SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




FORM
      10-KSB/A


(Amendment
      Number 1)




ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934


For
      the
      Fiscal Year Ended September 30, 2007


Commission
      File No. 2-95626-D




SIONIX
      CORPORATION


(Name
      of
      small business issuer in its charter)




Nevada
            87-0428526(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                Number)3880
                E. Eagle Dr., Anaheim, CA
            92807(Address
                of principal executive offices)
            (Zip
                Code)




Issuer’s
      Telephone Number:    (714) 678-1000




Securities
      registered under Section 12(b) of the Exchange Act: NONE




Securities
      registered under Section 12(g) of the Exchange Act:




COMMON
      STOCK, PAR VALUE $.001 PER SHARE


(Title
      of
      Class)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act 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 x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will 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-KSB
      or any amendment to this Form 10-KSB. x




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




The
      issuer’s revenues for the year ended September 30, 2007 were $0.




The
      aggregate market value of the voting stock held by non-affiliates as of November
      14, 2008, computed based on the closing price reported on the OTC Bulletin
      Board, was $15,606,395.




As
      of
      November 14, 2008, there were 136,189,686 shares of Common Stock of the issuer
      outstanding.




Documents
      Incorporated by Reference: NONE




Transitional
      Small Business Disclosure Format (Check one): Yes o No x










**EXPLANATORY
      NOTE**




On
      March
      21, 2008 Sionix Corporation received a letter from the Securities and Exchange
      Commission (the “SEC”) regarding the company’s Form 10-KSB for the period ended
      September 30, 2007 and its Form 10-QSB for the period ended December 31, 2007.
      We have responded to the SEC’s comments to our Form 10-KSB (the “Original
      Report”) in this amendment number 1 (the “Amendment”). The primary purpose of
      the Amendment is to disclose the restatement of our financial statements for
      the
      fiscal year ended September 30, 2007. A complete discussion of the restatement
      is included in the section of the Amendment titled “Management’s Discussion and
      Analysis of Financial Condition and Plan of Operation” and in note 16 to our
      restated financial statements for the fiscal year ended September 30, 2007.
      As a
      result of the restatement, the following adjustments were made to our financial
      statements for the fiscal year ended September 30, 2007:




Balance
      Sheet:




·
            Total
                current liabilities were restated from $2,956,380 to $7,626,614;
                and




·
            Stockholders’
                deficit was restated from $(2,437,085) to
                $(7,107,319).




Statement
      of Operations:




·
            Total
                operating expenses were restated from $1,455,045 to
                $1,603,890;




·
            Other
                expenses were restated from $(546,049) to
                $(561,744);




·
            Loss
                before income taxes was restated from $(2,001,094) to $(2,165,634);
                and




·
            Net
                loss was restated from $(2,001,094) to
                $(2,168,226).




Statement
      of Stockholders’ Equity (Deficit):




·
            Total
                stockholders’ deficit was restated from $(2,437,085) to $(7,107,319);
                and




·
            Additional
                paid-in capital was restated from $14,712,527 to
                $10,762,982.




Changes
      have also been made to the following items, either to correct, enhance or
      clarify information:




Part
      I




·
            Item
                1. Description of Business, including the section titled “Cautionary
                Factors that may Affect Future
                Results”




·
            Item
                2. Description of Property




Part
      II




·
            Item
                5. Market for Common Equity




·
            Item 6.
                Management’s Discussion and Analysis or Plan of
                Operation




·
            Item 7.
                Financial Statements and Supplementary
                Data




·
            Item 8A.
                Controls and Procedures




Part
      III




·
            Item
                10. Executive Compensation




·
            Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters




·
            Item
                14. Principal Accountant Fees and
                Services




This
      Amendment includes information contained in the Original Report, and we have
      made no attempt in this Amendment to modify or update the disclosures presented
      in the Original Report, except as identified above.




The
      disclosures in this Amendment continue to speak as of the date of the Original
      Report, and do not reflect events occurring after the filing of the Original
      Report. Accordingly, this Amendment should be read in conjunction with our
      other
      filings made with the Securities and Exchange Commission subsequent to the
      filing of the Original Report, including any amendments to those filings. The
      filing of this Amendment shall not be deemed to be an admission that the
      Original Report, when made, included any untrue statement of a material fact
      or
      omitted to state a material fact necessary to make a statement not
      misleading.





**PART
      I**




**ITEM
      1****DESCRIPTION
      OF BUSINESS.**




We
      design
      and develop turn-key stand-alone water treatment systems for: municipalities
      (both potable and wastewater), industrial (both make-up water and wastewater),
      emergency response, military and small residential communities. Sionix was
      initially incorporated in Utah in 1996, and reincorporated in Nevada in 2003.
      As
      of August 1, 2008, our executive offices and principal operations are located
      at
      3880 E. Eagle Dr., Anaheim, CA 92807. Our telephone number is (714) 678-1000,
      and our website is located at www.sionix.com.




**The
      Water Purification Industry**




*INDUSTRY
      BACKGROUND.* The
      water purification industry is highly fragmented, consisting of many companies
      involved in various capacities, including companies that design fully integrated
      systems for processing millions of gallons of water for municipal, industrial,
      and commercial applications. Demand for water purification has continued to
      grow
      due to economic expansion, population growth, scarcity of usable water, concerns
      about water quality and regulatory requirements. Drinking water, regardless
      of
      its source, may contain impurities that can affect the health of consumers.
      Although municipal agencies and water utilities in the United States are
      required to provide drinking water that complies with the U.S. Safe Drinking
      Water Act, the water supplied to homes and businesses from municipalities and
      utilities may contain high levels of bacteria, toxins, parasites and human
      and
      animal-health pharmaceuticals, as well as high levels of chlorine used to
      eliminate contaminants. The quality of drinking water outside the United States
      and other industrialized countries is generally much worse, with high levels
      of
      contaminants and often only rudimentary purification systems. In the
      industrialized world, water quality is often compromised by pollution, aging
      municipal water systems, and contaminated wells and surface water. In addition,
      the specter of terrorism directed at intentional contamination of water supplies
      has heightened awareness of the importance of reliable and secure water
      purification. The importance of effective water treatment is also critical
      from
      an economic standpoint, as health concerns and impure water can impair
      consumers' confidence in food products. Discharge of impaired waters to the
      environment can further degrade the earth's water and violate environmental
      laws, with the possibility of significant fines and penalties from regulatory
      agencies.




There
      are
      over 200,000 public rural water districts in the United States. The great
      majority of these are considered small to medium-sized public water systems,
      which support populations of fewer than 10,000 people. A substantial portion
      of
      these are in violation of the Safe Drinking Water Act at any given time. This
      problem is expected to worsen, as more stringent EPA rules are implemented
      for
      small public water systems. Substantial expenditures will be needed in coming
      years for repair, rehabilitation, operation, and maintenance of the water and
      wastewater treatment infrastructure. The Company believes that water districts
      using conventional sand-anthracite filters will be unable to comply with the
      Clean Water Act without massive installations of on-site chemical filter aids
      and disinfection equipment, such as ozone or ultraviolet. On a worldwide level,
      water supply issues are viewed by many as the next global crisis; while the
      quantity of available fresh water is relatively fixed, the world population
      and
      demand for clean water is increasing at a rapid pace.




The
      market for the treatment and purification of drinking water and the treatment,
      recycling and reuse of wastewater has shown significant growth as world demand
      for water of specified quality continues to increase and as regulations limiting
      waste discharges to the environment continue to mount. In addition, urbanization
      in the third world and the spread of agricultural activities has increased
      the
      demand for public water systems.




*EXISTING
      PURIFICATION SYSTEMS* .
      Until
      the early twentieth century, municipal water supplies consisted of flowing
      water
      directly from the source to the end user with little or no processing. In the
      late 19th and early 20th century, most large municipal water systems instituted
      a form of filtration called *"slow sand filtration"* to
      enhance the clarity and esthetics of delivered waters. These municipal water
      filtration systems however were extremely large plants that are typically
      excavated into the landscape of the facility. The surface area required for
      these filters could vary widely depending on the input quality of the water;
      generally, this involves extremely large areas or footprints. In a typical
      treatment facility, the first step adds to the raw incoming water a substance
      which causes tiny, sticky particles (called *"floc"* )
      to form
      - these attract dirt and other particles suspended in the water. This process
      of
      coagulation results in the heavy particles of dirt and floc clumping together
      and falling to the bottom. These heavier particles form sediment which is
      siphoned off, leaving the clearer water, which passes on to filtration. The
      most
      common filtration method is known as *"slow sand"* or
      sand-anthracite, in which the water flows into large shallow beds and passes
      down through layers of sand, gravel and charcoal. The final process is
      disinfection, which is intended to kill bacteria or other microorganisms left
      in
      the water and leave a residual to keep the water safe through the delivery
      pipes
      to the customer. Chlorine is the most commonly employed disinfectant, although
      chloramine, ozone, and ultraviolet (UV) are also used.




The
      current trend in water filtration, due to the higher demands for water and
      the
      reduction in clean or relatively clean source waters, is to clarify and heavily
      filter all municipal water supplies. Smaller municipalities and water districts
      will also be required to meet the added water quality goals of the larger
      systems and will require the infrastructure to do so.







While *"slow sand"* filtration is by far the most common treatment method used in the United States,
      it has serious drawbacks. The treatment facilities themselves occupy large
      tracts of land. The filtration beds are large, shallow in-ground concrete
      structures, often hundreds of feet long to accommodate large volumes of water.
      The water being filtered must remain in these beds for a comparatively long-time
      (known as *"residence time"* )
      in
      order for low density materials to settle out. The sand and charcoal filtering
      medium rapidly becomes plugged and clogged. The bed must then be taken off-line
      and back-flushed, which uses large volumes of water - water which becomes
      contaminated and is therefore wasted. Additional settling ponds are necessary
      to *"de-water"* this
      waste by evaporation so that the dried solids may be disposed of in an
      environmentally and expensive method.




The
      average life expectancy of a treatment plant is about 20 years, after which
      the
      plant must be extensively renovated. Population growth necessitates enlarging
      old facilities or building new ones, occupying still more valuable land. This
      process requires lengthy environmental impact studies, long design periods,
      and
      complex financing programs to fund costly construction budgets, as lead times
      usually stretch out for years.




Aside
      from cost and logistical issues, however, there are many pathogens resistant
      to
      chlorine or small enough to pass through these existing methods of filtration.
      Illnesses such as hepatitis, gastroenteritis, Legionnaire's Disease, as well
      as
      increasingly pervasive chemical contaminants, have become increasingly common.
      One of the more difficult of these problems is monitoring and providing a
      barrier against microscopic protozoan parasites such as cryptosporidium (3-4
      microns in size) and Giardia lamblia oocysts (5-7microns). These common
      organisms exist naturally in the digestive systems of livestock and wild
      animals, and end up in lakes and streams. They have caused severe illness in
      millions of people in the United States. Conventional *"slow sand"* water
      filtration beds, used in most of the nation's public water districts, will
      not
      filter out these parasites - the best treatment facilities are only able to
      remove particles larger than 10-15 microns.




In
      recent
      years, there have been several serious public health emergencies caused by
      microbes breaking through the filtration barrier in treatment facilities. When
      ingested, they can cause diarrhea, flu-like symptoms and dehydration. In persons
      with immune system impairment, the illness can be life-threatening. In 1993,
      over 400,000 people in Milwaukee, Wisconsin became ill and about 100 people
      died
      during a failure in the drinking water filtration system.




Most
      surface water bodies in the United States, many of which supply drinking water,
      are contaminated with these organisms. They are extremely resistant to
      disinfection, and increasing disinfectant levels in the attempt to kill them
      creates a new set of problems. Disinfectants such as chlorine can react with
      organic matter in the water to form new chemicals known as *"disinfection byproducts"* . These
      byproducts, of which trihalomethanes (THM's) are the most common, are thought
      to
      be health-threatening and possibly cancer-causing. Recent modifications in
      the
      EPA-SDWA regulations have addressed minimum acceptable levels of THM's.
      Therefore, physical removal of the organisms from the water is vitally important
      to their control.




The
      challenge of removing organic matter from water has been at the crux of water
      treatment since antiquity. Organic matter causes water to be cloudy, or turbid.
      High levels of turbidity can indicate the presence of pathogens and signal
      that
      the filtration process is not working effectively. The presence of high levels
      of organic matter makes disinfection more difficult and clogs filter media,
      causing long back-flush cycles, which in turn increases the volume of back-flush
      waste-water. In a typical treatment plant, this back-flush water can account
      for
      up to 20 percent of the raw water volume flowing through the
      facility.




Other
      filtration methods, such as reverse osmosis and activated charcoal, may be
      required to remove contaminants such as organic and inorganic chemicals, salts,
      color, odors, and viruses. However, they too are clogged quickly by organic
      particles in the water. These filter media are comparatively expensive, and
      frequent back-flush cycles drastically shorten filter life, thereby increasing
      the cost of treatment.




**Products
      and Technology**




*OUR
      BUSINESS STRATEGY* .
      Sionix
      was formed to develop advanced water treatment technology for public and private
      potable drinking water systems and wastewater treatment systems, as well as
      industrial systems, in order to address these issues. We have initially targeted
      (1) small to medium public and private water districts that provide communities
      with drinking water or sewage treatment service and (2) water reclamation
      systems of commercial-industrial clients that create and dispose of contaminated
      wastewater.




*DISSOLVED
      AIR FLOTATION*.
      Dissolved air flotation, or DAF, has been used in water and wastewater treatment
      for more than eighty years, primarily in Europe. Some of the first systems
      installed in the 1920's are still in operation in Scandinavia. The DAF method
      involves injecting microscopic bubbles of air under pressure into the water
      being treated. The air molecules bond with organic matter in the water, and
      because of their lightness, the clumps float to the surface, where they are
      skimmed away. Over the eight decades this technology has been utilized, various
      improvements have been made in the technology. Until recently, it has not been
      utilized widely in the United States, and is used primarily for wastewater
      treatment.





*SIONIX
      "ELIXIR" WATER TREATMENT SYSTEMS* .
      The
      dissolved air flotation system developed by Sionix, which employs patented
      technology, removes more than 99.95+ percent of the organic particles in water,
      and provides a barrier against microbial contaminants such as cryptosporidium
      and Giardia lamblia. Each Elixir Water Treatment System is a self-contained
      water treatment system or pre-treatment process using ordinary air, with minimal
      chemical flocculent aids. Our goal is to provide effective, practical and
      economical solutions to problems caused by pollution and toxic chemicals that
      seriously threaten public health and our environment. Our systems significantly
      reduce the risk of bacterial or parasitic contamination, particularly
      cryptosporidium, giardia, and e-coli, with minimal disinfecting by-products.
      Our
      systems are designed for quick installation, easy access for simple maintenance
      and are cost-effective for even the smallest water utilities or commercial
      applications. This technology is designed to support public water treatment
      plants, sewage treatment plants, water reclamation facilities, commercial air
      conditioning cooling towers, and emergency water systems for floods, earthquakes
      and other natural disasters. The Sionix system occupies a small footprint,
      is
      self-contained and portable.




Our
      Elixir system utilizes and refines this technology for a highly efficient
      pre-treatment process using ordinary oxygen. In addition, it helps ordinary
      filters meet EPA Safe Drinking Water Act regulations and eliminates potentially
      cancer-causing disinfection by-product precursors while reducing the risk of
      bacterial or parasitic contamination, particularly Trihalomethanes ( *"THM"* ),
      cryptosporidium and giardia. The Elixir system is designed for quick
      installation, is easily accessed for simple maintenance and is cost-effective
      enough for even the smallest water utilities or commercial
      applications.




By
      significantly reducing turbidity, the Elixir system remediates against
      disinfection byproducts such as THM. Used in conjunction with filtration or
      disinfection technology which may be required by specific raw water conditions,
      it reduces back-flushing cycle times, thereby lengthening the life of post-DAF
      equipment.




Completely
      modular, we plan to customize each system installation with filtration and
      disinfection options appropriate for the user. The entire unit is built into
      a
      standard thirty-foot or forty-foot ISO transportable container, making it easy
      to move by truck, train, plane, helicopter, or ship. Standard configuration
      includes a small control and testing laboratory located in the front of the
      container. The addition of a generator module makes the system self-powered.
      The
      customer can operate and control the entire system from a remote site via
      hardwired or wireless communications. A comprehensive service and maintenance
      program (which will be part of all equipment leases) includes a standard upgrade
      path.




A
      single
      unit should produce a minimum of 225 gallons of potable water per minute (about
      325,000 gallons, or one acre-foot, per day), enough for a community of 2,400
      people and its infrastructure - which is about 500-600 homes in the United
      States, based on U.S. Government guidelines. It is important to note that per
      capita usage of water in the U.S. is among the highest in the world. Two or
      more
      units can be ganged together for increased capacity.




Our
      systems are ideal for small to medium-sized potable water treatment utilities.
      They serve equally well in commercial/industrial uses where incoming process
      water must be treated to high levels of purity, or wastewater must be
      decontaminated before discharge to the environment. The products can also
      address water quality issues faced by commercial and industrial facilities
      that
      process water or produce toxic wastewater, such as food and beverage processing
      plants, dairy products facilities, and fresh water aquaculture installations,
      such as fish farms.




A
      major
      problem facing the water treatment industry is the difficulty in monitoring
      and
      disposing of microscopic parasites such as Cryptosporidium (4-5 microns) and
      Giardia cysts (7-12 microns), common chlorine-resistant organisms that have
      infected millions of people in the United States. Sand-anthracite water
      filtration beds, in use in most of the nation's public water districts, will
      not
      filter out these parasites and experience frequent breakthroughs of
      Cryptosporidium sized particles.




Our
      system uses a more efficient method of saturating recirculated post-filter
      water
      with excess dissolved air, and injecting this excess air in the form of
      microscopic bubbles in a DAF particle separator. Pressurized water can hold
      an
      excess amount of dissolved air and forms microscopic bubbles when injected
      into
      water, which has a lower pressure. A booster pump recirculates a small amount
      (approximately 10%) of the post-filtered water through the dissolved
      air-saturation system. Oxygen and nitrogen molecules are transferred directly
      into the recirculated high-pressure water without forming air bubbles. This
      method of transferring air into water is 100% efficient, and reduces the amount
      of energy required to saturate recirculated water with excess dissolved air.
      The
      Elixir provides a denser concentration of white water bubbles. This process
      requires less energy than a conventional system, and uses a fraction of the
      floor space.




In
      general, water districts using sand-anthracite filters cannot meet the EPA
      Surface Water Treatment rules without a massive increase in on-site chemical
      filter-aids, additional filtering and the installation of ozone or other
      disinfection equipment. Plant operators must continually test raw influent
      water
      to adjust chemical filter aid dosage properly. Chemical and metal (alum)
      filter-aids increase sludge volume and landfill disposal
      problems.




Our
      systems include automatic computer controls to optimize ozone concentration
      levels and reduce monthly energy costs. Higher ozone contact concentration
      levels using smaller sized generators are possible if most of the algae are
      removed first by DAF. Extended contact time increases collision rate of ionized
      ozone molecules with negatively charged organic suspended particles. By
      utilizing the Elixir to pre-treat the feedwater, less energy is required to
      create the appropriate amount of ozone. By creating a turbulent flow of water
      and gas within the mixing chamber, we have achieved a much higher saturation
      with less ozone (and a minimum of excess ozone) than in other mixing
      methods.





The
      Elixir system is a sealed unit, thus preventing tampering or incursion by
      bio-terrorism or airborne contaminants due to the steel container in which
      the
      system is assembled. Should catastrophic damage be incurred, a replacement
      unit
      may be installed within a few days rather than many months or years with
      in-ground systems.




**Pilot
      Program-Villa Park Dam**




In
      November of 2006 we entered into an oral agreement with the Serrano Water
      District in Orange County, California to install an Elixir system at the Villa
      Park Dam (near Anaheim, California) for testing of the system by processing
      flood water residue behind the dam. Under our arrangement, scientists and
      engineers from California State University at Fullerton are coordinating
      with the Serrano Water District to trace and record the cleaning efficiency
      for
      the various contaminants in the water (thought to be iron, manganese and algae)
      against the flow rate capacity of the Elixir system. The system placed at the
      dam site was designed by Sionix for research purposes and contains a variety
      of
      sampling sites within the system to extract and test water outside the system,
      as well as a suite of internal water quality measurement instruments to monitor
      the cleaning process.




Villa
      Park Dam is operated by Orange County Flood Control and is designed to check
      the
      flow of flood waters from several small watersheds in the northern Santa Ana
      Mountains. The dam is capable of impounding up to 15,000 acre-feet of water
      (4.9
      billion gallons), although its purpose is to check and safely release the waters
      during periods of heavy rainfall into Santiago Creek, where it is diverted
      to
      groundwater recharge ponds or allowed to discharge to the ocean. Serrano Water
      District has rights to 3,000 acre-feet of water from the impoundment pool.
      Until
      now, impounded waters have been released to flow downstream during storms.
      However, under the project, rain and other water will flow down creeks and
      collect to form a useable pool of water behind the dam. This water slowly
      degrades during the summer and has been shown to be very septic and has
      exceptionally high values of iron and manganese. This water has been
      prohibitively expensive to treat for drinking water.




In
      May of
      2007 we placed an Elixir system at the dam and began processing runoff water.
      We
      began a thorough evaluation of every component in the system during this testing
      period. Data are being used to evaluate the baseline water quality to be
      treated, as part of an ongoing water collection and analysis study of the Elixir
      water treatment system. Several testing and research programs to evaluate the
      treatment system have been implemented and will continue throughout the
      remainder of 2008.




During
      the next twenty-four months we plan to continue our testing program and
      demonstrate the ELIXIR water treatment system to potential clients at the Villa
      Park Dam under our arrangement with the Serrano Water District. We believe
      that
      this operation will position us to aggressively market the ELIXIR product.
      We plan to use these demonstrations as a model for operation and
      installation. Once we have sufficient financing, we plan to engage
      in promotional activities in connection with the operation of the unit,
      including media exposure and access to other public agencies and potential
      private customers. With the successful operation of the ELIXIR, we believe
      we
      will begin to receive orders for units. We have demonstrated this
      unit to over fifty prospective clients.




**Marketing
      and Customers**




*THE
      MARKET* .
      The
      potable water market includes residential, commercial, and food service
      customers. Demand is driven both by consumers' desire to improve the taste
      and
      quality of their drinking water and by the expanded concern of regulatory
      agencies. Water safety concerns have driven the growth of the consumer bottled
      water market to over $2 billion in the United States, as well as the growth
      in
      the water filtration market.




According
      to industry data, it is estimated that one billion people in the world do not
      have safe drinking water. Demand is driven both by consumers' desire to improve
      the taste and quality of their drinking water and by the expanded concern of
      regulatory agencies. There is significant market potential in Asian, Pacific
      and
      Latin American countries, where the quality of drinking water has been found
      to
      be severely deficient in several regions.




In
      the
      United States, the Company plans to initially target the established base of
      small to medium water providers, as well as industrial users (such as the dairy
      industry, meat and poultry producers, cruise ship operators, food and beverage
      processors, pharmaceuticals, cooling tower manufacturers and oil and gas
      producers) and disaster relief agencies with a need for a clean and consistent
      water supply. Outside the United States, the Company plans to market principally
      to local water systems and international relief organizations.




The
      Company's marketing efforts emphasize that its products are easily expandable
      and upgradable; for example, adding ozone and microfiltration equipment to
      a DAF
      unit is similar to adding a new hard drive to a personal computer. Each piece
      of
      equipment comes with state-of-the-art telemetry and wet-chemistry monitoring
      that expands as the system does. The Company plans to provide lease financing
      for all of its products, not only making it easy for a customer to acquire
      the
      equipment, but also guaranteeing that the customer will always have access
      to
      any refinements and improvements made to the Company's
      products.





Pilot
      study requirements and potential adverse environmental effects can generally
      be
      more easily addressed with Sionix' prepackaged plant approach. The company's
      initial approach to the market place is to supply the best of practice process
      for the largest number of water types encountered. The following is a brief
      description of the types of customers to be targeted:




*DOMESTIC
      WATER UTILITIES* .
      There
      are approximately 197,060 public rural water districts in the United States.
      The
      great majority of these are considered small to medium-sized public water
      systems, which support populations of fewer than 10,000 people. We believe
      that
      the Elixir system can provide a comprehensive solution for these utilities.
      It
      avoids most of the above problems, occupies a small footprint, and is
      self-contained and portable. Equally important, in most cases, it does not
      require costly and time consuming environmental studies.




