nilson, LLC
 Bountiful,
Utah
 April 2,
2009
  PCAOB
Registered, Members of AICPA, CPCAF and UACPA
 533
      West 2600 South, Suite 25 • Bountiful, Utah 84010
                12
      South Main, Suite 208, Layton, Utah
84041
  F-3
 SMART
ENERGY SOLUTIONS, INC.
 Balance
Sheets
  December 31,
                      
                      
                      December 31,2008
                      
                      
                      2007ASSETSCURRENT
      ASSETSCash
                      
                      $
                      132,687
                      
                      
                      $
                      70,902Accounts
      receivable, net
                      
                      
                      68,798
                      
                      
                      
                      259,552Inventory
                      
                      
                      494,269
                      
                      
                      
                      955,912Prepaid
      expenses
                      
                      
                      21,269
                      
                      
                      
                      485Total
      Current Assets
                      
                      
                      717,023
                      
                      
                      
                      1,286,851PROPERTY
      AND EQUIPMENT, net
                      
                      
                      27,139
                      
                      
                      
                      42,062OTHER
      ASSETSTrademark,
      net
                      
                      
                      429
                      
                      
                      
                      715Deposits
                      
                      
                      23,700
                      
                      
                      
                      23,700Battery
      Brain technology, net
                      
                      
                      13,027
                      
                      
                      
                      23,449Total
      Other Assets
                      
                      
                      37,156
                      
                      
                      
                      47,864TOTAL
      ASSETS
                      
                      $
                      781,318
                      
                      
                      $
                      1,376,777LIABILITIES AND STOCKHOLDERS'
      (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                      
                      $
                      623,626
                      
                      
                      $
                      481,060Bank
      overdraft
                      
                      
                      -
                      
                      
                      
                      52,294Deferred
      revenue
                      
                      
                      280,000
                      
                      
                      
                      140,000Convertible
      debt, net
                      
                      
                      -
                      
                      
                      
                      1,475,613Total
      Current Liabilities
                      
                      
                      903,626
                      
                      
                      
                      2,148,967TOTAL
      LIABILITIES
                      
                      
                      903,626
                      
                      
                      
                      2,148,967COMMITMENTS
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS'
      (DEFICIT)Preferred
      stock:no par value;1,000,000 shares authorized; none
      outstandingCommon
      stock, no par value; 500,000,000 shares authorized; 107,176,595 and
      82,022,679 shares issued and outstanding, respectively
                      
                      
                      21,916,986
                      
                      
                      
                      15,722,872Accumulated
      deficit
                      
                      
                      (22,039,294
                      )
                      
                      
                      (16,495,062
                      )Total
      Stockholders' (Deficit)
                      
                      
                      (122,308
                      )
                      
                      
                      (772,190
                      )TOTAL
      LIABILITIES AND STOCKHOLDERS' (DEFICIT)
                      
                      $
                      781,318
                      
                      
                      $
                      1,376,777
  The
accompanying notes are an integral part of these condensed financial
statements.
  F-4
 
 SMART
ENERGY SOLUTIONS, INC.
 Statements
of Operations
 
 For the Years EndedDecember 31,2008
                        
                        
                        2007REVENUES
                        
                        $
                        1,272,810
                        
                        
                        $
                        1,244,108COST
      OF GOODS SOLD
                        
                        
                        879,842
                        
                        
                        
                        933,836GROSS
      PROFIT
                        
                        
                        392,968
                        
                        
                        
                        310,272OPERATING
      EXPENSESGeneral
      and administrative
                        
                        
                        1,659,943
                        
                        
                        
                        2,687,557Marketing
      and advertising
                        
                        
                        144,802
                        
                        
                        
                        350,190Professional
      fees
                        
                        
                        194,375
                        
                        
                        
                        334,506Consultation
      fees
                        
                        
                        2,731,083
                        
                        
                        
                        4,644,482Total
      Operating Expenses
                        
                        
                        4,730,203
                        
                        
                        
                        8,016,735LOSS
      FROM OPERATIONS
                        
                        
                        (4,337,235
                        )
                        
                        
                        (7,706,463
                        )OTHER
      INCOME (EXPENSES)Interest
      income
                        
                        
                        7,124
                        
                        
                        
                        35,602Beneficial
      conversion expense
                        
                        
                        (349,859
                        )
                        
                        
                        -Loss
      on extinguishment of debt
                        
                        
                        (768,990
                        )
                        
                        
                        -Interest
      expense
                        
                        
                        (95,272
                        )
                        
                        
                        (225,818
                        )Total
      Other Income (Expenses)
                        
                        
                        (1,206,997
                        )
                        
                        
                        (190,216
                        )NET
      LOSS BEFORE INCOME TAXES
                        
                        
                        (5,544,232
                        )
                        
                        
                        (7,896,679
                        )INCOME
      TAX EXPENSE
                        
                        
                        -
                        
                        
                        
                        -NET
      LOSS
                        
                        $
                        (5,544,232
                        )
                        
                        $
                        (7,896,679
                        )BASIC
      AND FULLY DILUTED LOSS PER SHARE
                        
                        $
                        (0.06
                        )
                        
                        $
                        (0.10
                        )BASIC
      AND FULLY DILUTED WEIGHTED AVERAGENUMBER
      OF COMMON SHARES OUTSTANDING
                        
                        
                        95,947,996
                        
                        
                        
                        78,979,737
  The
accompanying notes are an integral part of these condensed financial
statements.
  F-5
 
 SMART ENERGY SOLUTIONS, INC.
 Statements
of Stockholders' (Deficit)
 For the
Period January 1, 2007 through December 31, 2008
 
 Shares
                  
                  
                  Amount
                  
                  
                  Deficit
                  
                  
                  TotalBalance,
      January 1, 2007
                  
                  
                  71,510,628
                  
                  
                  $
                  9,523,164
                  
                  
                  $
                  (8,598,383
                  )
                  
                  $
                  924,781Common
      stock issued for cash
                  
                  
                  5,946,531
                  
                  
                  
                  1,900,832
                  
                  
                  
                  -
                  
                  
                  
                  1,900,832Common
      stock issued for services
                  
                  
                  4,287,270
                  
                  
                  
                  2,346,526
                  
                  
                  
                  -
                  
                  
                  
                  2,346,526Common
      stock issued for exercise of options
                  
                  
                  278,250
                  
                  
                  
                  63,085
                  
                  
                  
                  -
                  
                  
                  
                  63,085Valuation
      of options and warrants
                  
                  
                  -
                  
                  
                  
                  1,889,265
                  
                  
                  
                  -
                  
                  
                  
                  1,889,265Net
      loss for the year ended December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7,896,679
                  )
                  
                  
                  (7,896,679
                  )Balance,
      December 31, 2007
                  
                  
                  82,022,679
                  
                  
                  
                  15,722,872
                  
                  
                  
                  (16,495,062
                  )
                  
                  
                  (772,190
                  )Common
      stock issued for cash
                  
                  
                  3,736,363
                  
                  
                  
                  775,000
                  
                  
                  
                  -
                  
                  
                  
                  775,000Common
      stock issued for services
                  
                  
                  1,565,282
                  
                  
                  
                  242,311
                  
                  
                  
                  -
                  
                  
                  
                  242,311Common
      stock issued for conversion of debt
                  
                  
                  19,852,271
                  
                  
                  
                  2,183,750
                  
                  
                  
                  -
                  
                  
                  
                  2,183,750Valuation
      of options and warrants
                  
                  
                  -
                  
                  
                  
                  1,898,591
                  
                  
                  
                  -
                  
                  
                  
                  1,898,591Fair
      value of beneficial conversion feature of convertible debt
                  
                  
                  -
                  
                  
                  
                  325,472
                  
                  
                  
                  -
                  
                  
                  
                  325,472Loss
      on conversion of debt
                  
                  
                  -
                  
                  
                  
                  768,990
                  
                  
                  
                  -
                  
                  
                  
                  768,990Net
      loss for the year ended December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,544,232
                  )
                  
                  
                  (5,544,232
                  )Balance,
      December 31, 2008
                  
                  
                  107,176,595
                  
                  
                  $
                  21,916,986
                  
                  
                  $
                  (22,039,294
                  )
                  
                  $
                  (122,308
                  )
  The
accompanying notes are an integral part of these condensed financial
statements.
  F-6
 
 SMART ENERGY SOLUTIONS, INC.
 Statements
of Cash Flows
 
 For the Years EndedDecember 31,2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                      
                      $
                      (5,544,232
                      )
                      
                      $
                      (7,896,679
                      )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Warrants
      and options issued for services
                      
                      
                      1,898,591
                      
                      
                      
                      1,889,265Common
      stock issued for services
                      
                      
                      242,311
                      
                      
                      
                      2,346,526Accretion
      of discount on convertible notes  payable
                      
                      
                      349,859
                      
                      
                      
                      15,818Depreciation
      and amortization
                      
                      
                      25,631
                      
                      
                      
                      106,820Loss
      on conversion of debt
                      
                      
                      768,990
                      
                      
                      
                      -Changes
      in operating assets and liabilities:(Increase)
      decrease in prepaid and expenses and deposits
                      
                      
                      (20,784
                      )
                      
                      
                      163,037(Increase)
      decrease in accounts receivable
                      
                      
                      190,754
                      
                      
                      
                      971,036(Increase)
      in inventory
                      
                      
                      461,644
                      
                      
                      
                      (742,471
                      )Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      326,315
                      
                      
                      
                      152,006Increase
      in deferred revenue
                      
                      
                      140,000
                      
                      
                      
                      140,000Net
      Cash Used in Operating Activities
                      
                      
                      (1,160,921
                      )
                      
                      
                      (2,854,642
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of equipment
                      
                      
                      -
                      
                      
                      
                      (2,000
                      )Net
      Cash Used in Investing Activities
                      
                      
                      -
                      
                      
                      
                      (2,000
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESRepayment
      of bank overdraft
                      
                      
                      (52,294
                      )
                      
                      
                      -Proceeds
      from notes payable
                      
                      
                      500,000
                      
                      
                      
                      -Proceeds
      from exercise of stock options
                      
                      
                      -
                      
                      
                      
                      63,085Proceeds
      from issuance of common stock
                      
                      
                      775,000
                      
                      
                      
                      1,900,832Net
      Cash Provided by Financing Activities
                      
                      
                      1,222,706
                      
                      
                      
                      1,963,917NET
      INCREASE (DECREASE) IN CASH
                      
                      
                      61,785
                      
                      
                      
                      (892,725
                      )CASH
      AT BEGINNING OF YEAR
                      
                      
                      70,902
                      
                      
                      
                      963,627CASH
      AT END OF YEAR
                      
                      $
                      132,687
                      
                      
                      $
                      70,902
 
 The
accompanying notes are an integral part of these condensed financial
statements.
  F-7
  
 SMART
ENERGY SOLUTIONS, INC.
 Statements
of Cash Flows (Continued)
 
 For the Years EndedDecember 31,2008
                      
                      
                      2007SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      Paid for:Interest
                      
                      $
                      -
                      
                      
                      $
                      210,411Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -NON-CASH
      FINANCING AND INVESTING ACTIVITIES:Common
      stock issued for services
                      
                      $
                      242,311
                      
                      
                      $
                      2,346,526Warrants
      and options issued for services
                      
                      $
                      1,898,591
                      
                      
                      $
                      1,889,265Common
      stock issued for convertible debt and interest
                      
                      $
                      2,183,750
                      
                      
                      $
                      -
  The
accompanying notes are an integral part of these condensed financial
statements.
  F-8




SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





a.   Business
and Organization





This
summary of significant accounting policies of Smart Energy Solutions, Inc. (the
Company) is presented to assist in understanding the Company’s financial
statements.  The financial statements and notes are representations of
the Company’s management, which is responsible for their integrity and
objectivity.  These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial
statements.