*INDUSTRIAL
      WASTEWATER PURIFICATION* .
      Many
      industries use water in their manufacturing process which results in
      contamination. This wastewater must be treated and purified before it can be
      reused or released into the ocean or streams. Principal markets are:
      pharmaceutical manufacturers, producers of paper products, the dairy industry,
      and silicon chip manufacturers. The small footprint, low cost, and predictably
      efficient output of the Elixir system make it an excellent choice for customers
      in these markets.




*FOOD
      AND BEVERAGE INDUSTRY* .
      The
      production of beer and wine, soft drinks, and food products require water of
      a
      specific purity that must be controlled and monitored as part of the production
      process. The food service industry has an increasing need for consistent global
      product quality. Food service includes water used for fountain beverages, steam
      ovens, coffee and tea.




*HEALTHCARE
      INDUSTRY* .
      Hospitals require clean, uncontaminated water for their normal day-to-day
      operations. They also produce contaminated water that may require treatment
      before being reused or released. The Sionix Elixir system will process
      waste-water to a specific and controlled purity. The systems can be used to
      filter water going into or coming out of use. In such exacting situations,
      the
      customer may be able to reuse contaminated water or ensure decontamination
      before discharge.




*WASTEWATER
      UTILITIES (SEWAGE TREATMENT* ).
      The
      Elixir system can treat any degree of contamination. Sewage overflows are a
      major problem in many communities. The unit can function as a cost-effective
      emergency alternative to mitigate the problem of overflows.




*THIRD-WORLD
      MARKETS* .
      In
      addition to the domestic market, fast spreading urbanization in third-world
      countries has created a growing demand for public water systems. Most of the
      fatal waterborne illnesses occur in these countries. Industrial and agricultural
      contamination of water supplies is epidemic because environmental controls
      are
      neither adequate nor well enforced.




*EMERGENCIES
      AND NATURAL DISASTERS* .
      During
      natural disasters such as earthquakes, floods, hurricanes, and tornadoes, it
      is
      the role of the National Guard and the Federal Emergency Management Agency
      (FEMA) to assist local authorities with emergency services. Damage to local
      utilities can disrupt the drinking water supply and cause the failure of
      wastewater (sewage) treatment plants. The Elixir system can help address both
      of
      these problems. The system is completely self-contained, can be easily
      transported from place to place, is highly efficient, and can be equipped with
      its own power package.




*DESALINIZATION.* Reverse
      osmosis (RO) is among the most efficient desalinization processes available
      today. An RO desalinization system requires prefiltration to reduce clogging
      of
      the filter membrane by organic matter. Placed in front of an RO filter unit
      in a
      desalinization system, the Elixir unit will greatly lengthen the time between
      costly back-flushes and prolong the life of the RO filters.




*MARKETING
      METHODS* .
      We plan
      to market our products through participation in industry groups, selected
      advertising in specialized publications, trade shows, and direct mail. Sionix
      initially will utilize in-house marketing in conjunction with outsourced
      marketing consultants and national and international
      distributorships.




**Patents**




We
      hold
      eight U.S. patents on technology incorporated into the Elixir system and related
      components, with an additional two patents pending. Our patents cover process,
      system and waste handling, an automatic backflushing system using air pressure
      to activate the valves, the ozone mixing system, and the inline wet-chemistry
      water quality monitoring system. The extent to which patents provide a
      commercial advantage, or inhibit the development of competing products, varies.
      We plan to be aggressive in securing additional patents to further protect
      and
      position Sionix for the future. We also rely on common law concepts of
      confidentiality and trade secrets, as well as economic barriers created by
      the
      required investments in tooling and technical personnel and the development
      of
      customer relationships, to protect our proprietary products.





**Competition**




Our
      products will compete with other producers of water filtration and purification
      equipment, such as USFilter and Cuno, Inc., many of which are more established
      and have significantly greater resources. We will also compete with large
      architectural/engineering firms that design and build water treatment plants
      and
      wastewater facilities. In addition to conventional methods such as chlorination
      and ozonation, our products may also compete with other new technologies for
      water filtration. Competitive factors include system effectiveness, operational
      cost and practicality of application, pilot study requirements and potential
      adverse environmental effects. In competing in this marketplace, we have to
      address the conservative nature of public water agencies and fiscal constraints
      on the installation of new systems and technologies.




**Regulatory
      Matters**




Process
      water treatment plants and wastewater plants must comply with clean water
      standards set by the Environmental Protection Agency under the authority of
      the
      Clean Water Act and standards set by states and local communities. In many
      jurisdictions, including the United States, because process water treatment
      facilities and wastewater treatment systems require permits from environmental
      regulatory agencies, delays in permitting could cause delays in construction
      or
      usage of the systems by prospective customers.




In
      1974,
      the Safe Drinking Water Act (SDWA) was passed. It empowered the EPA to set
      maximum levels of contamination allowable for health-threatening microbes,
      chemicals, and other substances which could find their way into drinking water
      systems, and gave the agency the power to delegate enforcement.




By
      1986,
      Congress was dissatisfied with the speed with which the EPA was regulating
      and
      enforcing contaminant limits. The SDWA revision that year set rigid timetables
      for establishing new standards and ordered water systems to monitor their
      supplies for many substances not yet regulated by EPA standards.




Additionally,
      it limited polluting activities near public groundwater wells used as drinking
      water sources - an acknowledgment of the growing threat to underground water
      supplies. It named 83 contaminants and set out a program for adding 25 more
      every three years, as well as specifying the *"best available technology"* for
      treating each contaminant.




The
      timetable for imposing these regulations was rigid and tended to treat all
      contaminants as equally dangerous, regardless of relative risk. The cost to
      water districts for monitoring compliance became a significant burden,
      especially to small or medium-sized districts. The 1986 law authorized the
      EPA
      to cover 75 percent of state administrative costs, but in actuality, only about
      35 percent was funded.




Congress
      updated the SDWA again in 1996, improving on the existing regulations in two
      significant ways. First, they changed the focus of contaminant regulations
      to
      reflect the risk of adverse health effects, the rate of occurrence of the
      contaminant in public water systems, and the estimated reduction in health
      risk
      resulting from regulation. Along with this, a thorough cost-benefit analysis
      must be performed by the EPA, with public health protection the primary basis
      for determining the level at which drinking water standards are set. Second,
      states were given greater flexibility to implement the standards while arriving
      at the same level of public health protection. In addition, a revolving loan
      fund was established to help districts build necessary improvements to their
      systems.




**Research
      and Development**




Research
      and development expenses for the year ended September 30, 2007 were $526,466.
      Research and development consists of fine-tuning the Elixir system for customer
      requirements, and making adjustments based on testing results.  Our policy
      is to capitalize only the direct costs associated with tooling for new products.
      All other costs, including salaries and wages of employees included in research
      and development, are expensed as incurred.




**Manufacturing
      and Raw Materials**




We
      have
      established our initial manufacturing and research and development facility
      in
      Anaheim, California to commence production of the ELIXIR water treatment
      systems. For those parts to be supplied by outside sources, we plan to specify
      parts from multiple sources for independence from manufacturers and
      distributors. Raw materials to be used will include bronze, brass, cast iron,
      steel, PVC and plastic, and are available from multiple sources.




**Employees**




We
      have six full-time employees, none of whom are covered by any
      collective bargaining agreement. The Company considers its relationship with
      its
      employees to be good.





**CAUTIONARY
      FACTORS THAT MAY AFFECT FUTURE RESULTS**




The
      disclosure and analysis in this report and in our other reports, press releases
      and public statements of our officers contain some forward-looking statements.
      Forward-looking statements give our current expectations or forecasts of future
      events, and may be identified by the fact that they do not relate strictly
      to
      historical or current facts. In particular, forward-looking statements include
      statements relating to future actions, prospective products or new product
      acceptance in the marketplace, future performance or results of current and
      anticipated products, sales efforts, expenses, and the outcome of contingencies
      and financial results. Many factors discussed in Part I of this report will
      be important in determining future results. We will have little or no control
      over many of these factors and any of these factors could cause our operating
      results and gross margins, and consequently the price of our Common Stock,
      to
      fluctuate significantly.




Any
      or
      all forward-looking statements in this report, or any other report, and in
      any
      other public statements may turn out to be wrong. They can be affected by
      inaccurate assumptions or by known or unknown uncertainties. No forward-looking
      statement can be guaranteed, and actual results may differ materially. We
      undertake no obligation to publicly update forward-looking statements, except
      as
      required by law. Shareholders are advised to consult further disclosures on
      related subjects on our other reports filed with the Securities and Exchange
      Commission. The following cautionary discussion of risks, uncertainties and
      possible inaccurate assumptions are factors that our management believes could
      cause actual results to differ materially from expected and historical results.
      Factors other than those included below could also adversely affect our business
      results. The following discussion is provided pursuant to the Private Securities
      Litigation Reform Act of 1995.




Prospective
      investors should carefully consider the following risk factors in evaluating
      our
      business. The factors listed below represent certain important factors that
      we
      believe could cause our business results to differ. These factors are not
      intended to represent a complete list of the general or specific risks that
      may
      affect us. It should be recognized that other risks may be significant,
      presently or in the future, and the risks set forth below may affect us to
      a
      greater extent than indicated.




**Risks
      Related To Our Company**




***We
      have never generated any revenues.***




Although
      we have been in business for more than ten years, we have never generated any
      revenues from operations. We have been in a development stage since inception,
      and have yet to manufacture products for sale to customers. All of our working
      capital has been generated by sales of securities and loans.




***We
      have a history of operating losses, which may
      continue.***




We
      have a
      history of losses and may continue to incur operating and net losses for the
      foreseeable future. We incurred a net loss of $2,168,226 for the year ended
      September 30, 2007 and a net loss of $774,887 for the year ended September
      30,
      2006. As of September 30, 2007 our accumulated deficit was $18,290,687. We
      have
      not achieved profitability on a quarterly or on an annual basis. We may not
      be
      able to generate revenues or reach a level of revenue to achieve
      profitability.




***Our
      future financial results, including our expected revenues, are unpredictable
      and
      difficult to forecast.***




If
      we
      begin to generate revenues, it is likely that our revenues, expenses and
      operating results will fluctuate from quarter to quarter, which could increase
      the volatility of the price of our Common Stock. We expect that our operating
      results will continue to fluctuate in the future due to a number of factors,
      some of which are beyond our control. These factors include:




·
            Our
                ability, thus far unproven, to sell our
                products.




·
            If
                we receive orders for products, our ability to complete those orders
                in a
                timely fashion.




·
            The
                costs we will incur in manufacturing
                products.




·
            The
                costs of marketing our products, including customer relations and
                warranty
                repairs.




Due
      to
      all of these factors, our operating results may fall below the expectations
      of
      investors, which could cause a decline in the price of our Common
      Stock.




***We
      will need to raise additional capital to meet our business requirements in
      the
      future and such capital raising may be costly or difficult to obtain and could
      dilute current stockholders’ ownership interests.***




We
      will
      need to raise additional capital in the future, which may not be available
      on
      reasonable terms or at all. The raising of additional capital may dilute our
      current stockholders’ ownership interests. Our income from operations will not
      be sufficient to achieve our business plan. We will need to raise additional
      funds through public or private debt or equity financings to meet various
      objectives including, but not limited to:




·
            pursuing
                growth opportunities, including more rapid
                expansion;




·
            acquiring
                complementary businesses;









·
            making
                capital improvements to improve our
                infrastructure;




·
            hiring
                qualified management and key
                employees;




·
            developing
                new products, accessories and
                services;




·
            responding
                to competitive pressures; and




·
            complying
                with regulatory requirements.




Furthermore,
      any additional debt or equity financing that we may need may not be available
      on
      terms favorable to us, or at all. Registration rights agreements we have entered
      into in connection with private placements of our securities provide that we
      will not, without the prior written consent of the majority of registered
      holders of such securities, file or request the acceleration of any other
      registration statement filed with the SEC, subject to certain exceptions, until
      the SEC has declared the registration statement contemplated by those
      registration rights agreements effective. In addition, negative covenants in
      the
      purchase agreements limit our ability to raise additional capital, including
      through the incurrence of debt or liens on our properties or the issuance of
      equity securities that include registration rights. These negative covenants
      may
      impair our ability to raise additional capital. If we are unable to obtain
      required additional capital, we may have to curtail our growth plans or cut
      back
      on existing business and, further, we may not be able to continue operating
      if
      we do not generate sufficient revenues from operations needed to stay in
      business.




We
      may
      incur substantial costs in pursuing future capital financing, including
      investment banking fees, legal fees, accounting fees, securities law compliance
      fees, printing and distribution expenses and other costs. We may also be
      required to recognize non-cash expenses in connection with certain securities
      we
      issue, such as convertible notes and warrants, which may adversely impact our
      financial condition.




***We
      may be required to pay liquidated damages to certain of our investors under
      certain circumstances.***




We
      entered into registration rights agreements in connection with private
      placements of our securities. These registration rights agreements require
      us to
      pay partial liquidated damages under certain circumstances if we do not satisfy
      our obligations under such registration rights agreements, including our
      obligations to file or obtain or maintain the effectiveness of registration
      statements as required under these registration rights agreements. If we are
      unable to satisfy our obligations under these registration rights agreements
      and
      we are obligated to pay partial liquidated damages, it may adversely impact
      our
      financial condition.




***Our
      auditors have indicated that our inability to generate sufficient revenue raises
      substantial doubt as to our ability to continue as a going
      concern.***




Our
      audited financial statements for the period ended September 30, 2007 were
      prepared on a going concern basis in accordance with United States generally
      accounting principles. The going concern basis of presentation assumes that
      we
      will continue in operation for the foreseeable future and will be able to
      realize our assets and discharge our liabilities and commitments in the normal
      course of business. However, our auditors have indicated that our inability
      to
      generate revenue raises substantial doubt as to our ability to continue as
      a
      going concern. In the absence of revenues, we are seeking to raise additional
      funds to meet our working capital needs principally through the additional
      sales
      of our securities or debt financings. However, we cannot guarantee that will
      be
      able to obtain sufficient additional funds when needed or that such funds,
      if
      available, will be obtainable on terms satisfactory to us. In the event that
      these plans can not be effectively realized, there can be no assurance that
      we
      will be able to continue as a going concern.




***We
      intend to expand our operations and increase our expenditures in an effort
      to
      grow our business. If we are unable to achieve or manage significant growth
      and
      expansion, or if our business does not grow as we expect, our operating results
      may suffer.***




Our
      business plan anticipates continued additional expenditure on development,
      manufacturing and other growth initiatives. We may not achieve significant
      growth. If achieved, significant growth would place increased demands on our
      management, accounting systems, network infrastructure and systems of financial
      and internal controls. We may be unable to expand associated resources and
      refine associated systems fast enough to keep pace with expansion, especially
      to
      the extent we expand into multiple facilities at distant locations. If we fail
      to ensure that our management, control and other systems keep pace with growth,
      we may experience a decline in the effectiveness and focus of our management
      team, problems with timely or accurate reporting, issues with costs and quality
      controls and other problems associated with a failure to manage rapid growth,
      all of which would harm our results of operations.





***Our
      ability to effectively recruit and retain qualified officers and directors
      could
      also be adversely affected if we experience difficulty in obtaining adequate
      directors’ and officers’ liability insurance.***




We
      may be
      unable to maintain sufficient insurance as a public company to cover liability
      claims made against our officers and directors. If we are unable to adequately
      insure our officers and directors, we may not be able to retain or recruit
      qualified officers and directors to manage us.




***Losing
      key personnel or failing to attract and retain other highly skilled personnel
      could affect our ability to successfully grow our
      business.***




Our
      future performance depends substantially on the continued service of our senior
      management and other key personnel. We do not currently maintain key person
      life
      insurance. If our senior management were to resign or no longer be able to
      serve
      as our employees, it could impair our revenue growth, business and future
      prospects.




To
      meet
      our expected growth, we believe that our future success will depend upon our
      ability to hire, train and retain other highly skilled personnel.  We
      cannot be sure that we will be successful in hiring, assimilating or retaining
      the necessary personnel, and our failure to do so could cause our operating
      results to fall below our growth and profit targets.




***Rules
      issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to
      retain or attract qualified officers and directors, which could adversely affect
      the management of our business and our ability to obtain or retain listing
      of
      our Common Stock.***




We
      may be
      unable to attract and retain those qualified officers, directors and members
      of
      board committees required to provide for our effective management because of
      rules and regulations that govern publicly held companies, including, but not
      limited to, certifications by principal executive officers. The enactment of
      the
      Sarbanes-Oxley Act has resulted in the issuance of rules and regulations and
      the
      strengthening of existing rules and regulations by the SEC, as well as the
      adoption of new and more stringent rules by the stock exchanges and NASDAQ.
      The
      perceived increased personal risk associated with these recent changes may
      deter
      qualified individuals from accepting roles as directors and executive
      officers.




Further,
      some of these recent changes heighten the requirements for board or committee
      membership, particularly with respect to an individual’s independence from the
      corporation and level of experience in finance and accounting matters. We may
      have difficulty attracting and retaining directors with the requisite
      qualifications. If we are unable to attract and retain qualified officers and
      directors, the management of our business and our ability to obtain or retain
      listing of our shares of Common Stock on any stock exchange or NASDAQ (assuming
      we elect to seek and are successful in obtaining such listing) could be
      adversely affected.




**RISKS
      RELATED TO OUR BUSINESS**




***We
      Expect Intense Competition In Our Industry***




Many
      of
      our competitors are large, diversified manufacturing companies with significant
      expertise in the water quality business and contacts with water utilities and
      industrial water consumers. These competitors have significantly greater name
      recognition and financial and other resources. We cannot assure you that we
      will
      succeed in the face of strong competition from other water treatment
      companies.




***Certain
      Aspects of Our Industry Are Subject To Government
      Regulation***




Treatment
      of domestic drinking water and wastewater is regulated by a number of federal
      state and local agencies, including the U.S. Environmental Protection Agency.
      The changing regulatory environment, including changes in water quality
      standards, could adversely affect our business or make our products
      obsolete.




***The
      Operation of Our Products Could Result In Product Liability
      Claims***




We,
      like
      any other manufacturer of products that are designed to treat food or water
      that
      will be ingested, face an inherent risk of exposure to product liability claims
      in the event that the use of our products results in injury. Such claims may
      include, among others, that our products fail to remove harmful contaminants
      or
      bacteria, or that our products introduce other contaminants into the water.
      While we intend to obtain product liability insurance, there can be no assurance
      that such insurance will continue to be available at a reasonable cost, or,
      if
      available, will be adequate to cover liabilities. We do not anticipate obtaining
      contractual indemnification from parties acquiring or using our products. In
      any
      event, any such indemnification if obtained will be limited by our terms and,
      as
      a practical matter, to the creditworthiness of the indemnifying party. In the
      event that we do not have adequate insurance or contractual indemnification,
      product liabilities relating to defective products could have a material adverse
      effect on our operations and financial conditions.





***Our
      water treatment system and the related technology are unproven and may not
      achieve widespread market acceptance among our prospective
      customers.***




Although
      we have installed a water treatment system on a pilot basis, our products have
      not been proven in a commercial context over any significant period of time.
      We
      have developed our proprietary technology and processes for water treatment
      based on dissolved air flotation technology, which competes with other forms
      of
      water treatment technologies that currently are in operation throughout the
      United States. Our water treatment system and the technology on which it is
      based may not achieve widespread market acceptance. Our success will depend
      on
      our ability to market our system and services to businesses and water providers
      on terms and conditions acceptable to us and to establish and maintain
      successful relationships with various water providers and state regulatory
      agencies.




We
      believe that market acceptance of our system and technology and our related
      success will depend on many factors including:




·
            the
                perceived advantages of our system over competing water treatment
                solutions;




·
            the
                actual and perceived safety and efficacy of our
                system;




·
            the
                availability and success of alternative water treatment
                solutions;




·
            the
                pricing and cost effectiveness of our
                system;




·
            our
                ability to access businesses and water providers that may use our
                system;




·
            the
                effectiveness of our sales and marketing
                efforts;




·
            publicity
                concerning our system and technology or competitive
                solutions;




·
            timeliness
                in assembling and installing our system on customer
                sites;




·
            our
                ability to respond to changes in the regulatory standards for levels
                of
                various contaminants; and




·
            our
                ability to provide effective service and maintenance of our systems
                to our
                customers’ satisfaction.




If
      our
      system or technology fails to achieve or maintain market acceptance or if new
      technologies are introduced by others that are more favorably received than
      our
      technology, are more cost effective or otherwise render our technology obsolete,
      we may experience a decline in demand for our system. If we are unable to market
      and sell our system and services successfully, our revenues would decline and
      our operating results and prospects would suffer.




**We
      must meet evolving customer requirements for water treatment and invest in
      the
      development of our water treatment technologies.**




If
      we are
      unable to develop or enhance our system and services to satisfy evolving
      customer demands, our business, operating results, financial condition and
      prospects will be harmed significantly. The market for water treatment is
      characterized by changing technologies, periodic new product introductions
      and
      evolving customer and industry standards. For instance, competitors in the
      water
      treatment industry are continuously searching for methods of water treatment
      that are more cost-effective and more efficient. Our current and prospective
      customers may choose water treatment systems that are offered at a lower price
      than our system. To achieve market acceptance for our system, we must
      effectively and timely anticipate and adapt to customer requirements and offer
      products and services that meet customer demands. This may cause us to pursue
      other technologies or capabilities through acquisitions or strategic alliances.
      Our customers may require us to provide water treatment systems for many
      different contaminants or higher volumes of water or to decrease the presence
      of
      contaminants. We also may experience design, engineering and other difficulties
      that could delay or prevent the development, introduction or marketing of any
      modifications to our system or our new services. Our failure to develop
      successfully and offer a system or services that satisfy customer requirements
      would significantly weaken demand for our system or services, which would likely
      cause a decrease in our revenues and harm our operating results. In addition,
      if
      our competitors introduce solutions and/or services based on new or alternative
      water treatment technologies, our existing and future system and/or services
      could become obsolete, which would also weaken demand for our system, thereby
      decreasing our revenues and harming our operating results.




**Failure
      to protect our intellectual property rights could impair our competitive
      position.**




Our
      water
      treatment systems utilize a variety of proprietary rights that are important
      to
      our competitive position and success. Because the intellectual property
      associated with our technology is evolving and rapidly changing, our current
      intellectual property rights may not protect us adequately. We rely on a
      combination of patents, trademarks, trade secrets and contractual restrictions
      to protect the intellectual property we use in our business. In addition, we
      generally enter into confidentiality or license agreements, or have
      confidentiality provisions in agreements, with our employees, consultants,
      strategic partners and customers and control access to, and distribution of,
      our
      technology, documentation and other proprietary information.





Because
      legal standards relating to the validity, enforceability and scope of protection
      of patent and intellectual property rights in new technologies are uncertain
      and
      still evolving, the future viability or value of our intellectual property
      rights is uncertain. Furthermore, our competitors independently may develop
      similar technologies that limit the value of our intellectual property or design
      around patents issued to us. If competitors or third parties are able to use
      our
      intellectual property or are able to successfully challenge, circumvent,
      invalidate or render unenforceable our intellectual property, we likely would
      lose any competitive advantage we might develop. We may not be successful in
      securing or maintaining proprietary or patent protection for the technology
      used
      in our system or services, and protection that is secured may be challenged
      and
      possibly lost.




***Risks
      Related to Our Industry***




**Changes
      in governmental regulation and other legal uncertainties could adversely affect
      our customers or decrease demand for our systems, and thus harm our business,
      operating results and prospects.**




In
      the
      United States, many different federal, state and local laws and regulations
      govern the treatment and distribution of water, as well as and disposal of
      attendant wastes. The increased interest in the treatment of contaminated water
      due to increased media attention on the adverse health effects from contaminated
      drinking water may result in intervention by the EPA or state regulatory
      agencies under existing or newly enacted legislation and in the imposition
      of
      restrictions, fees or charges on users and providers of products and services
      in
      this area. These restrictions, fees or charges could adversely affect our
      potential customers, which could negatively affect our revenues. Conversely,
      the
      failure of the EPA or state regulatory agencies to act on a timely basis to
      set
      interim or permanent standards for pollutants, or to delay effective dates
      for
      standards for pollutants, grant waivers of compliance with such standards or
      take other discretionary actions not to enforce these standards, may decrease
      demand for our system if water utilities and agencies are not required to bring
      their water into compliance with such regulatory standards. While we are not
      aware of any currently proposed federal regulation directly affecting our
      business, we cannot predict whether there will be future legislation regarding
      the treatment and distribution of water and the disposal of attendant
      wastes.