Nature of Operations
– Smart Energy Solutions, Inc., was incorporated in the State of Utah on
February 10, 1999, for the purpose of developing and marketing various Internet
and Internet-related products and services.  On March 23, 2005, the
Company purchased inventory, manufacturing molds and technology from Purisys,
Inc. whereby it became a producer of an electronic control for vehicle
batteries, known as the “Battery Brain”, which is intended to keep the batteries
from discharging to the point that the vehicle cannot be started. It is also
intended to prevent the vehicle from being started without using the ignition
system by what is commonly known as hot wiring. The Company has been selling the
Battery Brain from that date on a wholesale basis through distributors and a
retail basis over the internet. A special meeting of the shareholders of the
Company was held on August 22, 2005. At the Meeting, the shareholders approved
the change of the Company’s state of incorporation from Utah to Nevada by the
merger of the Company with and into its wholly owned subsidiary, Smart Energy
Solutions, Inc., a Nevada corporation.  The shareholders also
authorized the differences between the Articles of  Incorporation of
Smart Energy  Solutions,  Inc. and the Certificate of
Incorporation of the Company, including changing the Company's  name
from  Datigen.com,  Inc. to Smart Energy Solutions, Inc.,
increasing the number of shares of
the  authorized  common  stock of the Company from
50,000,000 to 500,000,000 shares of common stock and  authorization of
a class of 1,000,000 million shares of preferred stock.





Share-Based
Payments-The Company has adopted the fair value based method of
accounting for stock-based employee compensation in accordance with Statement of
Financial Accounting Standards Number 123 (REVISED 2004), "Share-Based
Payment"  (SFAS 123[R]).  In accordance with SFAS 123[R],
option expense of $1,898,591 and $1,889,265 was recognized for the years ended
December 31, 2008 and 2007, respectively.  The expense was calculated
using the Black-Scholes valuation model.





Fair Value of Financial
Instruments – On January 1, 2008, the Company adopted SFAS No. 157,
“Fair Value Measurements.SFAS No. 157 defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. The three levels are defined as
follows:


·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.


·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.




F-9


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)


·
            Level
      3 inputs to valuation methodology are unobservable and significant to the
      fair measurement.





The
carrying amounts reported in the balance sheets for the cash and cash
equivalents, receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and their current market rate of interest. The carrying value of
notes payable approximates fair value because negotiated terms and conditions
are consistent with current market rates as of December 31, 2008 and
2007.





Cash and Cash
Equivalents-For purposes of financial statement presentation, the Company
considers all highly liquid investments with a maturity of three months or less,
from the date of purchase, to be cash equivalents.





Concentration of Credit
Risk – Financial instruments, which potentially subject us to
concentrations of credit risk, consist principally of cash and trade
receivables.  Concentrations of credit risk with respect to trade
receivables are limited due to the clients that comprise our customer base and
their dispersion across different business and geographic areas.  We
estimate and maintain an allowance for potentially uncollectible accounts and
such estimates have historically been within management's
expectations.  Our cash balances are maintained in accounts held by
major banks and financial institutions located in the United
States.  The Company occasionally maintains amounts on deposit with a
financial institution that are in excess of the federally insured limit of
$250,000.  The Company had no amounts in excess of federally insured
limits at December 31, 2008 and 2007.





During
the year ended December 31, 2008, the Company had three customers that accounted
for approximately 29%, 19% and 12% of its revenues, respectively.





During
the year ended December 31, 2007, the Company had two customers that accounted
for approximately 27% and 13% of its revenues, respectively.





Basic and Fully Diluted Loss
Per Share - The computation of basic and diluted loss per common share is
based on the weighted average number of shares outstanding during each
period.


December 31,2008
                          
                          
                          2007NET
      LOSS
                          
                          $
                          (5,544,232
                          )
                          
                          $
                          (7,896,679
                          )BASIC
      AND FULLY DILUTED LOSS PER COMMON SHARE
                          
                          $
                          (0.06
                          )
                          
                          $
                          (0.10
                          )BASIC
      AND FULLY DILUTEDWEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
                          
                          
                          95,947,996
                          
                          
                          
                          78,979,737





The
computation of loss per common share is based on the weighted average number of
shares outstanding during the year plus the common stock equivalents which would
arise from the exercise of stock options and warrants outstanding using the
treasury stock method and the average market price per share during the
year.




F-10





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES   (Continued)


Common
stock equivalents, consisting of 11,334,665 and 10,934,665 in options and
10,878,517 and 16,560,037 in warrants were considered but were not included in
the computation of loss per share at December 31, 2008 and 2007, respectively,
because they would have been anti-dilutive.





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





Revenue Recognition-
The Company applies the provisions of SEC Staff Accounting Bulletin No. 104,
"Revenue Recognition in Financial Statements" ("SAB 104"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. In general, the Company recognizes revenue related to
goods and services provided when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the fee
is fixed or determinable, and (iv) collectability is reasonably
assured.





The
Company's revenues are generated from sale of products. Revenues from the sale
of products are generally recognized upon shipment of product, which corresponds
with the transfer of title. The costs of shipping are typically billed to the
customer upon shipment and are included in cost of sales. Deposits from
customers for orders to be delivered in the future are recorded as deferred
revenues. The Company has $280,000 and $140,000 in deferred revenues as of
December 31, 2008 and 2007,respectively.





Research and
Development-The Company follows the policy of expensing its research and
development costs in the period in which they are incurred in accordance with
SFAS No. 2, “Accounting for Research and Development Costs”. The Company
incurred research and development expenses of $394,188 and $423,441 during the
years ended December 31, 2008 and 2007, respectively.