**Water
      treatment systems in the United States must generally be permitted by a
      regulatory agency prior to its use by our customers, and changing drinking
      water
      standards and other factors could affect the approval process with respect
      to
      our systems by such regulatory agencies.**




In
      general, water treatment systems must be permitted by applicable state or local
      regulatory agencies prior to commencement of operations. We cannot assure you
      when or whether the various regulatory agencies will approve our system for
      use
      by our customers. The application process can be time consuming and often
      involves several information requests by the regulatory agencies with respect
      to
      the system. Any long waiting periods or difficulties faced by our customers
      in
      the application process could cause some of our customers to use competing
      technologies, products, services or sources of drinking water, rather than
      use
      our technology.




**Demand
      for our products could be adversely affected by a downturn in government
      spending related to water treatment, or in the cyclical residential or
      non-residential building markets.**




Our
      business will be dependent upon spending on water treatment systems by
      utilities, municipalities and other organizations that supply water, which
      in
      turn is often dependent upon residential construction, population growth,
      continued contamination of water sources and regulatory responses to this
      contamination. As a result, demand for our water treatment systems could be
      impacted adversely by general budgetary constraints on governmental or regulated
      customers, including government spending cuts, the inability of government
      entities to issue debt to finance any necessary water treatment projects,
      difficulty of customers in obtaining necessary permits or changes in regulatory
      limits associated with the contaminants we seek to address with our water
      treatment system.  A slowdown of growth in residential and non-residential
      building would reduce demand for drinking water and for water treatment systems.
      The residential and non-residential building markets are generally cyclical,
      and, historically, down cycles have typically lasted a number of years. Any
      significant decline in the governmental spending on water treatment systems
      or
      residential or non-residential building markets could weaken demand for our
      systems.




**We
      operate in a competitive market, and if we are unable to compete effectively,
      our business, operating results and prospects could
      suffer.**




The
      market environment in which we operate is very dynamic and is characterized
      by
      evolving standards, the development of new technology, regulations which
      continually reduce the acceptable levels for contaminants and affect the means,
      methods and costs of disposing of wastes derived from water
      treatment.




We
      will
      compete with large water treatment companies, such as USFilter Corporation,
      a
      subsidiary of Siemens AG. Our competition may vary according to the contaminant
      being removed. Many of our current and potential competitors have technical
      and
      financial resources, marketing and service organizations, and market expertise
      significantly greater than ours. Many of our competitors also have longer
      operating histories, greater name recognition and large customer bases.
      Moreover, our competitors may forecast the course of market developments more
      accurately and could in the future develop new technologies that compete with
      our system and/or services or even render our system and/or services obsolete.
      Due to the evolving markets in which we compete, additional competitors with
      significant market presence and financial resources may enter those markets,
      thereby further increasing competition. These competitors may be able to reduce
      our market share by adopting more aggressive pricing policies than we can or
      by
      developing technology and services that gain wider market acceptance than our
      system and/or services. Existing and potential competitors also may develop
      relationships with distributors of our system and services or third parties
      with
      whom we have strategic relationships in a manner that could harm our ability
      to
      sell, market and develop our system and services significantly. If we do not
      compete successfully we may never achieve significant market penetration and
      we
      may be unable to maintain or increase our business or revenues, causing our
      operating results and prospects to suffer.





**RISKS
      RELATED TO OUR COMMON STOCK**




***You
      may have difficulty trading our Common Stock as there is a limited public market
      for shares of our Common Stock.***




Our
      Common Stock is currently quoted on the NASD’s OTC Bulletin Board under the
      symbol *“SINX.OB.”* Our
      Common Stock is not actively traded and there is a limited public market for
      our
      Common Stock. As a result, a stockholder may find it difficult to dispose of,
      or
      to obtain accurate quotations of the price of, our Common Stock. This severely
      limits the liquidity of our Common Stock, and would likely have a material
      adverse effect on the market price for our Common Stock and on our ability
      to
      raise additional capital. An active public market for shares of our Common
      Stock
      may not develop, or if one should develop, it may not be sustained.




***Applicable
      SEC rules governing the trading of “penny stocks” may limit the trading and
      liquidity of our Common Stock which may affect the trading price of our Common
      Stock.***




Our
      Common Stock is currently quoted on the NASD’s OTC Bulletin
      Board.  Stocks such as ours which trade below $5.00 per share are
      considered *“penny
      stocks”* and
      subject to SEC rules and regulations which impose limitations upon the manner
      in
      which such shares may be publicly traded. These regulations require the
      delivery, prior to any transaction involving a penny stock, of a disclosure
      schedule explaining the penny stock market and the associated risks. Under
      these
      regulations, certain brokers who recommend such securities to persons other
      than
      established customers or certain accredited investors must make a special
      written suitability determination regarding such a purchaser and receive such
      purchaser’s written agreement to a transaction prior to sale. These regulations
      have the effect of limiting the trading activity of our Common Stock and
      reducing the liquidity of an investment in our Common Stock.




***We
      do not anticipate dividends to be paid on our Common Stock, and stockholders
      may
      lose the entire amount of their investment.***




A
      dividend has never been declared or paid in cash on our Common Stock, and we
      do
      not anticipate such a declaration or payment for the foreseeable future. We
      expect to use future earnings, if any, to fund business growth. Therefore,
      stockholders will not receive any funds absent a sale of their shares. We cannot
      assure stockholders of a positive return on their investment when they sell
      their shares, nor can we assure that stockholders will not lose the entire
      amount of their investment.




***You
      may experience dilution of your ownership interests because of the future
      issuance of additional shares of our Common
      Stock.***




In
      the
      future, we may issue our authorized but previously unissued equity securities,
      resulting in the dilution of the ownership interests of our present
      stockholders.  We are currently authorized to issue an aggregate of
      150,000,000 shares of Common Stock. As of December 31, 2007, there were
      106,635,201 shares of Common Stock outstanding. We may also issue additional
      shares of our Common Stock or other securities that are convertible into or
      exercisable for Common Stock in connection with hiring or retaining employees,
      future acquisitions, future sales of our securities for capital raising
      purposes, or for other business purposes. The future issuance of any such
      additional shares of our Common Stock or other securities may create downward
      pressure on the trading price of our Common Stock. There can be no assurance
      that we will not be required to issue additional shares, warrants or other
      convertible securities in the future in conjunction with any capital raising
      efforts, including at a price (or exercise prices) below the price at which
      shares of our Common Stock are currently quoted on the OTC Bulletin
      Board.




***Even
      though we are not a California corporation, our Common Stock could still be
      subject to a number of key provisions of the California General Corporation
      Law.***




Under
      Section 2115 of the California General Corporation Law (the *“CGCL”* ),
      corporations not organized under California law may still be subject to a number
      of key provisions of the CGCL. This determination is based on whether the
      corporation has significant business contacts with California and if more than
      50% of its voting securities are held of record by persons having addresses
      in
      California. In the immediate future, we will continue the business and
      operations of Sionix in California, and a majority of our business operations,
      revenue and payroll will be conducted in, derived from, and paid to residents
      of
      California. Therefore, depending on our ownership, we could be subject to
      certain provisions of the CGCL. Among the more important provisions are those
      relating to the election and removal of directors, cumulative voting, standards
      of liability and indemnification of directors, distributions, dividends and
      repurchases of shares, shareholder meetings, approval of certain corporate
      transactions, dissenters' and appraisal rights, and inspection of corporate
      records.





**ITEM
      2**  **DESCRIPTION
      OF PROPERTY.**




Our
      corporate headquarters consists of approximately 1,994 square feet of office
      space in Irvine, California. The lease covering this space expires in February
      2009. Our management believes the facilities will provide adequate space for
      our
      office, product assembly and warehouse activities, and that suitable additional
      space will be available to accommodate planned expansion.




**ITEM
      3****LEGAL
      PROCEEDINGS.**




From
      time
      to time we are involved in routine legal proceedings, none of which is material
      to our financial condition.




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




No
      matters were submitted to a vote of shareholders of the Company during the
      fourth quarter of the fiscal year ended September 30, 2007.





**PART
      II**




**ITEM
      5****MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**




**Market
      Prices**




Our
      Common Stock is quoted on the OTC Bulletin Board under the symbol *“SINX”* .
      The
      high and low closing prices of the Company’s Common Stock were as follows for
      the periods below *.* The
      quotations below reflect inter-dealer bid prices without retail markup,
      markdown, or commission and may not represent actual transactions.




High
            
            LowFiscal
                Year Ended September 30, 2007:First
                Quarter
            
            $
            0.145
            
            $
            0.035Second
                Quarter
            
            
            0.480
            
            
            0.095Third
                Quarter
            
            
            0.400
            
            
            0.200Fourth
                Quarter
            
            
            0.380
            
            
            0.260Fiscal
                Year Ended September 30, 2006:First
                Quarter
            
            
            0.035
            
            
            0.012Second
                Quarter
            
            
            0.025
            
            
            0.008Third
                Quarter
            
            
            0.013
            
            
            0.003Fourth
                Quarter
            
            
            0.060
            
            
            0.005




**Dividends**




We
      have
      not paid any cash dividends on our Common Stock since our inception and do
      not
      anticipate paying any cash dividends in the foreseeable future. We plan to
      retain our earnings, if any, to provide funds for the expansion of our business.
      Our Board of Directors will determine future dividend policy based upon
      conditions at that time, including our earnings and financial condition, capital
      requirements and other relevant factors.




**Securities
      Authorized for Issuance Under Equity Compensation Plans**




The
      following table sets forth certain information regarding the Company’s equity
      compensation plans as of September 30, 2007.




**Plan
                category**
            
            **No. of**
              **securities**
              **to be issued**
              **upon**
              **exercise of**
              **outstanding**
              **options,**
              **warrants**
              **and rights**
            
            **Weighted**
              **average**
              **exercise price**
              **of outstanding**
              **options,**
              **warrants and**
              **rights**
            
            **No. of**
              **securities**
              **remaining**
              **available for**
              **future**
              **issuance**
              **under equity**
              **compensation**
              **plans**Equity compensation plans
                approved by stockholders
            
            
            -0-
            
            
            -
            
            
            -0-Equity
                compensation plans not approved by stockholders
            
            
            7,034,140
            
            
            .15
            
            
            542,540Total
            
            
            7,034,140
            
            
            .15
            
            
            542,540


**Recent
      Issuances of Unregistered Securities**




In
      July
      2007 we completed a private offering, principally to private investment funds,
      in the amount of $1,025,000. The investors received Subordinated Convertible
      Debentures that bear interest at 8% per annum, mature twelve months after
      issuance, and are convertible into our Common Stock at a conversion price of
      $
      .22 per share.




We
      believe the sale of securities described above was exempt from the registration
      provisions of the Securities Act of 1933 by reason of Section 4(2) thereof
      and
      Regulation D thereunder.





**ITEM
      6**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
      OPERATION**




**General** .




The
      following discussion and analysis should be read in conjunction with our
      Financial Statements and Notes thereto, included elsewhere in this report.
      Except for the historical information contained in this report, the following
      discussion contains certain forward-looking statements that involve risks and
      uncertainties, such as statements of our plans, objectives, expectations and
      intentions. Our actual results may differ materially from the results
      discussed in the forward-looking statements, as a result of certain factors
      including, but not limited to, those discussed in the section of this report
      titled “Cautionary Factors That May Affect Future Results”, as well as other
      factors, some of which will be outside of our control. You are cautioned not
      to
      place undue reliance on these forward-looking statements, which relate only
      to
      events as of the date on which the statements are made. We undertake no
      obligation to publicly revise these forward-looking statements to reflect events
      or circumstances that arise after the date hereof. You should refer to and
      carefully review the information in future documents we file with the Securities
      and Exchange Commission.




**Restatement
      of Prior Period**




On
      December 11, 2007 the Company received a comment letter from the Securities
      and
      Exchange Commission. In responding to the comment letter, the Company
      recalculated the number of shares of Common Stock available for issuance and
      determined that as of September 30, 2007, the number of shares of Common Stock
      that would be required to be issued if all of the Company’s convertible
      securities, including debt securities, options and warrants, were converted
      or
      exercised would exceed the number of shares of authorized Common Stock. The
      difference between the original calculation and the recalculation is illustrated
      below.




AsOriginally
              
              AsCalculated
              
              RecalculatedAuthorized
                  shares per Articles of Incorportion
              
              
              150,000,000
              
              
              150,000,000Outstanding
                  shares
              
              
              (106,635,201
              )
              
              (106,635,201
              )Available
                  shares
              
              
              43,364,799
              
              
              43,364,799Securities
                  convertible or exercisable into common stock shares:2001
                  Executive Officers Stock Option Plan
              
              
              7,343,032
              
              
              7,034,140Advisory
                  Board Compensation
              
              
              
              
              
              11,520,0002004
                  Stock Purchase Agreement
              
              
              
              
              
              1,463,336Warrants
                  Related to 2004 Stock Purchase Agreement
              
              
              
              
              
              1,463,336Beneficial
                  Conversion Features
              
              
              32,009,087
              
              
              36,606,318Warrants
                  Related to $1,025,000 of Subordinated Convertible
                  Debentures
              
              
              2,159,088
              
              
              2,795,45441,511,207
              
              
              60,882,584




Adjustments
      to the original calculation included the following:




1.
            In
                2001, the Company adopted the 2001 Executive Officers Stock Option
                Plan.
                The plan has issued options to purchase 7,034,140 shares of Common
                Stock.
                The original calculation included options to purchase 7,343,032 shares
                of
                Common Stock, an overstatement of 308,892 shares of Common
                Stock.




2.
            On
                October 1, 2004, the Company formed an advisory board consisting
                of four
                members. In exchange for his services, each member was to receive
                $5,000
                monthly from October 1, 2004 to February 22, 2007 (for a total of
                $576,000
                to be paid to all members). Each member, in his sole discretion,
                was
                entitled to convert some or all of the cash amount owed to him into
                shares
                of Common Stock at the rate of $0.05 per share. If all of the members
                of
                the advisory board converted the total amount of cash compensation
                due to
                them into shares of Common Stock, the Company would be required to
                issue
                11,520,000 shares. The accrued expense convertible into shares of
                Common
                Stock was not included in the original
                calculation.




3.
            Under
                the terms of a 2004 Stock Purchase Agreement, the Company was to
                issue
                1,463,336 shares of Common Stock to certain investors that had previously
                remitted funds to the Company from February 9, 2004 to August 25,
                2004.
                The shares were not included in the original
                calculation.




4.
            Under
                the terms of the 2004 Stock Purchase Agreement, the Company issued
                warrants to purchase 1,463,336 shares of Common Stock to these investors
                at an exercise price of $0.03 per share. The warrants were not included
                in
                the original calculation.









5.
            As
                of September 30, 2007, the Company had Convertible Notes outstanding
                totaling $1,861,000 that included embedded beneficial conversion
                features
                that allowed for the conversion of the notes into shares of Common
                Stock
                at rates between $0.01 and $0.22, and matured between June 2008 and
                December 2008. The Convertible Notes accrue interest at rates between
                8%
                and 10%, and any accrued but unpaid interest is also convertible
                into
                shares of Common Stock. The original calculation of the beneficial
                conversion feature did not include accrued interest of $209,843 that
                could
                be converted into 4,597,231 shares of Common Stock at
                maturity.




6.
            On
                July 18, 2007 the Company completed an offering of $1,025,000 in
                principal
                amount of Subordinated Convertible Debentures (the “Convertible
                Debentures”) to a group of institutional and accredited investors. As part
                of this offering the Company issued warrants to purchase 2,795,454
                shares
                of Common Stock at a price of $0.50 per share. The number of warrant
                shares in the original calculation was
                2,159,088.




The
      Company analyzed the effect of the recalculation on the balance sheet and the
      statements of operations and cash flows as of Common Stock as of September
      30,
      2007. The analysis and results were as follows:




2001
      Executive Officers Stock Option Plan




In
      October 2000, the Company amended its employment agreements with its executive
      officers. In conjunction with the amendments the Company adopted the 2001
      Executive Officers Stock Option Plan. The plan has reserved 7,576,680 shares
      of
      Common Stock and has issued options for the purchase of 7,034,140 shares of
      Common Stock. The options expire 5 years from the date of issuance.




*Balance
      Sheet*




On
      the
      grant date, the Company applied Financial Accounting Standard Board (SFAS)
      Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* paragraph 6 to determine if the options were within the scope and definition
      of
      a derivative. The options: had one or more underlings and one or more notional
      amounts, required no initial investment, and required or permitted net
      settlement. Therefore, the options were determined to be derivatives. In order
      to determine how to classify the options, the Company followed the guidance
      of
      paragraphs 7 and 8 of Emerging Issues Task Force (EITF) 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* ,
      which
      states that contracts ** that
      require settlement in shares are equity instruments .
      In
      order to determine the value of the options, the Company applied EITF 00-19,
      paragraph 9, which states that contracts that require the company to deliver
      shares as part of a physical settlement or net-share settlement should be
      initially measured at fair value. In accordance with EITF 00-19, the options
      were recorded in additional paid-in capital at fair value on the date of
      issuance.




The
      Company began the analysis for the restatement by following the guidance of
      SFAS
      133 ,
      paragraph 6 to ascertain if the
      options issued remained derivatives as of September 30, 2007. All of the
      criteria in the original analysis were met, and the options issued were
      determined to be within the scope and definition of a derivative. The Company
      next followed the guidance of EITF 00-19, paragraph 19, which states that if
      a
      company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




In
      accordance with EITF 00-19, the options were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liabilities on the balance sheet,
      at
      the fair value of $2,271,879 using the Black Sholes model with the following
      assumptions: risk free rate of return of 5.02%; volatility of 219.89%; dividend
      yield of 0%; and an expected term of 3.67 years.




The
      Company followed the guidance of EITF 00-19, paragraph 9, which states that
      all
      contracts classified as liabilities should be measured at fair value at each
      balance sheet date, with changes in fair value reported in earnings and
      disclosed in the financial statements as long as the contracts remain classified
      as liabilities.




The
      fair
      value of the options was $1,926,914 as of September 30, 2007, calculated using
      the Black Sholes model with the following assumptions: risk free rate of return
      of 4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term
      of
      3.5 years.




The
      decrease in the fair value of the options was recorded by decreasing warrant
      liability on the balance sheet by $344,965.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company applied EITF 00-19, paragraph 9, which states
      that subsequent changes in fair value of contracts should not be recognized
      as
      long as the contracts continue to be classified as equity. Therefore, changes
      in
      the fair value of the options prior to the reclassification were not recorded.
      Subsequent to reclassifying the contracts as liabilities, the Company again
      followed the guidance of EITF 00-19, paragraph 9, which requires all contracts
      classified as liabilities to be measured at fair value, with changes in fair
      value reported in earnings as long as the contracts remain classified as
      liabilities.







From
      July
      17 to September 30, 2007, the fair value of the options decreased by $344,965.
      This amount is included in decrease in warrant liability in the other income
      (expense) section of the statement of operations.




*Statement
      of Cash Flows*




The
      change in the statement of cash flows was the result of the decrease of $344,965
      in the fair value of the options.




The
      reclassification of the options from additional paid-in capital to warrant
      liabilities was a non-cash transaction.




Advisory
      Board Compensation




On
      October 1, 2004, the Company formed an advisory board consisting of four
      members. In exchange for his services, each member was to receive $5,000 monthly
      from October 1, 2004 to February 22, 2007, for a total of $576,000 to be paid
      to
      all members. Each member, in his sole discretion, was entitled to convert some
      or all of the cash amount owed to him into shares of Common Stock at a rate
      of
      $0.05 per share. If all of the members of the advisory board converted the
      total
      amount of cash compensation due to them into shares of Common Stock, the Company
      would be required to issue 11,520,000 shares. The Company determined that:
      the
      accrued expense, embedded beneficial conversion features, embedded beneficial
      conversion feature discount, and related amortization expense were not recorded
      at the date of issuance or prior to the restatement. No payments have been
      made
      to any advisory board members and there has been no conversion by any advisory
      board members of the accrued liability into shares of Common Stock.




*Balance
      Sheet*




The
      Company began the analysis for the restatement by applying paragraph 6 of
      Financial Accounting Standard (SFAS) Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      to
      ascertain if the
      embedded beneficial conversion features were derivatives at the date of
      issuance. The embedded beneficial conversion features had one or more underlings
      and one or more notional amounts, required no initial investment, and required
      or permitted net settlement. Therefore, the embedded beneficial conversion
      features were determined to be within the scope and definition of a derivative
      at the date of issuance. Next, the Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be bifurcated from the accrued expense. The Company determined that: the
      economic characteristics of the embedded beneficial conversion features are
      not
      clearly and closely related to the accrued expense, the embedded beneficial
      conversion feature and accrued expense are not remeasured at fair value at
      each
      balance sheet date and a separate contract with the same terms would be a
      derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the embedded
      beneficial conversion features were bifurcated from the accrued expense to
      determine the classification and valuation. To determine the classification,
      the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8 which states
      that contracts ** that
      require settlement in shares are equity instruments . To
      determine the value, the Company followed the guidance of EITF 00-19, paragraph
      9, which
      states that contracts that require the company to deliver shares as part of
      a
      physical settlement or net-share settlement should be initially measured at
      fair
      value . The
      Company next followed the guidance of EITF 00-19, paragraph 19, which states
      that if a company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




The
      fair
      value of the monthly embedded beneficial conversion features was calculated
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 2.28% to 5.21%; volatility
      of
      144.19% to 270.5%; dividend yield of 0% and an expected term of 5 years. The
      sum
      of the monthly accrued expenses and embedded beneficial conversion features
      from
      October 1, 2004 to September 30, 2006, was $480,000 and $210,149, respectively,
      and considered earned prior to October 1, 2006. Therefore, as of September
      30,
      2006, $480,000 was recorded to accrued expenses and deficit accumulated during
      development stage, $210,149 was recorded to beneficial conversion features
      liability and netted against accrued expenses as a discount, and $49,192 was
      recorded to accrued expenses and deficit accumulated during development stage
      for the amortization of the beneficial conversion features discount.




The
      fair
      value of the monthly embedded beneficial conversion features was $480,000 as
      of
      September 30, 2006, which the Company calculated using the Black Sholes model
      with the following assumptions: risk free rate of return of 4.91%; volatility
      of
      270.5%; dividend yield of 0%; and an expected term of 3.08 to 5 years.







During
      the year ended September 30, 2007, the Company incurred and recorded to accrued
      expenses $96,000 for advisory board compensation until February 22, 2007, the
      date the Company’s Board of Directors terminated the compensation. The
      fair
      value of the monthly embedded beneficial conversion features was calculated
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.94% to 5.09%; volatility
      of
      268.59% to 277.2%; dividend yield of 0% and an expected term of 5 years. The
      sum
      of the embedded beneficial conversion features from October 1, 2006 to February
      22, 2007 was $91,956 and was recorded to beneficial conversion features
      liability and netted against accrued expenses. As of September 30, 2007, total
      amortization for the beneficial conversion features discount was $106,546
      ($49,192 from October 1, 2004 to September 30, 2006, and $57,354 for the year
      ended September 30, 2007), and was recorded to accrued expenses.




The
      fair
      value of the monthly embedded beneficial conversion features was $576,000 as
      of
      September 30, 2007, which the Company calculated using the Black Sholes model
      with the following assumptions: risk free rate of return of 4.05%; volatility
      of
      126.94%; dividend yield of 0%; and an expected term of 2.08 to 4.42 years.




The
      increase in the fair value of the embedded beneficial conversion feature was
      recorded by increasing beneficial conversion features liability on the balance
      sheet by $4,044.




*Statement
      of Operations*




The
      Company followed the guidance of EITF 00-19, paragraph 9, which requires all
      contracts classified as liabilities to be measured at fair value, with changes
      in fair value reported in earnings as long as the contracts remain classified
      as
      liabilities.




The
      increase in the fair value of the beneficial conversion features was $4,044
      and
      included in increase in beneficial conversion feature in the other income
      (expense) section of the statement of operations.




The
      amortization expense for the beneficial conversion feature discount was $57,354
      and included in general and administrative expenses in the operating expenses
      section of the statement of operations for the year ended September 30,
      2007.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the advisory board
      compensation accrued expense of $480,000 and $96,000, beneficial conversion
      features liability of $576,000 and unamortized beneficial conversion features
      discount of $380,441 on the balance sheet, and change in fair value of the
      liability of $4,044 and amortization of the beneficial conversion features
      discount of $49,193 on the statement of operations.