Inventory-The
Company’s inventory is composed of Battery Brain units and memory chips for the
Battery Brain. The inventory is recorded at the lower of cost or market and
comprised of the following as of December 31:


2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  381,203
                  
                  
                  $
                  314,432Work
      in progress
                  
                  
                  118,988
                  
                  
                  
                  -Raw
      materials
                  
                  
                  18,000
                  
                  
                  
                  641,480Reserve
      for obsolete inventory
                  
                  
                  (77,114
                  )
                  
                  
                  -$
                  441,077
                  
                  
                  $
                  955,912








F-11





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements




NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES


(Continued)


Accounts
Receivable- Accounts receivable are carried at
original invoice amount less an estimate made for doubtful receivables based on
a review of all outstanding amounts on a monthly basis.  Specific
reserves are estimated by management based on certain assumptions and variables,
including the customer’s financial condition, age of the customer’s receivables,
and changes in payment histories.  As of December 31, 2008 and 2007,
an allowance for doubtful receivables $17,956 and $21,367, respectively, was
considered necessary.  Trade receivables of $123,101, and $197,963
were written off when deemed uncollectible during 2007 and 2006,
respectively.  Recoveries of trade receivables previously written off
are recorded when received.





Income Taxes-The
Financial Accounting Standards Board (FASB) has issued Financial Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 requires a company to determine whether it is more likely
than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-likely-than-not threshold is met,
a company must measure the tax position to determine the amount to recognize in
the financial statements. As a result of the implementation of FIN 48, the
Company performed a review of its material tax positions. At the adoption date
of January 1, 2007, the Company had no unrecognized tax benefit which would
affect the effective tax rate.  As of December 31, 2008, the Company
had no accrued interest and penalties related to uncertain tax positions. Net
deferred tax assets consist of the following components as of December 31, 2008
and 2007:





2008
                    
                    
                    2007Current
      Federal and StateDeferred
      tax assets:NOL
      Carryover
                    
                    $
                    4,407,727
                    
                    
                    $
                    3,327,914Deferred
      tax liabilities:
                    
                    
                    -
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    (4,407,727
                    )
                    
                    
                    (3,327,914
                    )Net
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -





The
income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rates of 39% to pretax income
from continuing operations for the years ended December 31, 2008 and 2007 due to
the following:




2008
                    
                    
                    2007Book
      Loss from Operations
                    
                    $
                    (2,091,088
                    )
                    
                    $
                    (3,074,611
                    )Options
      and warrants issued for services
                    
                    
                    640,438
                    
                    
                    
                    736,813Common
      stock issued for services
                    
                    
                    83,035
                    
                    
                    
                    980,470Allowance
      for bad debts
                    
                    
                    (12,104
                    )
                    
                    
                    19,107Loss
      on conversion of debt
                    
                    
                    299,906
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    1,079,813
                    
                    
                    
                    1,338,221Income
      tax expense
                    
                    $
                    -
                    
                    
                    $
                    -








F-12





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements




NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)




Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry forwards for Federal income tax reporting purposes are subject to
annual limitations.  Should a change in ownership occur, net operating
loss carry forwards may be limited as to use in future years.





Intangible Assets-
Intangible assets consist of technology and trademark
costs.  Technology costs are acquisition costs.  Trademark
costs are costs incurred to develop and file trademark
applications.  If the technology is purchased or the trademarks are
approved, the costs are amortized using the straight-line method over the
estimated lives of 5 years for technology and 5 years for trademarks.
Unsuccessful trademark application costs are expensed at the time the
application is denied.  Management assesses the carrying values of
long-lived assets for impairment when circumstances warrant such a review. In
performing this assessment, management considers current market analysis and
appraisal of the technology, along with estimates of future cash flows. The
Company recognizes impairment
losses when undiscounted cash flows estimated to be generated from long-lived
assets are less than the amount of unamortized assets.





On March
23, 2005, the Company purchased the technology to its Battery Brain product for
$52,109. The technology is being amortized over a period of 5
years.  Costs associated with the trademark on the Battery Brain
product of $1,431 are also capitalized.
Trademarks that are pending or are being developed are not being
amortized.


Future
Amortization of these Costs is as follows:





2009
                  
                  $
                  10,7072010
                  
                  $
                  2,750





Amortization
expense for the years ended December 31, 2008 and 2007 was $10,707 and $10,707,
respectively.  The Company has recorded no impairment of its
intangible assets in 2008 or 2007.





Property and
Equipment-The Company’s property and equipment are comprised of the
following December 31, 2008 and 2007:





Office
      equipment
                  
                  $
                  35,853
                  
                  
                  $
                  35,853Trade
      show booth
                  
                  
                  4,650
                  
                  
                  
                  4,650Molds
                  
                  
                  22,500
                  
                  
                  
                  22,500Leasehold
      improvements
                  
                  
                  11,665
                  
                  
                  
                  11,66574,668
                  
                  
                  
                  74,668Accumulated
      depreciation
                  
                  
                  (47,529
                  )
                  
                  
                  (32,606
                  )Net
      Property and Equipment
                  
                  $
                  27,139
                  
                  
                  $
                  42,062








F-13





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements




NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)


Beneficial Conversion
Feature-The Company has adopted Emerging Issues Task Force ("EITF") Issue
No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," and EITF Issue No.
00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments."
The Company incurred debt with a conversion feature that provides for a rate of
conversion that is below market value. This feature is recorded by the Company
as a beneficial conversion feature pursuant to EITF Issues No. 98-5 and 00-27.
Expense recorded on the Company's financial statements during the years ended
December 31, 2008 and 2007 as a result of adoption of EITF issues No. 98-5 and
00-27 totaled $349,859 and $15,818, respectively.





Recent Accounting
Pronouncements- In June 2008, the FASB issued FASB Staff Position
EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities, (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the computation of earnings per share under the two-class method as described in
FASB Statement of Financial Accounting Standards No. 128, “Earnings per
Share.” FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. We are not required
to adopt FSP EITF 03-6-1; neither do we believe that FSP EITF 03-6-1 would have
material effect on our consolidated financial positionand results of
operations if adopted.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial
Guarantee Insurance Contracts-and interpretation of FASB Statement No.
60”.SFAS
No. 163 clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement of  premium
revenue and claims liabilities. This statement also requires expanded
disclosures about financial guarantee insurance contracts. SFAS No. 163 is
effective for fiscal years beginning on or after December 15, 2008, and interim
periods within those years. SFAS No. 163 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162,
“The Hierarchy of Generally
Accepted Accounting Principles”.SFAS No. 162 sets forth
the level of authority to a given accounting pronouncement or document by
category. Where there might be conflicting guidance between two categories, the
more authoritative category will prevail. SFAS No. 162 will become effective 60
days after the SEC approves the PCAOB’s amendments to AU Section 411 of the
AICPA Professional Standards. SFAS No. 162 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.