Warrants
      Related to 2004 Stock Purchase Agreement




Under
      the
      terms of a 2004 Stock Purchase Agreement, the Company issued warrants to
      purchase 1,463,336 shares of Common Stock at an exercise price of $0.03 which
      expired between February 9, 2007 and August 25, 2007. The Company determined
      that the warrants and related expense were not recorded at the date of issuance
      or prior to the restatement and there has been no exercise of the warrants
      into
      shares of Common Stock.




*Balance
      Sheet*




The
      Company followed the guidance of SFAS 133 ,
      paragraph 6, to
      determine if the warrants were within the scope and definition of a derivative
      at the date of issuance. The warrants had one or more underlings and one or
      more
      notional amounts, required no initial investment and required or permitted
      net
      settlement. Therefore, the warrants were determined to be derivatives at the
      date of issuance. In order to determine how to classify the warrants, the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
      that contracts ** which
      require settlement in shares are equity instruments. In order
      to determine the value of the options, the Company followed the guidance of
      EITF
      00-19, paragraph 9, which states that contracts which require the company to
      deliver shares as part of a physical settlement or net-share settlement should
      be initially measured at fair value.




The
      fair
      value of the warrants was $24,367 at the date of issuance, which the Company
      calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 1.21% to 2.14%; volatility
      of
      141.91% to 170.27%; dividend yield of 0% and an expected term of 3 years. The
      warrants were considered an expense prior to October 1, 2006, therefore, $24,367
      was recorded to additional paid-in capital and deficit accumulated during
      development stage.




The
      Company then applied EITF 00-19, paragraph 19, which states that if a company
      is
      required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company
      and the contract is required to be c lassified
      as a liability. The Company applied EITF 00-19, paragraph 10, which states
      that
      if a classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.







In
      accordance with EITF 00-19, the warrants were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liabilities on the balance sheet
      at
      the fair value of $70,029, which the Company calculated using the Black Sholes
      model with the following assumptions: risk free rate of return of 5.02%;
      volatility of 219.89%; dividend yield of 0%; and an expected term of .08 years.




The
      Company then applied EITF 00-19, paragraph 9, which states that all contracts
      classified as liabilities are to be measured at fair value at each balance
      sheet
      date, with changes in fair value reported in earnings and disclosed in the
      financial statements as long as the contracts remain classified as liabilities.




The
      Company determined that the fair value of the warrants was $0 as of September
      30, 2007, due to their expiration.




The
      $70,029 decrease in the fair value of the warrants was recorded to warrant
      liability.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company followed EITF 00-19, paragraph 9, which states
      that subsequent changes in the fair value of contracts should not be recognized
      as long as the contracts continue to be classified as equity. Therefore, changes
      in the fair value of the warrants prior to the reclassification were not
      recorded. Subsequent to reclassifying the warrants as liabilities, the Company
      again followed EITF 00-19, paragraph 9, which requires all contracts classified
      as liabilities to be measured at fair value, with changes in fair value reported
      in earnings as long as the contracts remain classified as liabilities.




The
      change in the fair value of the warrants from July 17, 2007 to September 30,
      2007 was $70,029 and is included in decrease in warrant liability in the other
      income (expense) section of the statement of operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the change in fair value
      of
      the warrants of $70,029 on the statement of operations.




The
      reclassification of the warrants from additional paid-in capital to warrant
      liability was a non-cash transaction.




Beneficial
      Conversion Features




As
      of
      September 30, 2007, the Company had Convertible Notes outstanding totaling
      $1,861,000 that were issued between October 17, 2006 and July 17, 2007. The
      convertible notes included an embedded beneficial conversion feature that
      allowed the holders of the convertible notes to convert their notes into Common
      Stock shares at rates between $0.01 and $0.22. The convertible notes mature
      between June 17, 2008 and December 31, 2008. The convertible notes accrue
      interest at rates between 8% and 10%, and any accrued but unpaid interest is
      also convertible by the holder of the convertible notes into shares of Common
      Stock at the same rate.




*Balance
      Sheet*




On
      the
      date of issuance, the Company applied SFAS 133 *,* paragraph 6 to determine if the embedded beneficial conversion features were
      within the scope and definition of a derivative. The embedded beneficial
      conversion features: had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the embedded beneficial conversion features were
      determined to be derivatives. Next, the Company followed the guidance of SFAS
      133, paragraph 12 to determine if the embedded beneficial conversion features
      should be separated from the convertible notes. The Company determined that:
      the
      economic characteristics of the embedded beneficial conversion features are
      not
      clearly and closely related to the convertible notes; the embedded beneficial
      conversion feature and convertible notes are not remeasured at fair value at
      each balance sheet date; and a separate contract with the same terms would
      be a
      derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the embedded
      beneficial conversion features were separated from the convertible notes to
      determine the classification and valuation. The Company followed the guidance
      of
      paragraphs 7 and 8 of EITF 00-19, which state that contracts ** that
      require settlement in shares are to be classified as equity
      instruments .
      The
      Company then applied paragraph 9 of EITF 00-19 to determine the value of the
      embedded beneficial conversion features. Paragraph 9 of EITF 00-19 states that
      contracts which require the company to deliver shares as part of a physical
      settlement or net-share settlement should be initially measured at fair value.
      Based on the analysis at the date of issuance, the embedded beneficial
      conversion features were recorded in additional paid-in capital at fair value
      on
      the date of issuance.




The
      fair
      value of the embedded beneficial conversion features was $1,021,569 computed
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 6%; volatility of 122.67%
      to
      195.97%; dividend yield of 0% and an expected term of 1 to 1.5 years. The
      embedded beneficial conversion features discount was $706,186 as of September
      30, 2007, net of amortization of $315,383, prior to the restatement.







The
      Company began the analysis for the restatement by applying SFAS 133 ,
      paragraph 6, to ascertain if the
      embedded beneficial conversion features remained derivatives as of September
      30,
      2007. All of the criteria in the original analysis were met, and the embedded
      beneficial conversion features issued were determined to be within the scope
      and
      definition of a derivative. The Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be separated from the convertible notes. All of the criteria in the original
      analysis were met, and the embedded beneficial conversion features were
      separated from the convertible notes. In order to determine the classification
      of the embedded conversion features, the Company applied paragraphs 7 and 8
      of
      EITF 00-19. Paragraph 7 states that contracts which require net-cash
      settlement are liabilities, and paragraph 8 states that contracts which give
      the
      counterparty (holders of the convertible notes) a choice of net-cash settlement
      or settlement in shares are liabilities. Therefore the embedded conversion
      features were determined to be liabilities. The change in the determination
      of
      the classification from equity to a liability was based on the contractual
      right
      granted to the holders of the convertible notes to convert the notes to shares
      of Common Stock. Therefore, share settlement is not controlled by the Company.
      In order to determine the value of the embedded conversion features, the Company
      followed the guidance of EITF 00-19, paragraph 9, which states that all
      contracts classified as liabilities are to be measured at fair value at each
      balance sheet date, with changes in fair value reported in earnings and
      disclosed in the financial statements as long as the contracts remain classified
      as liabilities.




The
      fair
      value of the embedded beneficial conversion features was recalculated and
      determined to be $1,430,812 at the date of issuance using the Black Sholes
      model with
      the
      following assumptions: risk free rate of return of 2.02% to 5.09%; volatility
      of
      108.5% to 274.86%; dividend yield of 0% and an expected term of 1 to 1.5 years.
      Based on the recalculation, the embedded beneficial conversion features discount
      was $779,300 at September 30, 2007, net of amortization of $651,511, subsequent
      to the restatement.




The
      increase in the fair value of $409,242 ($1,430,811-$1,021,569) of the embedded
      beneficial conversion features was recorded to the beneficial conversion
      features and netted against convertible notes on the balance sheet. The increase
      in the amortization of the beneficial conversion features discount of $336,129
      ($651,511-$315,382) was recorded to convertible notes.




The
      fair
      value of the embedded beneficial conversion features was $1,430,812 as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0% and an expected term of .58 to 1.25 years.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company applied EITF 00-19, paragraph 9 which states
      that subsequent changes in fair value of contracts are not to be recognized
      as
      long as the contracts continue to be classified as equity. Therefore, the
      Company did not record changes in the fair value of the beneficial conversion
      features. Subsequent to reclassifying the beneficial conversion features, the
      Company again followed the guidance of paragraph 9 of EITF 00-19, which requires
      all contracts classified as liabilities to be measured at fair value, with
      changes in fair value reported in earnings as long as the contracts remain
      classified as liabilities. There was no change in the fair value of the
      beneficial conversion features from the date of issuance and September 30,
      2007.




The
      increase in the amortization of the beneficial conversion features discount
      of
      $336,129 was included in interest expense in the other income (expense) section
      of the statement of operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the change in the amortization
      of the beneficial conversion features discounts of $336,129 on the statement
      of
      operations.




Warrants
      related to Convertible Debentures




On
      July
      17, 2007 the Company completed an offering of $1,025,000 of Convertible
      Debentures to a group of institutional and accredited investors which included
      warrants to purchase 2,795,454 shares of Common Stock (2,329,546 shares of
      Common Stock to holders of the Convertible Debentures and 465,908 shares of
      Common Stock as a placement fee) at an exercise price of $0.50 per share.




*Balance
      Sheet*




On
      the
      grant date, the Company applied SFAS 133 *,* paragraph 6 to determine if the warrants were within the scope and definition
      of
      a derivative. The warrants: had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the warrants were determined to be derivatives. In order
      to determine the classification of the warrants, the Company followed the
      guidance of paragraphs 7 and 8 of EITF 00-19, which state that
      contracts ** which
      require settlement in shares are equity instruments .
      In
      order to determine the value of the warrants, the Company followed the guidance
      of paragraph 9 of EITF 00-19, which states that contracts which require the
      company to deliver shares as part of a physical settlement or net-share
      settlement are to be initially measured at fair value. In accordance with EITF
      00-19, the warrants were recorded in additional paid-in capital at fair value
      on
      the date of issuance.







The
      fair
      value of the warrants was calculated as $340,583 ( $304,259
      attributable to the holders of the Convertible Debentures and $36,324
      attributable to the placement fee) at the
      date of issuance prior to the restatement using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 6%; volatility of 122.67%
      to
      195.97%; dividend yield of 0% and an expected term of 5 years.




The
      Company began the analysis for the restatement by applying SFAS 133 ,
      paragraph 6 to ascertain if the
      warrants issued remained derivatives as of September 30, 2007. All of the
      criteria in the original analysis were met, and the warrants issued were
      determined to be within the scope and definition of a derivative. In order
      to
      determine the classification of the warrants, the Company followed the guidance
      of paragraph 19 of EITF 00-19, which states that if a company is required to
      obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company
      and the contract is required to be c lassified
      as a liability. In order to determine the value of the warrants, the Company
      followed the guidance of paragraph 9 of EITF
      00-19, which states that all contracts classified as liabilities are to be
      measured at fair value at each balance sheet date, with changes in fair value
      reported in earnings and disclosed in the financial statements as long as the
      contracts remain classified as liabilities.




Based
      on
      the change in the determination of the classification of the warrants, $340,583
      was reclassified from additional paid-in capital to warrant
      liabilities.




The
      fair
      value of the warrants was recalculated and was determined to be $554,249
      ($430,189 attributable to the holders of the Convertible Debentures and $124,060
      attributable to the placement fee) at the date of issuance calculated using
      the
      Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96% to 5.02%; volatility
      of
      219.89% to 226.04%; dividend yield of 0% and an expected term of 5 years.




The
      increase in the fair value of the warrants attributable to the holders of the
      Convertible Debentures was $125,930 ($430,189-$304,259) and was recorded to
      warrant liabilities and netted against convertible notes. The increase in the
      fair value of the warrants attributable to the placement fee was $87,736
      ($124,060-$36,324) and was recorded in warrant liability and general and
      administrative expenses.




Based
      on
      the increase in the warrant discount, the amortization of warrant discount
      increased by $55,179, and was recorded to convertible notes.




The
      fair
      value of the warrants was determined to be $499,932 ($379,672 attributable to
      the
      holders of the Convertible Debentures and $120,260 attributable to the placement
      fee) as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0%; and an expected term of 4.67 to 4.75 years.




The
      decrease in the fair value of the warrants was recorded by decreasing warrant
      liabilities on the balance sheet by $54,317 ($50,518 attributable
      to the holders of the Convertible Debentures and $3,799 attributable to the
      placement fee) .




*Statement
      of Operations*




The
      Company followed the guidance of EITF 00-19, paragraph 9, which requires all
      contracts classified as liabilities to be measured at fair value, with changes
      in fair value reported in earnings as long as the contracts remain classified
      as
      liabilities. The change in the fair value of the warrants was $54,317 for the
      year ended September 30, 2007, and recorded in decrease in warrants in the
      other
      income (expense) section of the statement of operations.




The
      increase in the amortization of the warrant discount of $124,961 is included
      in
      interest expense in the other income (expense) section of the statement of
      operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the decrease in the fair
      value
      of the warrant liability of $54,317, increase in the amortization of the warrant
      discount of $55,179 on the balance sheet, and the change in fair value of the
      warrants at the date of issuance of $87,736 on the statement of
      operations.




In
      addition to the analysis of the securities exercisable or convertible into
      Common Stock, the Company analyzed the classification of general and
      administrative expenses for the year ended September 30, 2007, and determined
      that research and development costs of $526,466, a legal settlement of $89,654
      and income tax expense of $2,592 were incorrectly classified as general and
      administrative expenses. See below for the specific line items affected in
      the
      statement of operations by the reclassification.




Table
      1
      shows the effect of each of the changes discussed above on the Company’s balance
      sheet, statement of operation, statement of equity, and statement of cash flows
      for the year ended September 30, 2007.







Table
      1




Beneficial
            
            WarrantsConversion
            
            Related toFeatures
            
            $1,025,000 of2001
            
            
            
            Warrants
            
            and
            
            ConvertibleExecutive
            
            
            
            Related to
            
            Beneficial
            
            Bridge NotesAs
            
            Officers
            
            Advisory
            
            2004 Stock
            
            Conversion
            
            andPreviously
            
            Option
            
            Board
            
            Purchase
            
            Features
            
            Warrant
            
            
            
            AsStated
            
            Plan
            
            Compensation
            
            Agreement
            
            Discount
            
            Discount
            
            Reclassifications
            
            Restated**Balance Sheet**Accrued
                expenses
            
            $
            1,687,673
            
            
            
            
            $
            380,441
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,068,114Convertible
                Notes, net
            
            
            920,337
            
            
            
            
            
            
            
            
            
            
            
            (73,114
            )
            
            (70,751
            )
            
            
            
            
            776,472Warrant
                liability
            
            
            -
            
            
            1,926,914
            
            
            
            
            
            
            
            
            
            
            
            499,932
            
            
            
            
            
            2,426,846Beneficial
                conversionfeature
                liability
            
            
            
            
            
            
            
            
            576,000
            
            
            
            
            
            1,430,812
            
            
            
            
            
            
            
            
            2,006,812Additional
                paid-in capital
            
            
            14,712,527
            
            
            (2,271,879
            )
            
            (269,851
            )
            
            (45,663
            )
            
            (1,021,569
            )
            
            (340,583
            )
            
            
            
            
            10,762,982Deficit
                accumulatedduring
                development stage
            
            
            (17,300,147
            )
            
            344,965
            
            
            (686,590
            )
            
            45,663
            
            
            (336,129
            )
            
            (88,598
            )
            
            
            
            
            (18,020,836
            )**Statement
                of Operations (for the****year
                ended September 30, 2007)**General
                and administrative
            
            $
            1,423,347
            
            
            
            
            $
            153,354
            
            
            
            
            
            
            
            $
            87,736
            
            $
            (618,712
            )
            $
            1,045,725Research
                and development
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            526,466
            
            
            526,466Interest
                expense
            
            
            (550,935
            )
            
            
            
            
            
            
            
            
            
            
            (336,129
            )
            
            (55,179
            )
            
            
            
            
            (942,243
            )Decrease
                inwarrant
                liability
            
            
            -
            
            
            344,965
            
            
            
            
            
            70,029
            
            
            
            
            
            54,317
            
            
            
            
            
            469,311Increase
                inbeneficial
                conversion feature
            
            
            
            
            
            
            
            
            (4,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,044
            )Legal
                settlement
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (89,654
            )
            
            (89,654
            )Income
                tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,592
            
            
            2,592**Statement
                of Operations (since****inception)**General
                and administrative
            
            $
            13,585,568
            
            
            
            
            $
            250,546
            
            $
            24,367
            
            
            
            
            $
            87,736
            
            $
            (618,712
            )
            $
            13,329,505Research
                and development
            
            
            1,449,474
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            526,466
            
            
            1,975,940Interest
                expense
            
            
            (785,621
            )
            
            
            
            
            
            
            
            
            
            
            (336,129
            )
            
            (55,179
            )
            
            
            
            
            (1,176,929
            )Decrease
                inwarrant
                liability
            
            
            -
            
            
            344,965
            
            
            
            
            
            70,029
            
            
            
            
            
            54,317
            
            
            
            
            
            469,311Increase
                inbeneficial
                conversion feature
            
            
            
            
            
            
            
            
            (4,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,044
            )Legal
                settlement
            
            
            434,603
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (89,654
            )
            
            344,949Income
                tax expense
            
            
            9,900
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,592
            
            
            12,492**Statement
                of Cash Flows (for the****year
                ended September 30, 2007)**Net
                loss
            
            $
            (2,001,095
            )
            $
            344,965
            
            $
            (157,398
            )
            $
            70,029
            
            $
            (336,129
            )
            $
            (88,598
            )
            
            
            
            $
            (2,168,226
            )Other
            
            
            
            
            
            
            
            
            (799,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (799,044
            )Stock
                based compensation expense-consultant
            
            
            84,292
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            124,697
            
            
            
            
            
            208,989Decrease
                in warrant liability
            
            
            -
            
            
            (344,965
            )
            
            
            
            
            (70,029
            )
            
            
            
            
            (54,317
            )
            
            
            
            
            (469,311
            )Increase
                in beneficial conversionfeature
                liaiblity
            
            
            
            
            
            
            
            
            4,044
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,044Accrued
                expenses
            
            
            566,278
            
            
            
            
            
            895,044
            
            
            
            
            
            
            
            
            
            
            
            (15,376
            )
            
            1,445,946Accrual
                of liquidating damages
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,375
            
            
            15,375










Beneficial
            
            WarrantsConversion
            
            Related to2001
            
            
            
            
            
            Features
            
            $1,025,000 ofExecutive
            
            
            
            Warrants
            
            and
            
            ConvertibleOfficers
            
            
            
            Related to
            
            Beneficial
            
            Bridge NotesAs
            
            Stock
            
            Advisory
            
            2004 Stock
            
            Conversion
            
            andPreviously
            
            Option
            
            Board
            
            Purchase
            
            Features
            
            Warrant
            
            
            
            AsStated
            
            Plan
            
            Compensation
            
            Agreement
            
            Discount
            
            Discount
            
            Reclassifications
            
            Restated**Statement
                of Cash Flows (since****inception)**Net
                loss
            
            $
            (17,030,296
            )
            $
            344,965
            
            $
            (956,441
            )
            $
            45,663
            
            $
            (336,129
            )
            $
            (88,598
            )
            
            
            
            $
            (18,020,836
            )Other
            
            
            
            
            
            
            
            
            (799,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (799,044
            )Stock
                based compensation expense-consultant
            
            
            2,840,172
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            124,697
            
            
            
            
            
            2,964,869Decrease
                in warrant liability
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -Increase
                in beneficial conversionfeature
                liaiblity
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Amoritzation
                of consulting fees
            
            
            13,075
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,075
            )
            
            -Increase
                in warranty liability
            
            
            -
            
            
            (344,965
            )
            
            -
            
            
            (70,029
            )
            
            
            
            
            (54,317
            )
            
            
            
            
            (469,311
            )Decrease
                in other assets
            
            
            40,370
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (40,370
            )
            
            -Increase
                in advances to employees
            
            
            (512,077
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            512,077
            
            
            -Decrease
                in other receivables
            
            
            3,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,000
            )
            
            -Increase
                in deposits
            
            
            (104,600
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            104,600
            
            
            -Other
                current assets
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,350
            )
            
            (1,350
            )Other
                assets
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (104,600
            )
            
            (104,600
            )Accrued
                expenses
            
            
            2,021,239
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,427
            )
            
            2,006,812Accrual
                of liquidating damages
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,375
            
            
            15,375Proceeds
                from issuance of notes
            
            
            2,318,433
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (457,433
            )
            
            1,861,000Proceeds
                from notes payable, related party
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            457,433
            
            
            457,433Increase
                in fair value of beneficialconversion
                features discountat
                date of issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,044
            
            
            
            
            
            
            
            
            4,044Issuance
                of common stock for cash
            
            
            7,376,094
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            7,386,094Receipt
                of cash for stock to be issued
            
            
            53,900
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,000
            )
            
            43,900--







**Application
      of Critical Accounting Policies and Estimates**




The
      preparation of our consolidated financial statements in accordance with U.S.
      GAAP requires management to make judgments, assumptions and estimates that
      affect the amounts reported. A critical accounting estimate is an assumption
      about highly uncertain matters and could have a material effect on the
      consolidated financial statements if another, also reasonable, amount were
      used,
      or, a change in the estimate is reasonably likely from period to period. We
      base
      our assumptions on historical experience and on other estimates that we believe
      are reasonable under the circumstances. Actual results could differ
      significantly from these estimates. There were no changes in accounting policies
      or significant changes in accounting estimates during fiscal 2007. Management
      believes the following critical accounting policies reflect its more significant
      estimates and assumptions.




Revenue
      Recognition. Although the Company has yet to generate sales, it plans to follow
      the guidance provided by SAB 104 for recognition of revenues. The Company does
      not plan to recognize revenue unless there is persuasive evidence of an
      arrangement, title and risk of loss has passed to the customer, delivery has
      occurred or the services have been rendered, the sales price is fixed or
      determinable and collection of the related receivable is reasonably assured.
      In
      general, the Company plans to require a deposit from a customer before a unit
      is
      fabricated and shipped.  It is the Company's policy to require an
      arrangement with its customers, either in the form of a written contract or
      purchase order containing all of the terms and conditions governing the
      arrangement, prior to the recognition of revenue. Title and risk of loss will
      generally pass to the customer at the time of delivery of the product to a
      common carrier. At the time of the transaction, the Company will assess whether
      the sale price is fixed or determinable and whether or not collection is
      reasonably assured. If the sales price is not deemed to be fixed or
      determinable, revenue will be recognized as the amounts become due from the
      customer. The Company does not plan to offer a right of return on its products
      and the products will generally not be subject to customer acceptance rights.
      The Company plans to assess collectability based on a number of factors,
      including past transaction and collection history with a customer and the
      creditworthiness of the customer. The Company plans to perform ongoing credit
      evaluations of its customers' financial condition. If the Company determines
      that collectability of the sales price is not reasonably assured, revenue
      recognition will be deferred until such time as collection becomes reasonably
      assured, which is generally upon receipt of payment from the customer. The
      Company plan to include shipping and handling costs in revenue and cost of
      sales.




Support
      Services. The Company plans to provide support services to customers primarily
      through service contracts, and it will recognize support service revenue ratably
      over the term of the service contract or as services are rendered.




Warranties.
      The Company's products are generally subject to warranty, and related costs
      will
      be provided for in cost of sales when revenue is recognized. Once the Company
      has a history of sales, the Company's warranty obligation will be based upon
      historical product failure rates and costs incurred in correcting a product
      failure. If actual product failure rates or the costs associated with fixing
      failures differ from historical rates, adjustments to the warranty liability
      may
      be required in the period in which determined.




Allowance
      for Doubtful Accounts. The Company will evaluate the adequacy of its allowance
      for doubtful accounts on an ongoing basis through detailed reviews of its
      accounts and notes receivables. Estimates will be used in determining the
      Company's allowance for doubtful accounts and will be based on historical
      collection experience, trends including prevailing economic conditions and
      adverse events that may affect a customer's ability to repay, aging of accounts
      and notes receivable by category, and other factors such as the financial
      condition of customers. This evaluation is inherently subjective because
      estimates may be revised in the future as more information becomes available
      about outstanding accounts.