In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.This standard requires companies to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet adopted the
provisions of SFAS No. 161, but does not expect it to have a material impact on
its financial position, results of operations or cash flows.


F-14





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)




In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based
Payment.  In particular, the staff indicated in SAB 107 that it
will accept a company's election to use the simplified method, regardless of
whether the company has sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the staff stated in SAB
107 that it would not expect a company to use the simplified method for share
option grants after December 31, 2007. The staff understands that such detailed
information about employee exercise behavior may not be widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances,
the use of the simplified method beyond December 31, 2007. The Company currently
uses the simplified method for “plain vanilla” share options and warrants, and
will assess the impact of SAB 110 for fiscal year 2009. It is not believed that
this will have an impact on the Company’s financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No.
51.  This statement amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. Before this
statement was issued, limited guidance existed for reporting noncontrolling
interests. As a result, considerable diversity in practice existed. So-called
minority interests were reported in the consolidated statement of financial
position as liabilities or in the mezzanine section between liabilities and
equity. This statement improves comparability by eliminating that diversity.
This statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009,
for entities with calendar year-ends). Earlier adoption is prohibited. The
effective date of this statement is the same as that of the related Statement
141 (revised 2007). The Company will adopt this Statement beginning March 1,
2009. It is not believed that this will have an impact on the Company’s
financial position, results of operations or cash flows.





In
December 2007, the FASB, issued FAS No. 141 (revised 2007), Business Combinations.’This
Statement replaces FASB Statement No. 141, Business Combinations, but
retains the fundamental requirements in Statement 141.  This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. The
effective date of this statement is the same as that of the related FASB
Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  The Company will adopt this
statement beginning March 1, 2009. It is not believed that this will have an
impact on the Company’s financial position, results of operations or cash
flows.




F-15


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)




In
February 2007, the FASB, issued SFAS No. 159,The Fair Value Option for Financial
Assets and Liabilities—Including an Amendment of FASB Statement No.
115.  This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities. Most of the provisions in FAS 159 are elective;
however, an amendment to FAS 115 Accounting for Certain Investments
in Debt and Equity Securities applies to all entities with available for
sale or trading securities. Some requirements apply differently to entities that
do not report net income. SFAS No. 159 is effective as of the beginning of an
entities first fiscal year that begins after November 15, 2007.


Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that fiscal year and
also elects to apply the provisions of SFAS No. 157 Fair Value
Measurements.  The Company adopted SFAS No. 159 beginning March
1, 2008. The adoption of this pronouncement did not have an impact on the
Company’s financial position, results of operations or cash flows.





In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements  This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change
current practice. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The Company adopted this statement March 1, 2008. The adoption of this
pronouncement did not have an impact on the Company’s financial position,
results of operations or cash flows.





Advertising and
Marketing-The Company expenses advertising costs in the period in which
they are incurred. Advertising and marketing expense was $144,802 and $350,190
for the years ended December 31, 2008 and 2007, respectively.




Deferred Loan Fees-In
connection with the $1,500,000 of convertible debt issued by the Company during
2006, the Company paid loan fees of $50,000 in cash and issued $157,714 in
shares of its common stock. The loan fees are being amortized over the one year
term of the convertible debt. The Company recorded amortization expense of $-0-
and $81,378 during the years ended December 31, 2008 and 2007, respectively. At
December 31, 2008 the deferred loan fees were fully
amortized.




F-16




SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)


Long-Lived Assets-The
Company applies the provisions of Statement of Financial Accounting Standards
No. 144,” Accounting for the Impairment or Disposal of Long-Lived Assets” (‘SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company periodically evaluates the carrying
value of long-lived assets to be held and used in accordance with SFAS 144. SFAS
144 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset’s
carrying amounts. In that event a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived assets. Loss
on long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, The Company has not recorded an impairment of long-lived assets as of
December 31, 2008 and 2007.





NOTE
      2 -
            GOING
      CONCERN





The
Company’s financial statements are prepared using generally accepted accounting
principles applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business.  The Company has not yet established an ongoing source of
revenues sufficient to cover its operating costs and allow it to continue as a
going concern.  Historically, the Company has incurred significant
annual losses, which have resulted in an accumulated deficit of $22,039,294 at
December 31, 2008. The Company also has a negative working capital and negative
cash flow from operations of $186,603 and $1,160,921, respectively, at December
31, 2008. These factors raise substantial doubt about the Company’s ability to
continue as a going concern.  The ability of the Company to continue
as a going concern is dependent on the Company increasing sales to the point it
becomes profitable.  The Company may need to raise additional capital
for marketing to increase its sales. If the Company is unable to increase sales
sufficiently or obtain adequate capital, it could be forced to cease
operation.  The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty.





Management
plans to increase sales by increasing its marketing program and to obtain
additional capital from the private placement of shares of its common stock.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its plans.


NOTE
      3 -
              CAPITAL
      STRUCTURE
 
 The
Company has 1,000,000 shares of preferred stock authorized with no par value. No
preferred shares are issued and outstanding at December 31, 2008 and 2007. The
rights and preferences of the preferred stock will be determined by the board of
directors at the time of issuance.
 
 The
Company has 500,000,000 shares of common stock authorized with no par value. All
common shares are entitled to one vote per share in all matters submitted to the
shareholders.


F-17


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements




NOTE
      3-
              CAPITAL
      STRUCTURE (CONTINUED)




During
the year ended December 31, 2008, the Company issued 2,600,000 shares of its
common stock to unrelated investors for an aggregate cash inflow of $650,000 at
$0.25 per share.  The Company also issued 1,136,363 shares for cash at
$0.11 per share for an aggregate cash inflow of $125,000.