Inventory
      Valuation .
      Inventories will be stated at the lower of cost or market, with costs generally
      determined on a first-in first-out basis. We plan to utilize both specific
      product identification and historical product demand as the basis for
      determining excess or obsolete inventory reserve. Changes in market conditions
      lower than expected customer demand or changes in technology or features could
      result in additional obsolete inventory that is not saleable and could require
      additional inventory reserve provisions.




Goodwill
      and other Intangibles .
      Goodwill and intangible assets with indefinite lives will be tested annually
      for
      impairment in accordance with the provisions of Financial Accounting Standards
      Board Statement No. 142 “Goodwill and Other Intangible Assets” (FAS 142). We
      will use our judgment in assessing whether assets may have become impaired
      between annual impairment tests. We perform our annual test for indicators
      of
      goodwill and non-amortizable intangible assets impairment in the fourth quarter
      of our fiscal year or sooner if indicators of impairment exist.




Legal
      Contingencies .
      From
      time to time we are a defendant in litigation. As required by Financial
      Accounting Standards Board Statement No. 5*“Accounting
      for Contingencies”*(FAS 5),
      we determine whether an estimated loss from a loss contingency should be accrued
      by assessing whether a loss is deemed probable and the loss amount can be
      reasonably estimated, net of any applicable insurance proceeds. Estimates of
      potential outcomes of these contingencies are developed in consultation with
      outside counsel. While this assessment is based upon all available information,
      litigation is inherently uncertain and the actual liability to fully resolve
      this litigation cannot be predicted with any assurance of accuracy. Final
      settlement of these matters could possibly result in significant effects on
      our
      results of operations, cash flows and financial position.





**Plan
      of Operation** .




During
      the next twenty-four months we plan to test and continue demonstrating the
      ELIXIR water treatment system to potential clients at the Villa Park Dam under
      our arrangement with the Serrano Water District. We believe that the operation
      of the unit at this facility will position us to aggressively market the ELIXIR
      to public water utilities, private companies and other potential
      customers.  These demonstrations will serve as a sales tool and a
      model for possible applications and installations. Once we obtain sufficient
      financing, we plan to engage in substantial promotional activities in connection
      with the operation of the unit, including media exposure and access to other
      public agencies and potential private customers. If the unit continues to
      operate successfully, we believe we can receive orders for operating units.
      We
      have demonstrated the unit at the Villa Park Dam to over fifty prospective
      clients.




We
      have
      established our manufacturing facility in Anaheim, California to begin
      production of the units, and we have installed the machinery and tooling in
      the
      building. Once we have obtained financing we will begin to recruit and hire
      employees to serve at the facility. We anticipate that most of our capital
      needs
      will need to be funded by equity financing until such time that we have received
      orders for, and deposits with respect to, our products.




Once
      we
      receive orders, we intend to manufacture Elixir systems at our facility to
      fulfill the orders and ship them to customers.




**Results
      of Operations (Year Ended September 30, 2007 Compared To Year Ended September
      30, 2006).**




The
      Company was relatively inactive during most of the 2006 fiscal year due to
      lack
      of resources, although it reactivated operations in the last quarter. Revenues
      for both the 2006 and 2007 fiscal years were zero, as the Company had not yet
      commenced the sale of products. The Company incurred operating expenses of
      $1,603,890 during the fiscal year ended September 30, 2007, an increase of
      $658,873 or approximately 70%, as compared to operating expenses of $670,585
      for
      the fiscal year ended September 30, 2006. The significant increase in operating
      expenses was partially the result of an increase of $526,466 in research and
      development expenses for the fiscal year ended September 30, 2007, as compared
      to no research and development expenses incurred during the fiscal year ended
      September 30, 2006. The increase in research and development expenses resulted
      from the completion of the design and the refinement of the ELIXIR water
      treatment system and costs associated with the establishment of the pilot
      project at the Villa Park Dam. During the fiscal year ended September 30, 2006,
      the Company did not have the capital necessary to invest in research and
      development activities. General and administrative expenses for the 2007 fiscal
      year also increased significantly. General and administrative expenses totaled
      $1,045,725, an increase of $132,034, or approximately 14%, over general and
      administrative expenses of $913,691 incurred during the 2006 fiscal year.
      General and administrative expenses were incurred during the fiscal year ended
      September 30, 2007 primarily to maintain the Company’s corporate office and to
      engage in financing activities.




Other
      income (expense) totaled $(561,744) during the fiscal year ended September
      30,
      2007, an increase of $457,422 or approximately 439%, as compared to $(104,302)
      for the fiscal year ended September 30, 2006. The Company earned interest income
      of $4,886 during the fiscal year ended September 30, 2007, as compared to no
      interest income during the fiscal year ended September 30, 2006. The Company
      also recorded a decrease in warrant liability in the amount of $469,311 during
      the fiscal year ended September 30, 2007, as compared to no decrease in warrant
      liability during the fiscal year ended September 30, 2006. These items were
      offset by interest expense of $942,243 incurred during the fiscal year ended
      September 30, 2007, as compared to interest expense of $10,080 incurred during
      the fiscal year ended September 30, 2006, an increase of $932,163. The
      significant increase in interest expense was due primarily to the issuance
      of
      convertible debt securities and the amortization of the beneficial conversion
      features discount and warrant discount of the convertible debt securities during
      the fiscal year ended September 30, 2007. During the fiscal year ended September
      30, 2007, the Company recorded an expense in the amount of $4,044 related to
      an
      increase in beneficial conversion features liability and an expense in the
      amount of $89,654 related to the settlement of a legal action. No comparable
      expenses were incurred during the fiscal year ended September 30, 2006. However,
      during the fiscal year ended September 30, 2006, the Company incurred an
      extraordinary loss on settlement of debts in the amount of $94,222, with no
      corresponding loss during the fiscal year ended September 30, 2007. As a result
      of these items, the loss for the fiscal year ended September 30, 2007 was
      $2,165,634, an increase of $1,116,315 or approximately 106% over the loss of
      $1,049,319 incurred for the fiscal year ended September 30, 2006.




**Liquidity
      and Capital Resources** .




On
      September 30, 2007, the Company had cash and cash equivalents of $372,511.
      The
      Company’s sole source of liquidity has been the sale of its securities.
      Additional capital will be required to finance the Company's operations. The
      Company believes that anticipated proceeds from sales of securities and other
      financing activities, plus possible cash flow from operations during the 2008
      fiscal year, will be sufficient to finance the Company's operations. However,
      the Company has no commitments for financing, and there can be no assurance
      that
      such financing will be available or that the Company will not encounter
      unforeseen difficulties that may deplete its capital resources more rapidly
      than
      anticipated. Also, the Company may not be able to generate revenues from
      operations during the fiscal year.





During
      the fiscal year ended September 30, 2007, the Company used $1,133,236 of cash
      in
      operating activities, as compared to $44,290 of cash used in operating
      activities during the fiscal year ended September 30, 2006. During the fiscal
      year ended September 30, 2007, non-cash adjustments included $799,044 for
      advisory board compensation . The Company also recorded an increase of $1,350
      in
      current assets, an increase of $104,600 in deposits and a decrease of $115,209
      in accounts payable. Cash provided by operating activities included $31,699
      in
      depreciation, $833,826 in amortization of beneficial conversion features
      discount and warrant discount and an increase of $4,044 in beneficial conversion
      features liabilities. $208,989 in stock based compensation was paid to a
      consultant and accrued expenses totaled $1,445,946.




During
      the fiscal year ended September 30, 2007, the Company acquired property and
      equipment totaling $27,772, as compared to property acquisitions of $950 during
      the fiscal year ended September 30, 2006.




Financing
      activities provided $1,528,975 to the Company during the fiscal year ended
      September 30, 2007, as compared to $49,440 during the fiscal year ended
      September 30, 2006. Financing activities for the fiscal year ended September
      30,
      2007 provided $1,861,000 in proceeds from the placement of Convertible Notes.
      The Company also accrued liquidated damages of $15,375 during the fiscal year
      ended September 30, 2007. The Company made payments of $47,400 to an officer
      for
      a loan and $300,000 toward an equity line of credit during the fiscal year
      ended
      September 30, 2007. During the fiscal year ended September 30, 2006, the Company
      borrowed $49,440 from a related party.




At
      September 30, 2007, the Company had cash of $372,511, as compared to cash of
      $4,544 at September 30, 2006.




As
      of
      September 30, 2007, the Company had an accumulated deficit of $18,020,836.
      Management anticipates that future operating results will continue to be subject
      to many of the problems, expenses, delays and risks inherent in the
      establishment of a developmental business enterprise, many of which the Company
      cannot control.




**Recent
      Private Placements**




In
      a
      private offering that commenced in October of 2006 and concluded in early 2007,
      we issued convertible notes in the amount of $750,000 to a group of private
      investors. The notes bear interest at 10% per annum, are due eighteen months
      after issuance, and are convertible into our Common Stock at a conversion price
      of $0.04 per share. The holders have the option to convert accrued interest
      on
      these notes into Common Stock at the same conversion rate.




In
      June
      2007 we completed a private offering of 10% Convertible Promissory Notes
      totaling $86,000 to five private investors. The notes are convertible into
      Common Stock at a conversion price of $0.01 per share. The rights of the holders
      of these notes to convert is subject to the completion of certain financing
      milestones.




In
      July
      2007 we completed a private offering, principally to private investment funds,
      in the amount of $1,025,000. The investors received Subordinated Convertible
      Debentures that bear interest at 8% per annum, are due twelve months after
      issuance, and are convertible into share of our Common Stock at a conversion
      price of $0.22 per share. The investors also received warrants to purchase
      2,329,546 shares of Common Stock at a cost of $0.50 per share. In addition,
      we
      issued a warrant to purchase 465,908 shares of our Common Stock at $0.50 per
      share as a fee for assisting us with the transaction.




**Going
      Concern Opinion** .




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. This basis of accounting contemplates the
      recovery of the Company’s assets and the satisfaction of its liabilities in the
      normal course of business. Through September 30, 2007, the Company has incurred
      cumulative losses of $18,290,687, including a loss for the year ended September
      30, 2007 of $2,168,225. As the Company has no cash flow from operations, its
      ability to transition from a development stage company to an operating company
      is entirely dependent upon obtaining adequate financing to pay for its overhead,
      research and development activities, and acquisition of production equipment.
      It
      is unknown when, if ever, the Company will achieve a level of revenues adequate
      to support its costs and expenses. In order for the Company to meet its basic
      financial obligations, including rent, salaries, debt service and operations,
      it
      plans to undertake additional equity or debt financing. Because of the Company’s
      history and current debt levels, there is considerable doubt that the Company
      will be able to obtain financing. The Company’s ability to meet its cash
      requirements for the next twelve months depends on its ability to obtain such
      financing. Even if financing is obtained, any such financing will likely involve
      additional fees and debt service requirements, which may significantly reduce
      the amount of cash we will have for our operations. Accordingly, there is no
      assurance that the Company will be able to implement its plans.




The
      Company expects to continue to incur substantial operating losses for the
      foreseeable future, and it cannot predict the extent of the future losses or
      when it may become profitable, if ever. It expects to incur increasing sales
      and
      marketing, research and development and general and administrative expenses.
      Also, the Company has a substantial amount of short-term debt, which will need
      to be repaid or refinanced, unless it is converted into equity. As a result,
      if
      it begins to generate revenues from operations, those revenues will need to
      be
      significant in order to cover current and anticipated expenses. These factors
      raise substantial doubt about the Company's ability to continue as a going
      concern unless it is able to obtain substantial additional financing in the
      short term and generate revenues over the long term. If the Company is unable
      to
      obtain financing, it would likely discontinue operations.





**ITEM
      7**   **FINANCIAL
      STATEMENTS**




**SIONIX
      CORPORATION**


**INDEX
      TO FINANCIAL STATEMENTS**




Report
                of Independent Registered Public Accounting Firm
            F-2Balance
                Sheet as of September 30, 2007 (Restated)
            F-3Statement
                of Operations for the years ended September 30, 2007 and September
                30,
                2006 and Cumulative from Inception (October 3, 1994) to September
                30, 2007
                (Restated)
            F-4Statement
                of Stockholders’ Equity (Deficit) from Inception (October 3, 1994) to
                September 30, 2007 (Restated)
            F-5Statement
                of Cash Flows for the years ended September 30, 2007 and September
                30,
                2006 and Cumulative From Inception (October 3, 1994) to September
                30, 2007
                (Restated)
            F-8Notes
                to Financial Statements
            F-9





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders


Sionix
      Corporation





We
      have
      audited the accompanying balance sheet of Sionix Corporation (a development
      stage entity) (a Nevada corporation) as of September 30, 2007 and the related
      statements of operations, stockholders' equity (deficit), and cash flows for
      the
      years ended September 30, 2007 and 2006 and for the period from October 3,
      1994
      (inception) to September 30, 2007. 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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement.  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 Sionix Corporation as of September
      30, 2007 and the results of its operations and its cash flows for the years
      ended September 30, 2007 and 2006 and for the period from October 3, 1994
      (inception) to September 30, 2007, in conformity with accounting principles
      generally accepted in the United States of America.




The
      Company's financial statements are prepared using the 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 deficit accumulated from inception
      amounting $18,020,836 at September 30, 2007 including a net loss of $2,168,226
      incurred in the year ended September 30, 2007. These factors as discussed in
      Note 13 to the financial statements, raises substantial doubt about the
      Company's ability to continue as a going concern. Management's plans in regard
      to these matters are also described in Note 13.  The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




As
      discussed in note 16, the financial statements for the years ended September
      30,
      2007 and 2006 have been restated.





Kabani
      & Company, Inc.


Certified
      Public Accountants





Los
      Angeles, California.





December
      7, 2007 except for note 2, 4, 8, 9, 10, 11, 12, 13, 15, & 16 are as of
      October 9, 2008.


F-2


**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**BALANCE
      SHEET**


**SEPTEMBER
      30, 2007**


AsRestatedASSETSCURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                372,511Other
                    current assets
                
                
                1,350TOTAL
                    CURRENT ASSETS
                
                
                373,861PROPERTY
                    AND EQUIPMENT, net
                
                
                40,834DEPOSITS
                
                
                104,600TOTAL
                    ASSETS
                
                $
                519,295LIABILITIES
                    AND STOCKHOLDERS' DEFICITCURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                157,399Accrued
                    expenses
                
                
                2,068,114Liquidated
                    damages liability
                
                
                15,375Notes
                    payable to related parties
                
                
                129,000Notes
                    payable to officers
                
                
                19,260Equity
                    line of credit
                
                
                27,336Convertible
                    notes, net
                
                
                776,472Warrant
                    liability
                
                
                2,426,846Beneficial
                    conversion features liability
                
                
                2,006,812TOTAL
                    CURRENT LIABILITIES
                
                
                7,626,614STOCKHOLDERS'
                    DEFICITCommon
                    Stock(150,000,000
                    shares authorized; 107,117,101 shares issued; 106,635,201 shares
                    outstanding)
                
                
                106,635Additional
                    paid-in capital
                
                
                10,762,982Shares
                    to be issued
                
                
                43,900Deficit
                    accumulated during development stage
                
                
                (18,020,836
                )TOTAL
                    STOCKHOLDERS' DEFICIT
                
                
                (7,107,319
                )TOTAL
                    LIABILITIES AND STOCKHOLDERS' DEFICIT
                
                $
                519,295




The
      accompanying notes form an integral part of these financial
      statements.


F-3


**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF OPERATIONS**


Years Ended September 30,
                
                (October 3, 1994) to2007
                
                2006
                
                September 30, 2007(As Restated)
                
                (As Restated)
                
                (As Restated)Operating expensesGeneral
                    and administrative
                
                $
                1,045,725
                
                $
                913,691
                
                $
                13,329,505Research
                    and development
                
                
                526,466
                
                
                -
                
                
                1,975,940Depreciation
                    and amortization
                
                
                31,699
                
                
                31,326
                
                
                532,105Total
                    operating expenses
                
                
                1,603,890
                
                
                945,017
                
                
                15,837,550Loss
                    from Operations
                
                
                (1,603,890
                )
                
                (945,017
                )
                
                (15,837,550
                )Other
                    income (expense)Interest
                    income
                
                
                4,886
                
                
                -
                
                
                58,543Interest
                    expense
                
                
                (942,243
                )
                
                (10,080
                )
                
                (1,176,929
                )Decrease
                    in warrant liability
                
                
                469,311
                
                
                -
                
                
                469,311Increase
                    in beneficial conversion features liability
                
                
                (4,044
                )
                
                
                
                
                (4,044
                )Impairment
                    of intangibles
                
                
                -
                
                
                -
                
                
                (1,267,278
                )Inventory
                    obsolescence
                
                
                -
                
                
                -
                
                
                (365,078
                )Legal
                    settlement
                
                
                (89,654
                )
                
                
                
                
                344,949Loss
                    on settlement of debt
                
                
                -
                
                
                (94,222
                )
                
                (230,268
                )Total
                    Other Income (Expense)
                
                
                (561,744
                )
                
                (104,302
                )
                
                (2,170,794
                )Loss
                    before income taxes
                
                
                (2,165,634
                )
                
                (1,049,319
                )
                
                (18,008,344
                )Income
                    Taxes
                
                
                2,592
                
                
                -
                
                
                12,492Net
                    Loss
                
                $
                (2,168,226
                )
                $
                (1,049,319
                )
                $
                (18,020,836
                )Basic
                    an dilutive loss per share
                
                $
                0.02
                
                $
                0.01Basic
                    and diluted wighted average nubmer of shares of Common Stock
                    outstanding*
                
                
                106,207,706
                
                
                102,524,186
 *
        -
        Weighted averag diluted number of share are the same as basic weighted average
        nuimber of shares as the effect is anti-dilutive.




The
      accompanying notes form an integral part of these financial
      statements.




F-4





**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIT)**




Deficit
            
            TotalCommon
                Stock
            
            Additional
            
            Stock
            
            Stock
            
            Shares
            
            Unamortized
            
            Accumulated
            
            Stockholders'Number
            
            
            
            Paid-in
            
            to
                be
            
            Subscription
            
            to
                be
            
            Consulting
            
            from
            
            Equityof
                Shares
            
            Amount
            
            Capital
            
            Issued
            
            Receivable
            
            Cancelled
            
            Fees
            
            Inception
            
            (Deficit)Stock
                issued for cashOctober
                3, 1994
            
            
            10,000
            
            $
            10
            
            $
            90
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            100Net
                loss from October 3, 1994, to December 31, 1994
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,521
            )
            
            (1,521
            )Balance
                at December 31, 1994
            
            
            10,000
            
            
            10
            
            
            90
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,521
            )
            
            (1,421
            )Shares
                issued for assignment rights
            
            
            1,990,000
            
            
            1,990
            
            
            (1,990
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares
                issued for services
            
            
            572,473
            
            
            572
            
            
            135,046
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,618Shares
                issued for debt
            
            
            1,038,640
            
            
            1,038
            
            
            1,164,915
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,165,953Shares
                issued for cash
            
            
            232,557
            
            
            233
            
            
            1,119,027
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,119,260Shares
                issued for subscription receivable
            
            
            414,200
            
            
            414
            
            
            1,652,658
            
            
            
            
            
            (1,656,800
            )
            
            
            
            
            
            
            
            
            
            
            (3,728
            )Shares
                issued for productions costs
            
            
            112,500
            
            
            113
            
            
            674,887
            
            
            
            
            
            (675,000
            )
            
            
            
            
            
            
            
            
            
            
            -Net
                loss for the year ended December 31, 1995
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (914,279
            )
            
            (914,279
            )Balance
                at December 31, 1995
            
            
            4,370,370
            
            
            4,370
            
            
            4,744,633
            
            
            -
            
            
            (2,331,800
            )
            
            -
            
            
            -
            
            
            (915,800
            )
            
            1,501,403Shares
                issued for reorganization
            
            
            18,632,612
            
            
            18,633
            
            
            (58,033
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (39,400
            )Shares
                issued for cash
            
            
            572,407
            
            
            573
            
            
            571,834
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            572,407Shares
                issued for services
            
            
            24,307
            
            
            24
            
            
            24,283
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24,307Net
                loss for the year endedSeptember
                30, 1996
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (922,717
            )
            
            (922,717
            )Balance
                at September 30, 1996
            
            
            23,599,696
            
            
            23,600
            
            
            5,282,717
            
            
            -
            
            
            (2,331,800
            )
            
            -
            
            
            -
            
            
            (1,838,517
            )
            
            1,136,000Shares
                issued for cash
            
            
            722,733
            
            
            723
            
            
            365,857
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            366,580Shares
                issued for services
            
            
            274,299
            
            
            274
            
            
            54,586
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            54,860Cancellation
                of shares
            
            
            (542,138
            )
            
            (542
            )
            
            (674,458
            )
            
            
            
            
            675,000
            
            
            
            
            
            
            
            
            
            
            
            -Net
                loss for the year ended September 30, 1997
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (858,915
            )
            
            (858,915
            )Balance
                at September 30, 1997
            
            
            24,054,590
            
            
            24,055
            
            
            5,028,702
            
            
            -
            
            
            (1,656,800
            )
            
            -
            
            
            -
            
            
            (2,697,432
            )
            
            698,525Shares
                issued for cash
            
            
            2,810,000
            
            
            2,810
            
            
            278,190
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            281,000Shares
                issued for services
            
            
            895,455
            
            
            895
            
            
            88,651
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            89,546Shares
                issued for compensation
            
            
            2,200,000
            
            
            2,200
            
            
            217,800
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            220,000Cancellation
                of shares
            
            
            (2,538,170
            )
            
            (2,538
            )
            
            (1,534,262
            )
            
            
            
            
            1,656,800
            
            
            
            
            
            
            
            
            
            
            
            120,000Net
                loss for the year ended September 30, 1998
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,898,376
            )
            
            (1,898,376
            )Balance
                at September 30, 1998
            
            
            27,421,875
            
            
            27,422
            
            
            4,079,081
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,595,808
            )
            
            (489,305
            )Shares
                issued for compensation
            
            
            3,847,742
            
            
            3,847
            
            
            389,078
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            392,925Shares
                issued for services
            
            
            705,746
            
            
            706
            
            
            215,329
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            216,035Shares
                issued for cash
            
            
            9,383,000
            
            
            9,383
            
            
            928,917
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            938,300Net
                loss for the year ended September 30, 1999
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,158,755
            )
            
            (1,158,755
            )Balance
                at September 30, 1999
            
            
            41,358,363
            
            
            41,358
            
            
            5,612,405
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,754,563
            )
            
            (100,800
            )Shares
                issued for cash
            
            
            10,303,500
            
            
            10,304
            
            
            1,020,046
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,030,350Shares
                issued for compensation
            
            
            1,517,615
            
            
            1,518
            
            
            1,218,598
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,220,116Shares
                issued for services
            
            
            986,844
            
            
            986
            
            
            253,301
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            254,287Net
                loss for the year ended September 30, 2000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,414,188
            )
            
            (2,414,188
            )




The
      accompanying notes form an integral part of these financial
      statements.