During
the year ended December 31, 2008, the Company issued 19,852,271 shares of its
common stock upon the conversion of $2,213,150 of debt at $0.11 per
share.





During
February 2008, the Company issued 250,000 shares of common stock at $0.25 per
share for services rendered for a total value of $50,000. During August 2008,
the Company issued 845,282 shares of common stock for services at $0.11 per
share rendered for a value of $92,981. During September 2008, the Company issued
330,000 shares for services at $0.21 per share for a value of $69,930. The
Company also awarded 140,000 shares for accrued services at $0.21 per share for
a value of $29,400, which were issued subsequent to December 31,
2008.





During
the year ended December 31, 2007, the Company issued 278,250 shares of its
common stock to an unrelated investor for an aggregate cash inflow of $63,085
upon the exercise of their warrants at $0.45 per share.  The Company
also issued 4,777,781
shares for cash at $0.30 per share and 1,168,750 shares for cash at $0.40 per
share for an aggregate cash inflow of $1,900,832.





During
January 2007, the Company issued 250,000 shares of common stock at $0.54 per
share for services rendered for a total value of $135,000 and 360,000 shares of
common stock for services at $0.46 per share for a value of $163,800. During
March 2007, the Company issued 350,000 shares of common stock for services
rendered at $0.58 per share for a value of $203,000, 25,000 shares of common
stock at $0.60  for a value of $15,000 and 166,000 shares of common
stock at $0.59 for a value of $97,940.During May 2007, the Company issued 40,000
shares of common stock for services at $0.59 per share rendered for a value of
$23,600, 1,333,333 shares at $0.58 for a value of $773,333 and 350,000 shares at
$0.59 for a value of $206,500. During June 2007, the Company issued 350,000
shares for services at $0.55 per share for a value of $189,000. During August
2007, the Company issued 170,000 shares for services at $0.57 per share for a
value of $96,900. During September 2007, the Company issued 600,000 shares for
services at $0.50 per share for a value of $306,000 and 31,000
shares  at $0.52 for a value of $16,120. In October 2007, the Company
issued  110,000 shares of common stock at $0.50 per share for services
rendered for a value of $55,000, In December 2007, the Company issued 151,937
shares of common stock at $0.43 per share for services rendered for a value of
$65,333.


All
valuations of common stock issued for services were based upon value of the
services rendered, which did not differ materially from the fair value of the
Company’s common stock during the period the services were
rendered.
 
 NOTE
      4-
              CONVERTIBLE
      DEBT
 
 During
      2006, the Company raised $1,000,000 through the issuance of 15% unsecured
      convertible debt and $500,000 from the issuance of 12% unsecured
      convertible debt. The debt with the accrued interest is due, by extension,
      on September
      8, 2008.  The Company was unable to repay the debt on the
      original due date, accordingly the holders thereof have the right to
      convert the debt to
equity.




F-18





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements




NOTE
      4-
            CONVERTIBLE
      DEBT (CONTINUED)




Per the
convertible debt agreement the conversion price is to be calculated by dividing
the amount of outstanding principal and interest that the holder elects to convert
by the average of the conversion price.  The conversion price is 95%
of the average of the last bid and ask price of the common stock as quoted on
the Over-the-Counter Bulletin Board or such other exchange where the common
stock is quoted or listed for the five trading days ending the day prior to the
Company's receipt of the holders' written notice of election to
convert.  Since the convertible debt can be converted at anytime from
the signing of the agreement forward, the closing prices of the five trading
days prior to May 24, 2006 were used for the calculation of the beneficial
conversion feature, in accordance with EITF 98-5.





The value
of the beneficial conversion feature was determined using the intrinsic value
method.  The amount recorded as a discount to the convertible debt was
$48,246. The discount is being amortized over the 2 year term of the convertible
debt, accordingly, the Company recorded $6,097 and $15,818 in expense for the
accretion of the discount during the years ended December 31, 2008 and 2007. On
the date of the conversion, the Company issued a total of 19,852,271 shares of
common stock in full satisfaction of $2,000,000 in principle and $183,750 in
accrued interest on the convertible debt. At the same time, the Company recorded
an expense for the unamortized debt discount of $18,920 and $325,472 related to
the $1,500,000 and $500,000 principle notes, respectively. This was recorded as
a debit to beneficial conversion expense and a credit to convertible debt, in
accordance with EITF 00-21, paragraph 21.




During
2008, the Company entered into two convertible notes of $250,000. The notes are
convertible at 60% of the average closing price of the Company’s common stock
for the 15 days immediately preceding the date of conversion. The value of the
beneficial conversion feature was determined using the intrinsic value
method.  The amount recorded as a discount to the convertible debt was
$325,472.




The
Company also amended the terms of the $500,000 15% convertible promissory note
dated June 18, 2006, the $500,000 15% convertible promissory note dated May 22,
2006, and the $500,000 12% convertible note dated August 15, 2006 (amended and
restated April 27, 2008).  The conversion price of the $1,500,000 of prior
notes was amended from 95% of the average bid and ask on the day prior to
conversion to 60% of the average closing price of the Company’s common stock for
the 15 days immediately preceding the date of conversion as an incentive to the
note holders to convert. In accordance with EITF Issue No. 96-19, “Debtor’s
Accounting for a Modification or Exchange of Debt Instruments”, EITF Issue No.
06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt
Instruments,” and FAS 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” the Company
has determined this to be a substantial modification to the debt instruments and
has applied debt extinguishment accounting to record a loss on extinguishment of
debt of $768,990 for the year ended December 31, 2008.




F-19





SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE5-
            COMMON
      STOCK PURCHASE WARRANTS AND OPTIONS





Warrants


The
Company has determined the estimated value of the compensatory warrants granted
to non-employees in exchange for services and financing expenses using the
Black-Scholes pricing model and the following assumptions: expected term of 1year, a
risk free interest rate of 3.25% in 2008 and 4.93% in 2007, a dividend yield of
0% in both years and volatility of 55 to 63%% in 2007 and 92% for the valuation
of warrants in 2007. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $489,469 and $218,278
during the years ended December 31, 2008 and 2007, respectively.





The
following table summarizes the changes in warrants outstanding and the related
prices for the shares of the Company’s common stock issued to non-employees of
the Company. These warrants were granted in lieu of cash compensation for
services performed or financing expenses. Warrants vest immediately and services
are provided during the period granted.


Number
      of
                    Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      as of January 1, 2007
                  
                  
                  16,850,518
                  
                  
                  $
                  0.70Granted
                  
                  
                  2,695,037
                  
                  
                  
                  0.45Exercised
                  
                  
                  -
                  
                  
                  
                  0.00Cancelled
                  
                  
                  (2,985,518
                  )
                  
                  
                  0.45Outstanding
      at December 31, 2007
                  
                  
                  16,560,037
                  
                  
                  
                  0.46Granted
                  
                  
                  8,058,480
                  
                  
                  
                  0.21Exercised
                  
                  
                  -
                  
                  
                  
                  0.00Cancelled
                  
                  
                  (13,740,000
                  )
                  
                  
                  0.75Outstanding
      at December 31, 2008
                  
                  
                  10,878,517
                  
                  
                  $
                  0.44





Common
stock warrants outstanding and exercisable as of December 31,2008 and 2007
are:





Warrants Outstanding
                  
                  
                  Warrants ExercisableYear
                  
                  ExercisePrice
                  
                  
                  Numbersharesoutstanding
                  
                  
                  WeightedAverageContractual Life(Years)
                  
                  
                  NumberExercisable
                  
                  
                  WeightedAverageExercise Price2006
                  
                  $
                  0.75
                  
                  
                  
                  125,000
                  
                  
                  
                  .5
                  
                  
                  
                  125,000
                  
                  
                  $
                  0.752007
                  
                  $
                  0.45
                  
                  
                  
                  2,695,037
                  
                  
                  
                  .18
                  
                  
                  
                  2,695,037
                  
                  
                  $
                  0.452008
                  
                  $
                  0.45
                  
                  
                  
                  4,963,068
                  
                  
                  
                  .75
                  
                  
                  
                  4,963,068
                  
                  
                  $
                  0.112008
                  
                  $
                  0.45
                  
                  
                  
                  284,092
                  
                  
                  
                  .75
                  
                  
                  
                  284,092
                  
                  
                  $
                  0.112008
                  
                  $
                  0.40
                  
                  
                  
                  2,600,000
                  
                  
                  
                  .25
                  
                  
                  
                  2,600,000
                  
                  
                  $
                  0.402008
                  
                  $
                  0.11
                  
                  
                  
                  211,320
                  
                  
                  
                  0
                  
                  
                  
                  211,320
                  
                  
                  $
                  0.11Total
                  
                  
                  
                  
                  
                  
                  10,878,517
                  
                  
                  
                  
                  
                  
                  
                  10,878,517





The
aggregate intrinsic value of stock warrants outstanding and exercisable at
December 31, 2008 and 2007 totaled $0 and $0 and $0 and $0, respectively. The
weighted average grant date fair value of warrants granted during the years
ended December 31, 2008 and 2007 is $0.19 and $0.35, respectively. The fair
value of warrants vested during the years ended December 31, 2008 and 2007
totaled $77,744 and $619,859, respectively.




F-20


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      5-
            COMMON
      STOCK PURCHASE WARRANTS AND OPTIONS
(CONTINUED)




Options





The
Company has granted common stock purchase options to certain of its employees,
directors and consultants. The options vest according to the terms of the
employment contracts with the employees and consulting agreements with directors and
consultants (usually 1 to 3 years). The option price is also determined in
accordance with the terms of the contracts (between $0.00 to $0.75 per
share).





During
the year ended December 31, 2008, the estimated value of the compensatory common
stock purchase options granted to non-employees in exchange for services and
financing expenses was determined using the Black-Scholes pricing model and the
following assumptions: expected term of 1 to 5 years, a risk free interest rate
of 3.25%, a dividend yield of 0% and volatility of 55 to 63%. The amount of the
expense charged to operations for compensatory options and warrants granted in
exchange for services was $1,123,113.





During
the year ended December 31, 2007, the estimated value of the compensatory common
stock purchase options granted to non-employees in exchange for services and
financing expenses was determined using the Black-Scholes pricing model and the
following assumptions: expected term of 1 to 3 years, a risk free interest rate
of 4.69% to
5.85%, a dividend yield of 0% and volatility of 98%. The amount of the expense
charged to operations for compensatory options and warrants granted in exchange
for services was $1,562,616.





The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company’s common stock issued to employees and
non-employees of the Company. These options were granted in lieu of cash
compensation for services performed. Options vest either immediately or over 3
years and services are provided during the vesting period.


Number
      ofShares
                  
                  
                  WeightedAverageExercise
      PriceOutstanding
      as of January 1, 2007
                  
                  
                  10,223,665
                  
                  
                  $
                  0.15Granted
                  
                  
                  1,341,000
                  
                  
                  
                  0.41Exercised
                  
                  
                  (278,250
                  )
                  
                  
                  0.23Cancelled
                  
                  
                  (351,750
                  )
                  
                  
                  0.40Outstanding
      at December 31, 2007
                  
                  
                  10,934,665
                  
                  
                  $
                  0.18Granted
                  
                  
                  400,000
                  
                  
                  
                  0.26Exercised
                  
                  
                  -
                  
                  
                  
                  0.00Cancelled
                  
                  
                  -
                  
                  
                  
                  0.00Outstanding
      at December 31, 2008
                  
                  
                  11,334,665
                  
                  
                  $
                  0.18


F-21


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE5-
            COMMON
      STOCK PURCHASE WARRANTS AND OPTIONS
(Continued)


The
      following table summarizes the changes in options outstanding and the
      related prices for the shares of the Company’s common stock issued to
      non-employees of the Company. These options were granted in lieu of cash
      compensation for services performed or financing
  expenses.