F-5


**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIT) - Continued**




Deficit
            
            TotalCommon Stock
            
            Additional
            
            Stock
            
            Stock
            
            Shares
            
            Unamortized
            
            Accumulated
            
            Stockholders'Number
            
            
            
            Paid-in
            
            to be
            
            Subscription
            
            to be
            
            Consulting
            
            from
            
            Equityof Shares
            
            Amount
            
            Capital
            
            Issued
            
            Receivable
            
            Cancelled
            
            Fees
            
            Inception
            
            (Deficit)Balance
                at September 30, 2000
            
            
            54,166,322
            
            
            54,166
            
            
            8,104,350
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,168,751
            )
            
            (10,235
            )Shares
                issued for services and prepaid expenses
            
            
            2,517,376
            
            
            2,517
            
            
            530,368
            
            
            
            
            
            
            
            
            
            
            
            (141,318
            )
            
            
            
            
            391,567Shares
                issued for cash
            
            
            6,005,000
            
            
            6,005
            
            
            594,495
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            600,500Shares
                to be issued for cash (100,000 shares)
            
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000Shares
                to be issued for debt (639,509 shares)
            
            
            
            
            
            
            
            
            
            
            
            103,295
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            103,295Net
                loss for the year ended September 30, 2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,353,429
            )
            
            (1,353,429
            )Balance
                at September 30, 2001
            
            
            62,688,698
            
            
            62,688
            
            
            9,229,213
            
            
            113,295
            
            
            -
            
            
            -
            
            
            (141,318
            )
            
            (9,522,180
            )
            
            (258,302
            )Shares
                issued for services and prepaid expenses
            
            
            1,111,710
            
            
            1,112
            
            
            361,603
            
            
            
            
            
            
            
            
            
            
            
            54,400
            
            
            
            
            
            417,115Shares
                issued as a contribution
            
            
            100,000
            
            
            100
            
            
            11,200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            11,300Shares
                issued for compensation
            
            
            18,838
            
            
            19
            
            
            2,897
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,916Shares
                issued for cash
            
            
            16,815,357
            
            
            16,815
            
            
            1,560,782
            
            
            (10,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,567,597Shares
                issued for debt
            
            
            1,339,509
            
            
            1,340
            
            
            208,639
            
            
            (103,295
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            106,684Shares
                to be issued for services related to raising equity (967,742
                shares)
            
            
            
            
            
            
            
            
            (300,000
            )
            
            300,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Cancellation
                of shares
            
            
            (7,533,701
            )
            
            (7,534
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,534
            )Net
                loss for the year ended September 30, 2002
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,243,309
            )
            
            (1,243,309
            )Balance
                at September 30, 2002
            
            
            74,540,411
            
            
            74,540
            
            
            11,074,334
            
            
            300,000
            
            
            -
            
            
            -
            
            
            (86,918
            )
            
            (10,765,489
            )
            
            596,467Shares
                issued for services and prepaid expenses
            
            
            2,467,742
            
            
            2,468
            
            
            651,757
            
            
            (300,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            354,225Shares
                issued for capital equity line
            
            
            8,154,317
            
            
            8,154
            
            
            891,846
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            900,000Amortization
                of consulting fees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            86,918
            
            
            
            
            
            86,918Cancellation
                of shares
            
            
            (50,000
            )
            
            (50
            )
            
            50
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares
                to be cancelled (7,349,204 shares)
            
            
            
            
            
            
            
            
            7,349
            
            
            
            
            
            
            
            
            (7,349
            )
            
            
            
            
            
            
            
            -Net
                loss for the year ended September 30, 2003
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,721,991
            )
            
            (1,721,991
            )Balance
                at September 30, 2003
            
            
            85,112,470
            
            
            85,112
            
            
            12,625,336
            
            
            -
            
            
            -
            
            
            (7,349
            )
            
            -
            
            
            (12,487,480
            )
            
            215,619Shares
                issued for capital equity line
            
            
            19,179,016
            
            
            19,179
            
            
            447,706
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            466,885Shares
                issued for services
            
            
            5,100,004
            
            
            5,100
            
            
            196,997
            
            
            
            
            
            
            
            
            
            
            
            (13,075
            )
            
            
            
            
            189,022Share
                to be issued for cash (963,336 shares)
            
            
            
            
            
            
            
            
            
            
            
            28,900
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,900Shares
                to be issued for debt (500,000 shares)
            
            
            
            
            
            
            
            
            
            
            
            15,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,000Cancellation
                of shares
            
            
            (7,349,204
            )
            
            (7,349
            )
            
            
            
            
            
            
            
            
            
            
            7,349
            
            
            
            
            
            
            
            
            -Issuance
                of warrants related to 2004 stock purchase
            
            
            
            
            
            
            
            
            24,366
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24,366Net
                loss for the year ended September 30, 2004
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,593,136
            )
            
            (1,593,136
            )





The
      accompanying notes form an integral part of these financial
      statements.


F-6


**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIT) - Continued**




Deficit
            
            TotalCommon Stock
            
            Additional
            
            Stock
            
            Stock
            
            Shares
            
            Unamortized
            
            Accumulated
            
            Stockholders'Number
            
            
            
            Paid-in
            
            to be
            
            Subscription
            
            to be
            
            Consulting
            
            from
            
            Equityof Shares
            
            Amount
            
            Capital
            
            Issued
            
            Receivable
            
            Cancelled
            
            Fees
            
            Inception
            
            (Deficit)Balance
                at September 30, 2004, Restated
            
            
            102,042,286
            
            
            102,042
            
            
            13,294,405
            
            
            43,900
            
            
            -
            
            
            -
            
            
            (13,075
            )
            
            (14,080,615
            )
            
            (653,343
            )Amortization
                of consulting fees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,075
            
            
            
            
            
            13,075Net
                loss for the year ended September 30, 2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (722,676
            )
            
            (722,676
            )Balance
                at September 30, 2005, Restated
            
            
            102,042,286
            
            
            102,042
            
            
            13,294,405
            
            
            43,900
            
            
            -
            
            
            -
            
            
            -
            
            
            (14,803,291
            )
            
            (1,362,944
            )Net
                loss for the year ended September 30, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,049,319
            )
            
            (1,049,319
            )Balance
                at September 30, 2006, Restated
            
            
            102,042,286
            
            
            102,042
            
            
            13,294,405
            
            
            43,900
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,852,610
            )
            
            (2,412,263
            )Shares
                issued for services
            
            
            4,592,915
            
            
            4,593
            
            
            80,336
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            84,929Reclassification
                of 2001Executive
                Option Plan as of July 17, 2007
            
            
            
            
            
            
            
            
            (2,271,879
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,271,879
            )Reclassification
                of beneficial conversion features liability related to advisory board
                compensation as of July 17, 2007
            
            
            
            
            
            
            
            
            (269,851
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (269,851
            )Reclassification
                of warrants related to 2004 stock purchase agreement as of July 17,
                2007
            
            
            
            
            
            
            
            
            (70,029
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (70,029
            )Net
                loss for the year ended September 30, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,168,226
            )
            
            (2,168,226
            )Balance
                at September 30, 2007, Restated
            
            
            106,635,201
            
            
            106,635
            
            
            10,762,982
            
            
            43,900
            
            
            -
            
            
            -
            
            
            -
            
            
            (18,020,836
            )
            
            (7,107,319
            )





The
      accompanying notes form an integral part of these financial
      statements.


F-7


**SIONIX
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF CASH FLOWS**




Cummulativefro mInceptionYears Ended September 30,
            
            (October 3, 1994) to2007
            
            2006
            
            September 30,2007(As Restated)
            
            (As Restated)
            
            (As Restated)**Operating
                activities:**Net
                loss
            
            $
            (2,168,226
            )
            $
            (1,049,319
            )
            $
            (18,020,836
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            31,699
            
            
            31,326
            
            
            619,023Amortization
                of beneficial conversion features discount and warrant
                discount
            
            
            833,826
            
            
            
            
            
            883,018Stock
                based compensation expense - employee
            
            
            -
            
            
            
            
            
            1,835,957Stock
                based compensation expense - consultant
            
            
            208,989
            
            
            
            
            
            2,964,869Decrease
                in warrant liabilities
            
            
            (469,311
            )
            
            
            
            
            (469,311
            )Increase
                in beneficial conversion features liabilities
            
            
            4,044
            
            
            
            
            
            4,044Impairment
                of assets
            
            
            -
            
            
            
            
            
            514,755Write-down
                of obsolete assets
            
            
            -
            
            
            
            
            
            38,862Impairment
                of intangible assets
            
            
            -
            
            
            
            
            
            1,117,601Loss
                on settlement of debt
            
            
            -
            
            
            94,221
            
            
            130,268Other
            
            
            (799,044
            )
            
            
            
            
            (799,044
            )(Increase)
                decrease in assets:Other
                current assets
            
            
            (1,350
            )
            
            
            
            
            (1,350
            )Other
                assets
            
            
            (104,600
            )
            
            
            
            
            (104,600
            )Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            (115,209
            )
            
            50,147
            
            
            157,399Accrued
                expenses
            
            
            1,445,946
            
            
            829,335
            
            
            2,006,812Net
                cash used in operating activities
            
            
            (1,133,236
            )
            
            (44,290
            )
            
            (9,122,533
            )**Investing
                activities:**Acquisition
                of property and equipment
            
            
            (27,772
            )
            
            (950
            )
            
            (371,455
            )Acquisition
                of patents
            
            
            
            
            
            
            
            
            (154,061
            )Net
                cash used in investing activities
            
            
            (27,772
            )
            
            (950
            )
            
            (525,516
            )**Financing
                activities:**Accrual
                of liquidating damages
            
            
            15,375
            
            
            
            
            
            15,375Payment
                on notes payable to officer
            
            
            (47,400
            )
            
            
            
            
            (199,242
            )Proceeds
                from notes payable, related party
            
            
            -
            
            
            49,440
            
            
            457,433Receipt
                from (payments to) equity line of credit
            
            
            (300,000
            )
            
            
            
            
            456,000Proceeds
                from convertible notes payable
            
            
            1,861,000
            
            
            
            
            
            1,861,000Issuance
                of common stock
            
            
            -
            
            
            
            
            
            7,386,094Receipt
                of cash for stock to be issued
            
            
            -
            
            
            
            
            
            43,900Net
                cash provided by financing activities
            
            
            1,528,975
            
            
            49,440
            
            
            10,020,560Net
                change in cash
            
            
            367,967
            
            
            4,200
            
            
            372,511Cash
                balances:Beginning
                of period
            
            
            4,544
            
            
            344End
                of period
            
            $
            372,511
            
            $
            4,544
            
            $
            372,511Cash
                paid for:Interest
            
            $
            -
            
            $
            -
            
            $
            -Income
                taxes
            
            $
            -
            
            $
            -
            
            $
            -




The
      accompanying notes form an integral part of these financial
      statements.


F-8


Note
      1  ORGANIZATION
      AND DESCRIPTION OF BUSINESS




Sionix
      Corporation (the "Company") was incorporated in Utah in 1985. The Company was
      formed to design, develop, and market automatic water filtration system
      primarily for small water districts.




The
      Company completed its reincorporation as a Nevada Corporation, effective July
      1,
      2003. The reincorporation was completed pursuant to an Agreement and Plan of
      Merger between Sionix Corporation, a Utah corporation ("Sionix Utah") and its
      wholly-owned Nevada subsidiary, Sionix Corporation ("Sionix Nevada"). Under
      the
      merger agreement, Sionix Utah merged with and into Sionix Nevada, and each
      share
      of Sionix Utah’s Common Stock was automatically converted into one share of
      Common Stock, par value $0.001 per share, of Sionix Nevada. The merger was
      effected by the filing of Articles of Merger, along with the Agreement and
      Plan
      of Merger, with the Secretary of State of Nevada.




The
      Company is a development stage company as defined in Statement of Financial
      Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development
      Stage Enterprises.” The Company is in the development stage and its efforts have
      been principally devoted to research and development, organizational activities,
      and raising capital. All losses accumulated since inception have been considered
      as part of the Company’s development stage activities.




Note
      2  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES - RESTATED




USE
      OF
      ESTIMATES




The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States (“GAAP”) requires management to make
      certain 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.  Significant estimates include collectibility of accounts
      receivable, accounts payable, sales returns and recoverability of long-term
      assets.




CASH
      AND
      CASH EQUIVALENTS




Cash
      and
      cash equivalents represent cash and short-term highly liquid investments with
      original maturities of three months or less.




PROPERTY
      AND EQUIPMENT




Property
      and equipment is stated at cost. The cost of additions and improvements are
      capitalized while maintenance and repairs are expensed as incurred. Depreciation
      of property and equipment is provided on a straight-line basis over the
      estimated five year useful lives of the assets.




PROVISION
      FOR INCOME TAXES




The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




ADVERTISING




The
      cost
      of advertising is expensed as incurred. Total advertising costs were $4,555
      and
      $3,355 for the years ended September 30, 2007 and 2006,
      respectively.




STOCK
      BASED COMPENSATION




Effective
      October 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 123-R, “Share-Based Payment” (“SFAS 123-R”), which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to employees and directors, including stock options, to be based
      on
      their fair values. SFAS 123-R supersedes Accounting Principles Board Opinion
      No.
      25, “Accounting for Stock Issued to Employees” (“APB 25”), which the Company
      previously followed in accounting for stock-based awards. In March 2005, the
      SEC
      issued Staff Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS
      123-R. The Company has applied SAB 107 in its adoption of SFAS
      123-R.




EARNINGS
      PER SHARE




Statement
      of Financial Accounting Standards No. 128, “Earnings per share” requires the
      presentation of basic earnings per share and diluted earnings per
      share.  Basic and diluted earnings per share computations presented by
      the Company conform to the standard and are based on the weighted average number
      of shares of Common Stock outstanding during the year.


F-9


Basic
      earnings per share is computed by dividing net income or loss by the weighted
      average number of shares outstanding for the year. “Diluted” earnings per share
      is computed by dividing net income or loss by the total of the weighted average
      number of shares outstanding, and the dilutive effect of outstanding stock
      options (applying the treasury stock method).




The
      Company had 7,034,140 of granted stock options that were exercisable as of
      September 30, 2007.




The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted earnings per share computations:




Year
                ended September 30,
            
            2007
            
            2006Basic
                Earnings per Share
            
            Net Loss
            
            Shares
            
            per Share
            
            Net Loss
            
            Shares
            
            Per
              ShareNet
                loss available to common shareholders
            
            $
            (2,168,226
            )
            
            106,207,706
            
            $
            (0.02
            )
            $
            (1,049,319
            )
            
            102,524,186
            
            $
            (0.01
            )Effect
                of dilutive securities (none)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Diluted
                Earnings per Share
            
            $
            (2,168,226
            )
            
            106,207,706
            
            $
            (0.02
            )
            $
            (1,049,319
            )
            
            102,524,186
            
            $
            (0.01
            )




FAIR
      VALUE OF FINANCIAL INSTRUMENTS




Statement
      of Financial Accounting Standard No. 107, *Disclosures
      about Fair Value of Financial Instruments* ,
      requires that the Company disclose estimated fair values of financial
      instruments. The carrying amounts reported in the statements of financial
      position for assets and liabilities qualifying as financial instruments are
      a
      reasonable estimate of fair value.




RECLASSIFICATIONS




Certain
      items in the prior year financial statements have been reclassified to conform
      to the current period’s presentation. These reclassifications have no effect on
      the previously reported net loss.




RECENT
      PRONOUNCEMENTS




In
      September 2006, SFAS issued SFAS 157, *Fair
      Value Measurement* s.
      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. Management is currently
      evaluating the effect of this pronouncement on the Company’s financial
      statements.




In
      September 2006, SFAS issued SFAS 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans—an
      amendment of SFAS Statements No. 87, 88, 106, and 132(R)* .
      This
      Statement improves financial reporting by requiring an employer to recognize
      the
      over funded or under funded status of a defined benefit postretirement plan
      (other than a multiemployer plan) as an asset or liability in its statement
      of
      financial position and to recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income of a business entity or
      changes in unrestricted net assets of a not-for-profit organization. This
      Statement also improves financial reporting by requiring an employer to measure
      the funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions. An employer with publicly traded
      equity securities is required to initially recognize the funded status of a
      defined benefit postretirement plan and to provide the required disclosures
      as
      of the end of the fiscal year ending after December 15, 2006. An employer
      without publicly traded equity securities is required to recognize the funded
      status of a defined benefit postretirement plan and to provide the required
      disclosures as of the end of the fiscal year ending after June 15, 2007.
      However, an employer without publicly traded equity securities is required
      to
      disclose the following information in the notes to financial statements for
      a
      fiscal year ending after December 15, 2006, but before June 16, 2007, unless
      it
      has applied the recognition provisions of this Statement in preparing those
      financial statements:




a.
            A
                brief description of the provisions of this
                Statement


F-10


b.
            The
                date that adoption is required




c.
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.




The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. Management is currently evaluating
      the effect of this pronouncement on the Company’s financial
      statements.




In
      February 2007, SFAS issued SFAS Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      FAS159
      is effective for fiscal years beginning after November 15, 2007. Early adoption
      is permitted subject to specific requirements outlined in the new Statement.
      Therefore, calendar-year companies may be able to adopt FAS 159 for their first
      quarter 2007 financial statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. Management is currently evaluating the effect of this pronouncement
      on the Company’s financial statements.




In
      December 2007, SFAS issued SFAS Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements—an amendment of ARB No.
      51* .
      This
      Statement applies to all entities that prepare consolidated financial
      statements, except not-for-profit organizations, but will affect only those
      entities that have an outstanding non-controlling interest in one or more
      subsidiaries or that deconsolidate a subsidiary. Not-for-profit organizations
      should continue to apply the guidance in Accounting Research Bulletin No. 51, *Consolidated
      Financial Statements* ,
      before
      the amendments made by this Statement, and any other applicable standards,
      until
      the Board issues interpretative guidance. 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(R). This Statement shall be
      applied prospectively as of the beginning of the fiscal year in which this
      Statement is initially applied, except for the presentation and disclosure
      requirements. The presentation and disclosure requirements shall be applied
      retrospectively for all periods presented. This statement has no effect on
      the
      Company’s financial statements as the Company does not have any outstanding
      non-controlling interest in one or more subsidiaries.




Note
      3  PROPERTY
      AND EQUIPMENT




Property
      and equipment consisted of the following at September 30, 2007:




Equipment
                and machinery
            
            $
            213,166Furniture
                and fixtures
            
            
            24,594TOTAL
                PROPERTY AND EQUIPMENT
            
            
            237,760Less
                accumulated depreciation (deduction)
            
            
            (196,926
            )NET
                PROPERTY AND EQUIPMENT
            
            $
            40,834




Depreciation
      expenses for fiscal years ended September 30, 2007 and 2006 were $31,699 and
      $31,326, respectively.




Note
      4  ACCRUED
      EXPENSES - RESTATED




Accrued
      expenses consisted of the following at September 30, 2007:




Accrued
                salaries
            
            $
            1,381,981Advisory
                board compensation
              Auto
                allowance accruals
            
            
            380,441
              71,768Interest
                payable
            
            
            165,770Other
                accruals
            
            
            68,154TOTAL
                ACCRUED EXPENSES
            
            $
            2,068,114


F-11


Note
      5  NOTES
      PAYABLE – RELATED PARTIES




The
      Company has received advances in the form of unsecured promissory notes from
      stockholders in order to pay ongoing operating expenses. These notes bear
      interest at rates up to 13% and are due on demand. As of September 30, 2007,
      notes payable amounted to $129,000. Accrued interest on the notes amounted
      to
      $64,548 at September 30, 2007, and is included in accrued expenses. Interest
      expenses on these notes for the years ended September 30, 2007 and 2006 amounted
      to $12,850 and $10,080 respectively.




Note
      6  NOTES
      PAYABLE – OFFICERS




Notes
      payables to officers are unsecured, interest free and due on demand. Proceeds
      from these notes payable were used to pay ongoing operating expenses. The
      balance at September 30, 2007 was $19,260.




Note
      7  NOTES
      PAYABLE UNDER EQUITY LINE OF CREDIT




During
      the year ended September 30, 2003, the Company received proceeds of $1,307,500
      from promissory notes issued to Cornell Capital Partners, LP, net of a 4% fee
      of
      $56,000 and $36,500 for escrow and other fees. The Company has settled $900,000
      by issuing shares of Common Stock during the year ended September 30, 2003.
      In
      2006, the Company entered into a settlement agreement with Cornell Capital
      Partners, LP to pay the total outstanding principal and accrued interest amount
      of $327,336; $50,000 was to be paid on or before November 15, 2006, $25,000
      was
      payable per month on the 15th day of each month commencing December 15, 2006,
      with the balance of $27,336 due and payable on or before October 15, 2007.
      The
      Company recorded a loss on settlement of debt of $94,221 for the year ended
      September 30, 2006. The balance as of September 30, 2007 is $27,336, which
      was
      subsequently paid in October 2007 (See note 15).




Note
      8  CONVERTILBE
      NOTES - RESTATED




**Convertible
      Note 1**




Between
      October 2006 and February 2007, the Company completed an offering of $750,000
      in
      principal amount of convertible notes, which bear interest at 10% per annum
      and
      mature the earlier of (i) eighteen (18) months from the date of issuance (ii)
      an
      event of default or (iii) the closing of any equity related financing by the
      Company in which the gross proceeds are a minimum of $2,500,000. These notes
      are
      convertible into shares of the Company’s Common Stock at $0.05 per share or
      shares of any equity security issued by the Company at a conversion price equal
      to the price at which such security is sold to any other party. In the event
      that a registration statement covering the underlying shares is not declared
      effective within 180 days after the closing, the conversion price shall be
      reduced by $0.0025 per share for each 30 day period that the effectiveness
      of
      the registration statement is delayed but in no case may the conversion price
      to
      be reduced below $0.04 per share. As of September 30, 2007, the conversion
      price
      was $0.04 per share.




SFAS
      133,
      paragraph 12 was applied to determine if the embedded beneficial conversion
      features should be bifurcated from the convertible notes. The Company determined
      that the economic characteristics of the embedded beneficial conversion features
      are not clearly and closely related to the convertible notes, the embedded
      beneficial conversion feature and convertible notes are not remeasured at fair
      value at each balance sheet date, and a separate contract with the same terms
      would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
      embedded beneficial conversion features were bifurcated from the convertible
      notes. SFAS 133 *,* paragraph 6 was applied to determine if the embedded beneficial conversion
      features were within the scope and definition of a derivative. The embedded
      beneficial conversion features had one or more underlings and one or more
      notional amounts, required no initial investment and required or permitted
      net
      settlement. Therefore, the embedded beneficial conversion features were
      determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to
      determine the classification of the beneficial conversion feature, which states
      that contracts which require
      net-share settlement are equity. Therefore the embedded conversion features
      were
      determined to be equity instruments at the date of issuance. The Company applied
      EITF 00-19, paragraph 9, which states that all contracts be initially measured
      at fair value. The terms of the conversion feature were analyzed and the Company
      determined that the convertible notes were a conventional convertible pursuant
      to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis
      of
      the convertible notes. SFAS
      150
      requires three classes of freestanding financial instruments, as defined in
      paragraphs 8 through 17, to be classified as liabilities. The first class,
      as
      defined in paragraph 9, is financial instruments that are mandatorily redeemable
      financial instruments. There are no terms or conditions that require the Company
      to unconditionally redeem the convertible notes by transferring assets at a
      specified or determinable date. The second class, as defined in paragraph 11,
      is
      financial instruments that require the repurchase of shares of Common Stock
      by
      transferring assets. There are no terms or conditions that require the Company
      to repurchase shares of Common Stock. The third class, as defined in paragraph
      12, is financial instruments that require the issuance of a variable number
      of
      shares of Common Stock. There are no terms or conditions that require the
      Company to issue a variable number of shares of Common Stock. Therefore, the
      Company concluded that the convertible notes were not within the scope of SFAS
      150.





The
      fair
      value of the embedded beneficial conversion features was $750,000 at the date
      of
      issuance using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 2.02% to 5.09%; volatility
      of
      268% to 275%; dividend yield of 0% and an expected term of 1.5
      years.


F-12





Based
      on
      the calculation of the fair value of the embedded beneficial conversion feature,
      the Company allocated $750,000 to the beneficial conversion feature and the
      beneficial conversion feature discount, and none to the convertible note at
      the
      date of issuance. The embedded beneficial conversion feature discount is
      amortized to interest expense over the term of the note, which is $41,667 per
      month.




As
      of
      September 30, 2007, the outstanding principal amount of the convertible notes
      was $750,000 and the unamortized embedded beneficial conversion feature discount
      was $290,556, for a net convertible debt of $459,444.




For
      the
      year ended September 30, 2007, interest expense was $65,718, and amortization
      expense for the embedded beneficial conversion feature discount was $459,444,
      which was included in interest expense in the other income (expense) section
      of
      the statement of operations.




Calico
      Capital Management, LLC acted as a financial advisor for Convertible
      Notes 1 and 2 for the Company and received a fee of $75,000. Southridge
      Investment Group LLC, Ridgefield, Connecticut (“Southridge”)
      acted as an
      agent for the Company in arranging the transaction for Convertible Notes 1
      and 2. The Company recorded these fees as an expense during the
      period.




**Convertible
      Note 2**




On
      June
      6, 2007, the Company completed an offering of $86,000 in principal amount of
      convertible notes, which bear interest at 10% per annum and mature on December
      31, 2008.These notes are convertible into shares of the Company’s Common Stock
      at $0.01 per share or shares of any equity security issued by the Company at
      a
      conversion price equal to the price at which such security is sold to any other
      party. There is no registration rights associated with these notes.