Options Outstanding
                            
                            
                            Options ExercisableYear
                            
                            Exercise
                              Price
                            
                            
                            Number
                              shares
                              outstanding
                            
                            
                            Weighted
                              Average
                              Contractual
                              Life (Years)
                            
                            
                            Number
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Exercise Price2005
                            
                            $
                            0.15
                            
                            
                            
                            4,035,000
                            
                            
                            
                            1
                            
                            
                            
                            3,172,000
                            
                            
                            $
                            0.152005
                            
                            $
                            0.00
                            
                            
                            
                            2,650,000
                            
                            
                            
                            1
                            
                            
                            
                            1,987,500
                            
                            
                            $
                            0.002005
                            
                            $
                            0.05
                            
                            
                            
                            1,000,000
                            
                            
                            
                            3
                            
                            
                            
                            750,000
                            
                            
                            $
                            0.052006
                            
                            $
                            0.15
                            
                            
                            
                            242,000
                            
                            
                            
                            0
                            
                            
                            
                            242,000
                            
                            
                            $
                            0.152006
                            
                            $
                            0.45
                            
                            
                            
                            1,166,665
                            
                            
                            
                            3
                            
                            
                            
                            481,850
                            
                            
                            $
                            0.452006
                            
                            $
                            0.35
                            
                            
                            
                            540,000
                            
                            
                            
                            1
                            
                            
                            
                            360,000
                            
                            
                            $
                            0.352006
                            
                            $
                            0.30
                            
                            
                            
                            50,000
                            
                            
                            
                            3
                            
                            
                            
                            50,000
                            
                            
                            $
                            0.302007
                            
                            $
                            0.35
                            
                            
                            
                            990,000
                            
                            
                            
                            .83
                            
                            
                            
                            450,000
                            
                            
                            $
                            0.352007
                            
                            $
                            0.35
                            
                            
                            
                            40,000
                            
                            
                            
                            3.33
                            
                            
                            
                            40,000
                            
                            
                            $
                            0.352007
                            
                            $
                            0.15
                            
                            
                            
                            60,000
                            
                            
                            
                            3
                            
                            
                            
                            60,000
                            
                            
                            $
                            0.152007
                            
                            $
                            0.15
                            
                            
                            
                            11,000
                            
                            
                            
                            3
                            
                            
                            
                            11,000
                            
                            
                            $
                            0.152007
                            
                            $
                            1.00
                            
                            
                            
                            150,000
                            
                            
                            
                            .33
                            
                            
                            
                            150,000
                            
                            
                            $
                            1.002008
                            
                            $
                            0.25
                            
                            
                            
                            350,000
                            
                            
                            
                            .25
                            
                            
                            
                            50,000
                            
                            
                            $
                            0.252008
                            
                            $
                            0.15
                            
                            
                            
                            50,000
                            
                            
                            
                            .25
                            
                            
                            
                            50,000
                            
                            
                            $
                            0.15Total
                            
                            
                            
                            
                            
                            
                            11,334,675
                            
                            
                            
                            
                            
                            
                            
                            7,854,350




The
      aggregate intrinsic value of stock options outstanding and exercisable at
      December 31, 2008 and 2007 totaled $26,500 and $19,875 and $1,137,340 and
      $870,925, respectively. The weighted average grant date fair value of
      stock options granted during the years ended December 31, 2008 and 2007 is
      $0.22 and $0.61, respectively. The fair value of stock options vested
      during the years ended December 31, 2008 and 2007 totaled $29,738 and
      $903,574, respectively.




F-22


SMART
ENERGY SOLUTIONS, INC.


Notes to
Financial Statements





NOTE
      6-
            COMMITMENTS
      AND CONTINGENCIES





Operating  Leases


The
      Company has entered into a one year lease for its office which expires in
      July 2008. Future lease commitments are $49,000 for 2009. The Company
      incurred rent expense of $75,313 and $75,313 in 2008 and 2007,
      respectively.





Warranties


The
      Company offers the warranty replacement of defective units for 2 years
      from the date of sale.





Employment
      Agreements


The
      Company is obligated to pay its Chief Technology Officer $200,000 and
      $240,000 for 2009 and 2010,
respectively.





NOTE
      7-
            SUBSEQUENT
      EVENTS





On
      January 13, 2009, the Company accepted resignations from 2 members of its
      board of directors.





On March
9, 2009, the board of directors of the Company determined that it was in its
best interest to raise up to $1,000,000 in fund by effectuating a private
placement of the issuance of secured convertible promissory notes. In accordance
with the authorization given by the board, the Company entered into subscription
agreements  with each of Aharon Levinas, Edward Braniff and Tamir
Levinas and EGFE, for the purchase and sale of Secured Convertible Promissory
Notes of the Company.





The Notes
to Aharon Levinas, Edward Braniff and Tamir Levinas for the purchase price of
$291,767, 103,985 and $72,376, respectively, represent prior salaries owed that
have been deferred pending available funds.  On March 9, 2009, the
Company entered into another subscription Agreement with Edward Braniff for the
purchase and sale of a Note in the amount of $50,000 and on March 13, 2009, the
Company entered into Subscription Agreements with EFGE and Aharon Levinas for
each for the purchase and sale of a Note in the amount of $50,000.





The
principal amount of each Note bears an interest rate of 15% per annum,
calculated on a 365 day calendar year. The accrued interest on the outstanding
balance is due and payable on August 3, 2009 and the maturity date, which is
December 31, 2009. Each Note contains default events which, if triggered and not
timely cured the purchaser may declared the outstanding principal and all
accrued interest thereon due and payable immediately.





All
principal and accrued interest on the Notes is convertible into shares of our
common stock at the election of the purchasers or the Company at any time at the
conversion price of $0.05 per share.





On
      January 18, 2009, the Company issued 2,000,000 shares to consultants for
      investor relation services to be
performed.


F-23