SFAS
      133,
      paragraph 12 was applied to determine if the embedded beneficial conversion
      features should be bifurcated from the convertible notes. The Company determined
      that the economic characteristics of the embedded beneficial conversion features
      are not clearly and closely related to the convertible notes, the embedded
      beneficial conversion feature and convertible notes are not remeasured at fair
      value at each balance sheet date, and a separate contract with the same terms
      would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
      embedded beneficial conversion features were bifurcated from the convertible
      notes. SFAS 133 *,* paragraph 6 was applied to determine if the embedded beneficial conversion
      features were within the scope and definition of a derivative. The embedded
      beneficial conversion features had one or more underlings and one or more
      notional amounts, required no initial investment and required or permitted
      net
      settlement. Therefore, the embedded beneficial conversion features were
      determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to
      determine the classification of the beneficial conversion feature, which states
      that contracts which require
      net-share settlement are equity. Therefore the embedded conversion features
      were
      determined to be equity instruments at the date of issuance. The Company applied
      EITF 00-19, paragraph 9, which states that all contracts be initially measured
      at fair value. The terms of the conversion feature were analyzed and the Company
      determined that the convertible notes were a conventional convertible pursuant
      to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis
      of
      the convertible notes. SFAS
      150
      requires three classes of freestanding financial instruments, as defined in
      paragraphs 8 through 17, to be classified as liabilities. The first class,
      as
      defined in paragraph 9, is financial instruments that are mandatorily redeemable
      financial instruments. There are no terms or conditions that require the Company
      to unconditionally redeem the convertible notes by transferring assets at a
      specified or determinable date. The second class, as defined in paragraph 11,
      is
      financial instruments that require the repurchase of shares of Common Stock
      by
      transferring assets. There are no terms or conditions that require the Company
      to repurchase shares of Common Stock. The third class, as defined in paragraph
      12, is financial instruments that require the issuance of a variable number
      of
      shares of Common Stock. There are no terms or conditions that require the
      Company to issue a variable number of shares of Common Stock. Therefore, the
      Company concluded that the convertible notes were not within the scope of SFAS
      150.





The
      fair
      value of the embedded beneficial conversion features was $86,000 at the date
      of
      issuance using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96%; volatility of 259.58%;
      dividend yield of 0% and an expected term of 1.5 years.




Based
      on
      the calculation of the fair value of the embedded beneficial conversion feature,
      the Company allocated $86,000 to the beneficial conversion feature and the
      beneficial conversion feature discount, and none to the convertible note. The
      embedded beneficial conversion feature discount is amortizated to interest
      expense over the term of the note, which is $4,778 per month.




As
      of
      September 30, 2007, the outstanding principal amount of the convertible notes
      was $86,000 and the unamortized embedded beneficial conversion feature discount
      was $66,889, for a net convertible debt of $19,111.




For
      the
      year ended September 30, 2007, interest expense was $2,795, and amortization
      expense for the embedded beneficial conversion feature discount was $19,111,
      which was included in interest expense in the other income (expense) section
      of
      the statement of operations.


F-13


Calico
      Capital Management, LLC acted as a financial advisor for Convertible Notes
      1 and 2 for the Company and received a fee of $75,000. Southridge acted as
      an
      agent for the Company in arranging the transaction for Convertible Notes 1
      and
      2. The Company recorded these fees as an expense during the period.




**Convertible
      Note 3**




On
      July
      18, 2007, the Company completed an offering of $1,025,000 in principal amount
      of
      Subordinated Convertible Debentures to a group of institutional and accredited
      investors, which bear interest at the rate of 8% per annum, and mature 12 months
      from the date of issuance. The Subordinated Convertible Debentures are
      convertible into shares of the Company’s Common Stock at an initial conversion
      rate of $0.22 per share, subject to anti-dilution adjustments. As part of the
      above offering the Company issued warrants to purchase 2,329,546 shares of
      Common Stock at an initial exercise price of $0.50 per share. An amendment
      to
      convertible note 3 dated March 13, 2008, reduces the conversion rate of the
      notes to $0.15 per share, and the exercise price of the warrants to $0.30 per
      share.




Under
      the
      terms of a Registration Rights Agreement signed in conjunction with this
      offering, the Company is required to file a registration statement under the
      Securities Act of 1933 in order to register the resale of the shares of Common
      Stock issuable upon conversion of the Subordinated Convertible Debentures and
      the warrant shares (collectively, the "Registrable Securities"). If the Company
      does not file a registration statement with respect to the registrable
      securities within forty-five days following the closing of the Offering, or
      if
      the Registration Statement is not declared effective by the Securities and
      Exchange Commission within 90 days, then the Company must pay to each purchaser
      damages equal to 1.5% of the purchase price paid by the purchaser for its
      Subordinated Convertible Debentures, for each 30 days that transpires after
      these deadlines. The aggregate amount of damages payable by the Company is
      limited to 15% of the purchase price. The Company had until August 31, 2007
      to
      file the registration statement. The Company recorded $15,375 as liquidated
      damages for a period of one month as of September 30, 2007. No derivative
      liability is recorded as the amount of liquidated damage is fixed with a maximum
      ceiling.




The
      Company applied APB 14, paragraph 15 to determine the allocation of the proceeds
      of the convertible debt, which states that proceeds from the sale of debt with
      stock purchase warrants should be allocated between the debt and warrants,
      and
      paragraph 16 states that the proceeds should be allocated based on the relative
      fair values of the two securities at the time of issuance.




The
      fair
      value of warrants was $741,371 at the date of issuance calculated using the
      Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96% to 5.02%; volatility
      of
      219.89% to 226.04%; dividend yield of 0% and an expected term of 5
      years. As a
      result, the relative fair value of the warrants was $594,811.




SFAS
      133,
      paragraph 12 was applied to determine if the embedded beneficial conversion
      features should be bifurcated from the convertible notes. The Company determined
      that the economic characteristics of the embedded beneficial conversion features
      are not clearly and closely related to the convertible notes, the embedded
      beneficial conversion feature and convertible notes are not remeasured at fair
      value at each balance sheet date, and a separate contract with the same terms
      would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
      embedded beneficial conversion features were bifurcated from the convertible
      notes. SFAS 133 *,* paragraph 6 was applied to determine if the embedded beneficial conversion
      features were within the scope and definition of a derivative. The embedded
      beneficial conversion features had one or more underlings and one or more
      notional amounts, required no initial investment and required or permitted
      net
      settlement. Therefore, the embedded beneficial conversion features were
      determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to
      determine the classification of the beneficial conversion feature, which states
      that contracts which require
      net-share settlement are equity. Therefore the embedded conversion features
      were
      determined to be equity instruments at the date of issuance. The Company applied
      EITF 00-19, paragraph 9, which states that all contracts be initially measured
      at fair value. The terms of the conversion feature were analyzed and the Company
      determined that the convertible notes were a conventional convertible pursuant
      to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis
      of
      the convertible notes. SFAS
      150
      requires three classes of freestanding financial instruments, as defined in
      paragraphs 8 through 17, to be classified as liabilities. The first class,
      as
      defined in paragraph 9, is financial instruments that are mandatorily redeemable
      financial instruments. There are no terms or conditions that require the Company
      to unconditionally redeem the convertible notes by transferring assets at a
      specified or determinable date. The second class, as defined in paragraph 11,
      is
      financial instruments that require the repurchase of shares of Common Stock
      by
      transferring assets. There are no terms or conditions that require the Company
      to repurchase shares of Common Stock. The third class, as defined in paragraph
      12, is financial instruments that require the issuance of a variable number
      of
      shares of Common Stock. There are no terms or conditions that require the
      Company to issue a variable number of shares of Common Stock. Therefore, the
      Company concluded that the convertible notes were not within the scope of SFAS
      150.





The
      fair
      value of the embedded beneficial conversion features was $430,189 at the date
      of
      issuance using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96% to 5.02%; volatility
      of
      219.89% to 226.04%; dividend yield of 0% and an expected term of 1
      year.


F-14


Southridge
      Investment Group LLC, Ridgefield, Connecticut (“Southridge”) acted as the
      Company’s agent in arranging the transaction, and received a placement fee of
      $102,500. Southridge also received warrants to purchase 465,909 shares of the
      Company’s Common Stock on the same terms and conditions as the warrants issued
      to the purchasers. The Company recorded the placement fees as an expense. The
      grant date fair value of the warrants amounted to $124,060 and was calculated
      using the Black-Sholes option pricing model, using the following assumptions:
      risk free rate of return of 5.01%, volatility of 226.04%, dividend yield of
      0%
      and expected term of five years.




As
      of
      September 30, 2007, the outstanding principal amount of the convertible notes
      were $1,025,000, the unamortized warrant discount was $305,228, the embedded
      beneficial conversion feature discount was $421,855, for a net convertible
      debt
      of $297,917, and the number of outstanding warrants was 2,329,546.




For
      the
      year ended September 30, 2007, interest expense was $20,559, amortization
      expense for the warrant discount was $124,961, which was included in interest
      expense in the other income (expense) section of the statement of operations,
      and amortization expense for the beneficial conversion feature discount was
      $172,955, which was also included in interest expense in the other income
      (expense) section of the statement of operations.




Note
      9
      WARRANT LIABILITY - RESTATED




**2001
      Executive Officers Stock Option Plan**




In
      October 2000, the Company amended its employment agreements with its executive
      officers. In conjunction with the amendments the Company adopted the 2001
      Executive Officers Stock Option Plan. The plan has reserved 7,576,680 shares
      of
      Common Stock and has issued options for the purchase of 7,034,140 shares of
      Common Stock. The options expire 5 years from the date of issuance.




On
      the
      grant date, the Company applied SFAS 133 *,* paragraph 6 to determine if the options were within the scope and definition
      of
      a derivative. The options: had one or more underlings, and one or more notional
      amounts; required no initial investment; and required or permitted net
      settlement. Therefore, the options were determined to be derivatives. In order
      to determine how to classify the options, the Company followed the guidance
      of
      paragraphs 7 and 8 of EITF 00-19, which states that contracts ** that
      require settlement in shares are equity instruments .
      In
      order to determine the value of the options, the Company applied EITF 00-19,
      paragraph 9, which states that contracts that require the company to deliver
      shares as part of a physical settlement or net-share settlement should be
      initially measured at fair value. In accordance with EITF 00-19, the options
      were recorded in additional paid-in capital at fair value on the date of
      issuance.




The
      Company analyzed the options as of September 30, 2007, by following the guidance
      of SFAS 133, paragraph 6 to ascertain if the options issued remained derivatives
      as of September 30, 2007. All of the criteria in the original analysis were
      met,
      and the options issued were determined to be within the scope and definition
      of
      a derivative. The Company next followed the guidance of EITF 00-19, paragraph
      19, which states that if a company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




In
      accordance with EITF 00-19, the options were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liability on the balance sheet,
      at
      the fair value of $2,271,879 using the Black Sholes model with the following
      assumptions: risk free rate of return of 5.02%; volatility of 219.89%; dividend
      yield of 0%; and an expected term of 3.67 years.




The
      Company followed the guidance of EITF 00-19, paragraph 9, which states that
      all
      contracts classified as liabilities should be measured at fair value at each
      balance sheet date, with changes in fair value reported in earnings and
      disclosed in the financial statements as long as the contracts remain classified
      as liabilities.




The
      fair
      value of the options was $1,926,914 as of September 30, 2007, calculated using
      the Black Sholes model with the following assumptions: risk free rate of return
      of 4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term
      of
      3.5 years.




The
      decrease in the fair value of the options was recorded by decreasing warrant
      liability on the balance sheet by $344,965.




**Warrants
      Related to 2004 Stock Purchase Agreement**




Under
      the
      terms of a 2004 Stock Purchase Agreement, the Company issued warrants to
      purchase 1,463,336 shares of Common Stock at an exercise price of $0.03 which
      expired between February 9, 2007 and August 25, 2007.


F-15


The
      Company followed the guidance of SFAS 133, paragraph 6, to determine if the
      warrants were within the scope and definition of a derivative at the date of
      issuance. The warrants had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the warrants were determined to be derivatives at the
      date of issuance. In order to determine how to classify the warrants, the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
      that contracts ** which
      require settlement in shares are equity instruments. In order
      to determine the value of the warrants, the Company followed the guidance of
      EITF 00-19, paragraph 9, which states that contracts which require the company
      to deliver shares as part of a physical settlement or net-share settlement
      should be initially measured at fair value.




The
      fair
      value of the warrants was $24,366 at the date of issuance, which the Company
      calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 1.21% to 2.14%; volatility
      of
      141.91% to 170.27%; dividend yield of 0% and an expected term of 5
      years.




The
      Company then applied EITF 00-19, paragraph 19, which states that if a company
      is
      required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company
      and the contract is required to be c lassified
      as a liability. The Company applied EITF 00-19, paragraph 10, which states
      that
      if a classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




In
      accordance with EITF 00-19, the warrants were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liability on the balance sheet at
      the
      fair value of $70,029, which the Company calculated using the Black Sholes
      model
      with the following assumptions: risk free rate of return of 5.02%; volatility
      of
      219.89%; dividend yield of 0%; and an expected term of .08 years.




The
      Company then applied EITF 00-19, paragraph 9, which states that all contracts
      classified as liabilities are to be measured at fair value at each balance
      sheet
      date, with changes in fair value reported in earnings and disclosed in the
      financial statements as long as the contracts remain classified as liabilities.




The
      Company determined that the fair value of the warrants was $0 as of September
      30, 2007, due to their expiration.




The
      $70,029 decrease in the fair value of the warrants was recorded to warrant
      liability.




**Warrants
      related to Convertible Debentures**




On
      July
      17, 2007 the Company completed an offering of $1,025,000 of Convertible
      Debentures to a group of institutional and accredited investors which included
      warrants to purchase 2,795,454 shares of Common Stock (2,329,546 shares of
      Common Stock to holders of the Convertible Debentures and 465,908 shares of
      Common Stock as a placement fee) at an exercise price of $0.50 per share.




The
      Company followed the guidance of SFAS 133, paragraph 6, to determine if the
      warrants were within the scope and definition of a derivative at the date of
      issuance. The warrants had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the warrants were determined to be derivatives at the
      date of issuance. In order to determine how to classify the warrants, the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
      that contracts  that
      require net-cash settlement (including a requirement to net cash settle the
      contract if an event occurs and if that event is outside the control of the
      company) are liability instruments. In order
      to determine the value of the options, the Company followed the guidance of
      EITF
      00-19, paragraph 9, which states that contracts which require the company to
      deliver shares as part of a physical settlement or net-share settlement should
      be initially measured at fair value.




The
      fair
      value of warrants was $554,249 ($430,189 attributable to the holders of the
      Convertible Debentures and $124,060 attributable to the placement fee) at the
      date of issuance calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96% to 5.02%; volatility
      of
      219.89% to 226.04%; dividend yield of 0% and an expected term of 5 years.




The
      Company then applied EITF 00-19, paragraph 9, which states that all contracts
      classified as liabilities are to be measured at fair value at each balance
      sheet
      date, with changes in fair value reported in earnings and disclosed in the
      financial statements as long as the contracts remain classified as
      liabilities.




The
      fair
      value of the warrants was determined to be $499,932 ($379,672 attributable to
      the
      holders of the Convertible Debentures and $120,260 attributable to the placement
      fee) as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0%; and an expected term of 4.67 to 4.75 years.




The
      decrease in the fair value of the warrants was recorded by decreasing warrant
      liabilities on the balance sheet by $54,317 ($50,518 attributable
      to the holders of the Convertible Debentures and $3,799 attributable to the
      placement fee) .


F-16


Note
      10
      BENEFICIAL CONVERSION FEATURES LIABILITY - RESTATED




**Advisory
      Board Compensation**




On
      October 1, 2004, the Company formed an advisory board consisting of four
      members. Each member was to receive $5,000 monthly from October 1, 2004 to
      February 22, 2007, for a total of $576,000. Any portion of this amount is
      convertible by the advisory board members at any time into shares of Common
      Stock at a rate of $0.05 per share.




The
      Company followed the guidance of SFAS 133, paragraph 6 to ascertain if the
      embedded beneficial conversion features were derivatives at the date of
      issuance. The embedded beneficial conversion features had one or more underlings
      and one or more notional amounts, required no initial investment, and required
      or permitted net settlement. Therefore, the embedded beneficial conversion
      features were determined to be within the scope and definition of a derivative
      at the date of issuance. Next, the Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be separated from the accrued expense. The Company determined that: the economic
      characteristics of the embedded beneficial conversion features are not clearly
      and closely related to the accrued expense, the embedded beneficial conversion
      feature and accrued expense are not remeasured at fair value at each balance
      sheet date and a separate contract with the same terms would be a derivative
      pursuant to SFAS 133, paragraphs 6-11. Therefore, the embedded beneficial
      conversion features were separated from the accrued expense to determine the
      classification and valuation. The Company followed the guidance of EITF 00-19,
      paragraphs 7 and 8 to determine the classification which states that
      contracts ** that
      require settlement in shares are equity instruments . The
      Company followed the guidance of EITF 00-19, paragraph 9, to determine the
      value which
      states that contracts that require the company to deliver shares as part of
      a
      physical settlement or net-share settlement should be initially measured at
      fair
      value . The
      Company next followed the guidance of EITF 00-19, paragraph 19, which states
      that if a company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




The
      fair
      value of the embedded beneficial conversion features was calculated using the
      Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.94% to 5.09%; volatility
      of
      268.59% to 277.2%; dividend yield of 0% and an expected term of 5 years. The
      sum
      of the monthly embedded beneficial conversion features from October 1, 2006
      to
      February 22, 2007, was $91,956.




The
      fair
      value of the monthly embedded beneficial conversion features was $576,000 as
      of
      September 30, 2007, which the Company calculated using the Black Sholes model
      with the following assumptions: risk free rate of return of 4.05%; volatility
      of
      126.94%; dividend yield of 0%; and an expected term of 2.08 to 4.42 years.




The
      increase in the fair value of the embedded beneficial conversion feature was
      recorded by increasing beneficial conversion features liability on the balance
      sheet by $4,044.




**Beneficial
      Conversion Features**




As
      of
      September 30, 2007, the Company had Convertible Notes outstanding totaling
      $1,861,000 that were issued between October 17, 2006, and July 17, 2007. The
      convertible notes included an embedded beneficial conversion features that
      allowed the holders of the convertible notes to convert their notes into Common
      Stock shares at rates between $.01 and $.22. The convertible notes mature
      between June 17, 2008 and December 31, 2008. The convertible notes accrue
      interest at rates between 8% and 10%, and any accrued but unpaid interest is
      also convertible by the holder of the convertible notes into shares of Common
      Stock at the same rate.




The
      Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
      embedded beneficial conversion features remained derivatives as of September
      30,
      2007. All of the criteria in the original analysis were met, and the embedded
      beneficial conversion features issued were determined to be within the scope
      and
      definition of a derivative. The Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be separated from the convertible notes. All of the criteria in the original
      analysis were met, and the embedded beneficial conversion features were
      separated from the convertible notes. In order to determine the classification
      of the embedded conversion features, the Company applied paragraph 19 of EITF
      00-19, which states that if a company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. In order
      to determine the value of the embedded conversion features, the Company followed
      the guidance of EITF 00-19, paragraph 9, which states that all contracts
      classified as liabilities are to be measured at fair value at each balance
      sheet
      date, with changes in fair value reported in earnings and disclosed in the
      financial statements as long as the contracts remain classified as
      liabilities.


F-17


The
      fair
      value of the embedded beneficial conversion features was $1,430,811 at the
      date
      of issuance using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 2.02% to 5.09%; volatility
      of
      108.5% to 274.86%; dividend yield of 0% and an expected term of 1 to 1.5
      years.




The
      fair
      value of the embedded beneficial conversion features was $1,430,811 as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0% and an expected term of .58 to 1.25 years.




Note
      11
      INCOME TAXES - RESTATED




Through
      September 30, 2007, the Company incurred net operating losses for tax purposes
      of approximately $13,157,000. The net operating loss carry forward for federal
      and state purposes may be used to reduce taxable income through the year 2027.
      The availability of the Company's net operating loss carry forward is subject
      to
      limitation if there is a 50% or more positive change in the ownership of the
      Company's stock.




The
      gross
      deferred tax asset balance as of September 30, 2007 is $4,740,000. A 100%
      valuation allowance has been established against the deferred tax assets, as
      the
      utilization of the loss carry forward cannot reasonably be assured. Components
      of deferred tax asset at September 30, 2007 are as follows:


2007
              
              2006Deferred
                  tax asset
              
              $
              4,740,000
              
              $
              3,785,000Less
                  valuation allowance
              
              
              (4,740,000
              )
              
              (3,785,000
              )$
              -
              
              $
              -






Differences
      between the benefit from income taxes and income taxes at the statutory federal
      income tax rate for years ended September 30, 2007 and 2006 are as
      follows:


September 30, 2007
              
              September 30, 2006Amount
              
              Percent
              
              Amount
              
              PercentIncome
                  tax expense (benefit) at statutory federal rate
              
              $
              (819,000
              )
              
              (34.0
              )%
              $
              (378,000
              )
              
              (34.0
              )%State
                  income tax expense (benefit), net of federal income tax
              
              
              (136,000
              )
              
              (6.0
              )%
              
              (63,000
              )
              
              (6.0
              )%Valuation
                  allowance
              
              
              955,000
              
              
              40.0
              %
              
              441,000
              
              
              40.0
              %-
              
              
              0.0
              %
              
              -
              
              
              0.0
              %




A
      detail
      of the Company’s deferred tax assets and liabilities as of September 30, 2007
      follows:





Warrant
                amortization expense
            
            $
            45,000Beneficial
                conversion feature expense
            
            
            134,000Increase
                in fair market value of warrants
            
            
            (85,000
            )Decrease
                in fair market value of beneficial conversion feature
            
            
            2,000Increase
                in fair market value of stock options
            
            
            (138,000
            )Net
                operating loss carryforward
            
            
            4,698,000Valuation
                allowance
            
            
            (4,740,000
            )$
            -




Note
      12  STOCKHOLDERS’ EQUITY - RESTATED




COMMON
      STOCK




The
      Company has 150,000,000 authorized shares, par value $0 .001 per share. As
      of
      September 30, 2007, the Company had 107,117,101 shares issued and 106,635,201
      shares outstanding.


F-18


During
      the year ended September 30, 2007, the Company issued 3,292,915 shares, valued
      at $0.01 per share, and 1,300,000 shares valued at $0.04 per share for
      consulting services recorded at the fair market value.




The
      Company has not issued 1,463,336 shares of Common Stock to certain investors
      under the terms of a 2004 Stock Purchase Agreement. The investment was made
      and
      funds deposited into the Company’s bank accounts between February 9, 2004, and
      August 25, 2004. The investment has been carried on the Company’s balance sheet
      in the Stockholders’ Deficit section as “Shares to be Issued”.




STOCK
      OPTIONS




2001
      Executive Officers Stock Option Plan




In
      October 2000, the Company entered into amendments to its employment agreement
      with each of its executive officers eliminating the provisions of stock bonuses.
      In lieu of the bonus provision, the Company adopted the 2001 Executive Officers
      Stock Option Plan. The Company reserved 7,576,680 shares for issuance under
      the
      plan.




A
      summary
      of the Company’s option activity is listed below:


Weighted
                Average
                Exercise
                Price
              
              Number of
                Options
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at September 30, 2006
              
              $
              0.15
              
              
              7,034,140
              
              $
              -Granted
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at September 30, 2007
              
              $
              0.15
              
              
              7,034,140
              
              $
              1,055,121
                  -




Options
      outstanding:


Stock Options
              
              Weighted Average
                Remaining
              
              Weighted Average Exercise PriceExercise Price
              
              Outstanding
              
              Exercisable
              
              Contractual Life
              
              Outstanding
              
              Exercisable$
              0.15
              
              
              7,034,140
              
              
              7,034,140
              
              
              3.5
                  Years
              
              $
              0.15
              
              $
              0.15




The
      fair
      value of the options was $1,926,914 calculated using the Black Sholes option
      valuation model with the following assumptions for the year ended September
      30,
      2007: risk free interest rates of 4.05%; expected volatility of 126.94%;
      dividend yields of 0%; and expected term of 3.56 years.




During
      the year ended September 30, 2007 the Company did not issue any new
      options.




STOCK
      WARRANTS




Under
      the
      terms of the 2004 Stock Purchase Agreement, the Company was to issue 1,463,336
      warrants to purchase shares of Common Stock at a price of $0.03 per share.
      The
      warrants attached to this issue of Common Stock have, by the terms of the
      agreement, expired as of September 30, 2007.




As
      part
      of the offering of Convertible Note 3, the Company issued warrants to purchase
      2,795,454 shares of the Company’s Common Stock at a price of $0.50 per share.
      The warrants expire five years from the date of issuance.




A
      summary
      of the Company’s warrant activity is listed below:


Weighted
                Average
                Exercise
                Price
              
              Number of
                Warrants
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at September 30, 2006
              
              $
              0.03
              
              
              1,463,336
              
              $
              -Granted
              
              
              0.50
              
              
              2,795,454
              
              
              -Expired
              
              
              0.03
              
              
              (1,463,336
              )
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at September 30, 2007
              
              $
              0.50
              
              
              2,795,454
              
              $
              -


F-19




All
      outstanding warrants were exercisable as of September 30, 2007.




Warrants
      outstanding:




WeightedAverage
            
            WeightedRemaining
            
            AverageExercise
            
            Number of
            
            Contractual
            
            ExercisePrice
            
            Warrants
            
            Life
            
            Price$
            0.50
            
            
            2,795,454
            
            
            4.70
            
            $
            0.50




Note
      13
      GOING CONCERN - RESTATED




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. This basis of accounting contemplates the
      recovery of the Company’s assets and the satisfaction of its liabilities in the
      normal course of business. Through September 30, 2007, the Company has incurred
      cumulative losses of $18,020,836 including a loss for the year ended September
      30, 2007 of $2,168,226. As the Company has no cash flow from
      operations,  its  ability to transition from a development
      stage company to an operating company is entirely dependent upon obtaining
      adequate cash to finance its overhead, research and development activities,
      and
      acquisition of production equipment. It is unknown when, if ever, the Company
      will achieve a level of revenues adequate to support its cost and expenses.
      In
      order for the Company to meet its basic financial obligations, including rent,
      salaries, debt service and operations, it plans to seek additional equity or
      debt financing. Because of the Company’s history and current debt levels, there
      is considerable doubt that the Company will be able to obtain financing. The
      Company’s ability to meet its cash requirements for the next twelve months
      depends on its ability to obtain such financing. Even if financing is obtained,
      any such financing will likely involve additional fees and debt service
      requirements which may significantly reduce the amount of cash we will have
      for
      our operations. Accordingly, there is no assurance that the Company will be
      able
      to implement its plans.




The
      Company expects to continue to incur substantial operating losses for the
      foreseeable future, and it cannot predict the extent of the future losses or
      when it may become profitable, if ever. The Company expects to incur increasing
      sales and marketing, research and development and general and administrative
      expenses. Also, the Company has a substantial amount of short-term debt, which
      will need to be repaid or refinanced, unless it is converted into equity. As
      a
      result, if the Company begins to generate revenues from operations, those
      revenues will need to be significant in order to cover current and anticipated
      expenses. These factors raise substantial doubt about the Company's ability
      to
      continue as a going concern unless it is able to obtain substantial additional
      financing in the short term and generate revenues over the long term. If the
      Company is unable to obtain financing, it would likely discontinue its
      operations.




Note
      14
      COMMITMENT




On
      February 19, 2007 the Company entered into a two year lease agreement beginning
      March 1, 2007. According to the terms of the agreement, at the beginning of
      each
      lease year, the then most recently published Consumer Price Index (CPI) figure
      shall be determined and the monthly rental payable for the succeeding lease
      year
      will be calculated. The future aggregate minimum annual lease payments arising
      from these lease agreements are as follows.




During
      the year ended September 30,




2008
            
            $
            55,2002009
            
            
            23,000$
            78,200




Total
      rent expense under the operating lease was approximately $32,200 for the year
      ended September 30, 2007.


F-20


Note
      15  SUBSEQUENT EVENTS - RESTATED




**Notes
      Payable Under Equity Line of Credit**




The
      Company paid $27,336 plus interest of $13,859 against a note payable under
      equity line of credit in October 2007 (See note 7).




**Issuance
      of Options**




On
      December 13, 2007, the Company issued 2,000,000 options to employees to purchase
      shares of Common Stock at $0.25 per share, which expire on December 12, 2012.
      The fair value of the options was $339,212 at the date of issuance and was
      calculated using the Black Sholes option valuation model with the following
      assumptions: risk free interest rates of 3.26%; expected volatility of 98.01%;
      dividend yields of 0%; and expected term of 5 years.




**Agreements
      with Richard Papalian**




On
      December 19, 2007, the Company entered into a one year Employment Agreement
      with
      Richard H. Papalian (the “Employment Agreement”), pursuant to which Mr. Papalian
      has been appointed as the Chief Executive Officer of the Company and elected
      to
      fill a vacancy on the Company’s board of directors. Mr. Papalian will not
      receive a cash salary or any fringe benefits under the Employment Agreement.
      Instead, pursuant to a Notice of Grant of Stock Option and a Stock Option
      Agreement dated December 19, 2007, the Company granted to Mr. Papalian a five
      year option to purchase up to 8,539,312 shares of the Company’s Common Stock at
      an exercise price of $0.25 per share (the “Papalian Option”); which on the date
      of the Employment Agreement represented 5% of the outstanding shares of the
      Company’s Common Stock on a fully diluted basis. The fair value of the options
      was $1,448,321 at the date of issuance and was calculated using the Black Sholes
      option valuation model with the following assumptions: risk free interest rates
      of 3.26%; expected volatility of 98.01%; dividend yields of 0%; and expected
      term of 5 years.




**Agreements
      with Mark Maron**




On
      December 19, 2007, the Company entered into a one year Consulting Agreement
      with
      Mark Maron (the “Consulting Agreement”), pursuant to which Mr. Maron has been
      appointed as Special Adviser to the Company. Mr. Maron will not receive cash
      remuneration under the Consulting Agreement. Instead, pursuant to a Notice
      of
      Grant of Stock Option and a Stock Option Agreement dated December 19, 2007,
      the
      Company granted to Mr. Maron a five year option to purchase up to 8,539,312
      shares of the Company’s Common Stock at an exercise price of $0.25 per share
      (the “Maron Option”), which represented 5% of the outstanding shares of the
      Company’s Common Stock on a fully diluted basis. The fair value of the options
      was $1,448,321 at the date of issuance and was calculated using the Black Sholes
      option valuation model with the following assumptions: risk free interest rates
      of 3.26%; expected volatility of 98.01%; dividend yield of 0%; and expected
      term
      of 5 years.




**Issuance
      of $425,000 in 10% Subordinated Notes Payable and Related
      Warrants**




During
      January 2008, the Company completed an offering of $425,000 in subordinated
      debentures to a group of institutional and accredited investors. The notes
      mature on December 31, 2008 and bear an interest at the rate of 10% per
      annum.




As
      part
      of the offering, the Company issued warrants to purchase 850,000 shares of
      Common Stock at $0.40 per share. The fair value of the warrants was $96,814
      at
      the date of issuance and was calculated using the Black-Sholes option pricing
      model, using the following assumptions: risk free rate of return of 2.64% to
      3.26%, volatility ranging from 97.08% to 98.27%, dividend yield of 0% and
      expected term of five years.




**Issuance
      of $750,000 in Common Stock and Related Warrants**




Between
      March 14 and May 28, 2008, the Company completed an offering of 7,500,000 shares
      of Common Stock at $0.10 per share to a group of institutional and accredited
      investors, for a total of $750,000.




As
      part
      of the offering, the Company issued warrants to purchase 15,000,000 shares
      of
      Common Stock at $0.10 per share. The grant date fair value of the warrants
      was
      $483,476 and was calculated using the Black-Sholes option pricing model, using
      the following assumptions: risk free rate of return of 1.32% to 2.17%,
      volatility ranging from 72.4% to 77.86%, dividend yield of 0% and expected
      term
      of five years.




**Termination
      of Lease**




On
      August
      30, 2007, the Company entered into a five year lease agreement beginning October
      1, 2007. On March 18, 2008, the Company successfully negotiated the termination
      of the lease by committing to issue 748,750 shares of the Company’s Common
      Stock, plus termination of all claims to its $100,000 security deposit. For
      the
      three months ended March 31, 2008, the Company wrote-off $29,166 of leasehold
      improvements and $100,000 of security deposit. The 748,750 shares of Common
      Stock to be issued represented $89,850 in rent expense.


F-21


**Conversion
      of Debt Into Share of Common Stock**




From
      April 2008 to June 2008 $754,667 of principal and $74,587 of accrued interest
      of
      Convertible Notes were converted into 10,363,796 shares of Common Stock of
      the
      Company. Conversion rates were between $0.01 and $0.22.




**Issuance
      of Warrants to Director**




On
      July
      11, 2008, the Company issued an option to purchase 500,000 shares of Common
      Stock to the Chief Financial Officer, who is also a member of the Board of
      Directors, at an exercise price of $0.25. The option expires December 13,
      2012.




**Operating
      Lease**




On
      July
      21, 2008, the Company entered into a three year agreement beginning August
      1,
      2008, for a 12,000 square foot industrial facility in Anaheim, California for
      research and development, and manufacturing and distribution of water filtration
      systems. Monthly lease payments are $8,650 for fiscal year 2009, $8,995 for
      fiscal year 2010, and $9,355 for fiscal year 2011.




**Issuance
      of $1,000,000 in Subordinated Convertible Notes Payable and Related
      Warrants**




On
      July
      29, 2008, the Company completed an offering of $1,000,000 in subordinated
      debentures to a group of institutional and accredited investors. The notes
      mature on December 31, 2008, bear an interest at the rate of 12% per annum,
      and
      are convertible into shares of Common Stock of the Company at $0.25 per
      share.




As
      part
      of the offering, the Company issued warrants to purchase 3,333,333 shares of
      Common Stock at $0.30 per share.




Note
      16  RESTATEMENT




On
      December 11, 2007 the Company received a comment letter from the Securities
      & Exchange Commission. In responding to the comment letter, the Company
      recalculated the number of shares of Common Stock available for issuance and
      determined that as of September 30, 2007, the number of shares of Common Stock
      that would be required to be issued if all of the Company’s convertible
      securities, including debt securities, options and warrants, were converted
      or
      exercised would exceed the number of shares of authorized Common Stock. The
      difference between the original calculation and the recalculation is illustrated
      below.




AsOriginally
            
            AsCalculated
            
            RecalculatedAuthorized
                shares per Articles of Incorportion
            
            
            150,000,000
            
            
            150,000,000Outstanding
                shares
            
            
            (106,635,201
            )
            
            (106,635,201
            )Available
                shares
            
            
            43,364,799
            
            
            43,364,799Securities
                convertible or exercisable into common stock shares:2001
                Executive Officers Stock Option Plan
            
            
            7,343,032
            
            
            7,034,140Advisory
                Board Compensation
            
            
            
            
            
            11,520,0002004
                Stock Purchase Agreement
            
            
            
            
            
            1,463,336Warrants
                Related to 2004 Stock Purchase Agreement
            
            
            
            
            
            1,463,336Warrants
                Issued for Services
            
            
            
            
            
            1,010,000Beneficial
                Conversion Features
            
            
            32,009,087
            
            
            36,606,318Warrants
                Related to $1,025,000 of Subordinated Convertible
                Debentures
            
            
            2,159,088
            
            
            2,795,45441,511,207
            
            
            61,892,584




Adjustments
      to the original calculation included the following:




1.
            In
                2001, the Company adopted the 2001 Executive Officers Stock Option
                Plan.
                The plan has issued options to purchase 7,034,140 shares of Common
                Stock.
                The original calculation included options to purchase 7,343,032 shares
                of
                Common Stock, an overstatement of 308,892 shares of Common
                Stock.




2.
            On
                October 1, 2004, the Company formed an advisory board consisting
                of four
                members. In exchange for his services, each member was to receive
                $5,000
                monthly from October 1, 2004 to February 22, 2007 (for a total of
                $576,000
                to be paid to all members). Each member, in his sole discretion,
                was
                entitled to convert some or all of the cash amount owed to him into
                shares
                of Common Stock at the rate of $0.05 per share. If all of the members
                of
                the advisory board converted the total amount of cash compensation
                due to
                them into shares of Common Stock, the Company would be required to
                issue
                11,520,000 shares. The accrued expense convertible into shares of
                Common
                Stock was not included in the original
                calculation.


F-22


3.
            Under
                the terms of a 2004 Stock Purchase Agreement, the Company was to
                issue
                1,463,336 shares of Common Stock to certain investors that had previously
                remitted funds to the Company from February 9, 2004 to August 25,
                2004.
                The shares were not included in the original
                calculation.




4.
            Under
                the terms of the 2004 Stock Purchase Agreement, the Company issued
                warrants to purchase 1,463,336 shares of Common Stock to these investors
                at an exercise price of $0.03 per share. The warrants were not included
                in
                the original calculation.




5.
            As
                of September 30, 2007, the Company had Convertible Notes outstanding
                totaling $1,861,000 that included embedded beneficial conversion
                features
                that allowed for the conversion of the notes into shares of Common
                Stock
                at rates between $0.01 and $0.22, and matured between June 2008 and
                December 2008. The Convertible Notes accrue interest at rates between
                8%
                and 10%, and any accrued but unpaid interest is also convertible
                into
                shares of Common Stock. The original calculation of the beneficial
                conversion feature did not include accrued interest of $209,843 that
                could
                be converted into 4,597,231 shares of Common Stock at
                maturity.




6.
            On
                July 18, 2007 the Company completed an offering of $1,025,000 in
                principal
                amount of Subordinated Convertible Debentures (the “Convertible
                Debentures”) to a group of institutional and accredited investors. As part
                of this offering the Company issued warrants to purchase 2,795,454
                shares
                of Common Stock at a price of $0.50 per share. The number of warrant
                shares in the original calculation was
                2,159,088.




The
      Company analyzed the effect of the recalculation on the balance sheet and the
      statements of operations and cash flows as of September 30, 2007. The analysis
      and results were as follows:




2001
      Executive Officers Stock Option Plan




In
      October 2000, the Company amended its employment agreements with its executive
      officers. In conjunction with the amendments the Company adopted the 2001
      Executive Officers Stock Option Plan. The plan has reserved 7,576,680 shares
      of
      Common Stock and has issued options for the purchase of 7,034,140 shares of
      Common Stock. The options expire 5 years from the date of issuance.




*Balance
      Sheet*




On
      the
      grant date, the Company applied Financial Accounting Standard Board (SFAS)
      Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* paragraph 6 to determine if the options were within the scope and definition
      of
      a derivative. The options: had one or more underlings and one or more notional
      amounts, required no initial investment, and required or permitted net
      settlement. Therefore, the options were determined to be derivatives. In order
      to determine how to classify the options, the Company followed the guidance
      of
      paragraphs 7 and 8 of Emerging Issues Task Force (EITF) 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* ,
      which
      states that contracts ** that
      require settlement in shares are equity instruments .
      In
      order to determine the value of the options, the Company applied EITF 00-19,
      paragraph 9, which states that contracts that require a company to deliver
      shares as part of a physical settlement or net-share settlement should be
      initially measured at fair value. In accordance with EITF 00-19, the options
      were recorded in additional paid-in capital at fair value on the date of
      issuance.




The
      Company began the analysis for the restatement by following the guidance of
      SFAS
      133 ,
      paragraph 6 to ascertain if the
      options issued remained derivatives as of September 30, 2007. All of the
      criteria in the original analysis were met, and the options issued were
      determined to be within the scope and definition of a derivative. The Company
      next followed the guidance of EITF 00-19, paragraph 19, which states that if
      a
      company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




In
      accordance with EITF 00-19, the options were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liabilities on the balance sheet,
      at
      the fair value of $2,271,879 using the Black Sholes model with the following
      assumptions: risk free rate of return of 5.02%; volatility of 219.89%; dividend
      yield of 0%; and an expected term of 3.67 years.




The
      Company followed the guidance of EITF 00-19, paragraph 9, which states that
      all
      contracts classified as liabilities should be measured at fair value at each
      balance sheet date, with changes in fair value reported in earnings and
      disclosed in the financial statements as long as the contracts remain classified
      as liabilities.




The
      fair
      value of the options was $1,926,914 as of September 30, 2007, calculated using
      the Black Sholes model with the following assumptions: risk free rate of return
      of 4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term
      of
      3.5 years.


F-23


The
      decrease in the fair value of the options was recorded by decreasing warrant
      liability on the balance sheet by $344,965.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company applied EITF 00-19, paragraph 9, which states
      that subsequent changes in fair value of contracts should not be recognized
      as
      long as the contracts continue to be classified as equity. Therefore, changes
      in
      the fair value of the options prior to the reclassification were not recorded.
      Subsequent to reclassifying the contracts as liabilities, the Company again
      followed the guidance of EITF 00-19, paragraph 9, which requires all contracts
      classified as liabilities to be measured at fair value, with changes in fair
      value reported in earnings as long as the contracts remain classified as
      liabilities.




From
      July
      17 to September 30, 2007, the fair value of the options decreased by $344,965.
      This amount is included in decrease in warrant liability in the other income
      (expense) section of the statement of operations.




*Statement
      of Cash Flows*




The
      change in the statement of cash flows was the result of the decrease of $344,965
      in the fair value the options.




The
      reclassification of the options from additional paid-in capital to warrant
      liabilities was a non-cash transaction.




Advisory
      Board Compensation




On
      October 1, 2004, the Company formed an advisory board consisting of four
      members. In exchange for his services, each member was to receive $5,000 monthly
      from October 1, 2004 to February 22, 2007, for a total of $576,000 to be paid
      to
      all members. Each member, in his sole discretion, was entitled to convert some
      or all of the cash amount owed to him into shares of Common Stock at a rate
      of
      $0.05 per share. If all of the members of the advisory board converted the
      total
      amount of cash compensation due to them into shares of Common Stock, the Company
      would be required to issue 11,520,000 shares. The Company determined that:
      the
      accrued expense, embedded beneficial conversion features, embedded beneficial
      conversion feature discount, and related amortization expense were not recorded
      at the date of issuance or prior to the restatement. No payments have been
      made
      to any advisory board members and there has been no conversion by any advisory
      board members of the accrued liability into shares of Common Stock.




*Balance
      Sheet*




The
      Company began the analysis for the restatement by applying paragraph 6 of SFAS
      133 to
      ascertain if the
      embedded beneficial conversion features were derivatives at the date of
      issuance. The embedded beneficial conversion features had one or more underlings
      and one or more notional amounts, required no initial investment, and required
      or permitted net settlement. Therefore, the embedded beneficial conversion
      features were determined to be within the scope and definition of a derivative
      at the date of issuance. Next, the Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be bifurcated from the accrued expense. The Company determined that: the
      economic characteristics of the embedded beneficial conversion features are
      not
      clearly and closely related to the accrued expense, the embedded beneficial
      conversion feature and accrued expense are not remeasured at fair value at
      each
      balance sheet date and a separate contract with the same terms would be a
      derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the embedded
      beneficial conversion features were bifurcated from the accrued expense to
      determine the classification and valuation. To determine the classification,
      the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8 which states
      that contracts ** that
      require settlement in shares are equity instruments . To
      determine the value, the Company followed the guidance of EITF 00-19, paragraph
      9, which
      states that contracts that require the company to deliver shares as part of
      a
      physical settlement or net-share settlement should be initially measured at
      fair
      value . The
      Company next followed the guidance of EITF 00-19, paragraph 19, which states
      that if a company is required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company,
      and the contract is required to be c lassified
      as a liability. The Company next applied EITF 00-19, paragraph 10, which states
      that if classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.




The
      fair
      value of the monthly embedded beneficial conversion features was calculated
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 2.28% to 5.21%; volatility
      of
      144.19% to 270.5%; dividend yield of 0% and an expected term of 5 years. The
      sum
      of the monthly accrued expenses and embedded beneficial conversion features
      from
      October 1, 2004 to September 30, 2006, was $480,000 and $210,149, respectively,
      and considered earned prior to October 1, 2006. Therefore, as of September
      30,
      2006, $480,000 was recorded to accrued expenses and deficit accumulated during
      development stage, $210,149 was recorded to beneficial conversion features
      liability and netted against accrued expenses as a discount, and $49,192 was
      recorded to accrued expenses and deficit accumulated during development stage
      for the amortization of the beneficial conversion features discount.


F-24


The
      fair
      value of the monthly embedded beneficial conversion features was $480,000 as
      of
      September 30, 2006, which the Company calculated using the Black Sholes model
      with the following assumptions: risk free rate of return of 4.91%; volatility
      of
      270.5%; dividend yield of 0%; and an expected term of 3.08 to 5 years. The
      increase in the fair value of the embedded beneficial conversion feature was
      recorded by increasing beneficial conversion feature liability and deficit
      accumulated during development stage on the balance sheet by
      $269,851.




During
      the year ended September 30, 2007, the Company incurred and recorded to accrued
      expenses $96,000 for advisory board compensation until February 22, 2007, the
      date the Company’s Board of Directors terminated the compensation. The
      fair
      value of the monthly embedded beneficial conversion features was calculated
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.94% to 5.09%; volatility
      of
      268.59% to 277.2%; dividend yield of 0% and an expected term of 5 years. The
      sum
      of the embedded beneficial conversion features from October 1, 2006 to February
      22, 2007 was $91,956 and was recorded to beneficial conversion features
      liability and netted against accrued expenses. As of September 30, 2007, total
      amortization for the beneficial conversion features discount was $106,546
      ($49,192 from October 1, 2004 to September 30, 2006, and $57,354 for the year
      ended September 30, 2007), and was recorded to accrued expenses.




The
      fair
      value of the monthly embedded beneficial conversion features was $576,000 as
      of
      September 30, 2007, which the Company calculated using the Black Sholes model
      with the following assumptions: risk free rate of return of 4.05%; volatility
      of
      126.94%; dividend yield of 0%; and an expected term of 2.08 to 4.42 years.




The
      increase in the fair value of the embedded beneficial conversion feature was
      recorded by increasing beneficial conversion features liability on the balance
      sheet by $4,044.




*Statement
      of Operations*




The
      Company followed the guidance of EITF 00-19, paragraph 9, which requires all
      contracts classified as liabilities to be measured at fair value, with changes
      in fair value reported in earnings as long as the contracts remain classified
      as
      liabilities.




The
      increase in the fair value of the beneficial conversion features was $4,044
      and
      included in increase in beneficial conversion feature in the other income
      (expense) section of the statement of operations.




The
      amortization expense for the beneficial conversion feature discount was $57,354
      and included in general and administrative expenses in the operating expenses
      section of the statement of operations for the year ended September 30,
      2007.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the advisory board
      compensation accrued expense of $480,000 and $96,000, beneficial conversion
      features liability of $576,000 and unamortized beneficial conversion features
      discount of $380,441 on the balance sheet, and change in fair value of the
      liability of $269,851 and $4,044 and amortization of the beneficial conversion
      features discount of $49,193 on the statement of operations.




Warrants
      Related to 2004 Stock Purchase Agreement




Under
      the
      terms of a 2004 Stock Purchase Agreement, the Company issued warrants to
      purchase 1,463,336 shares of Common Stock at an exercise price of $0.03 which
      expired between February 9, 2007 and August 25, 2007. The Company determined
      that the warrants and related expense were not recorded at the date of issuance
      or prior to the restatement and there has been no exercise of the warrants
      into
      shares of Common Stock.




*Balance
      Sheet*




The
      Company followed the guidance of SFAS 133 ,
      paragraph 6, to
      determine if the warrants were within the scope and definition of a derivative
      at the date of issuance. The warrants had one or more underlings and one or
      more
      notional amounts, required no initial investment and required or permitted
      net
      settlement. Therefore, the warrants were determined to be derivatives at the
      date of issuance. In order to determine how to classify the warrants, the
      Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
      that contracts ** which
      require settlement in shares are equity instruments. In order
      to determine the value of the options, the Company followed the guidance of
      EITF
      00-19, paragraph 9, which states that contracts which require the company to
      deliver shares as part of a physical settlement or net-share settlement should
      be initially measured at fair value.




The
      fair
      value of the warrants was $24,367 at the date of issuance, which the Company
      calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 1.21% to 2.14%; volatility
      of
      141.91% to 170.27%; dividend yield of 0% and an expected term of 3 years. The
      warrants were considered an expense prior to October 1, 2006, therefore, $24,367
      was recorded to additional paid-in capital and deficit accumulated during
      development stage.




The
      Company then applied EITF 00-19, paragraph 19, which states that if a company
      is
      required to obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company
      and the contract is required to be c lassified
      as a liability. The Company applied EITF 00-19, paragraph 10, which states
      that
      if a classification changes as the result of an event, the contract should
      be
      reclassified as of the date of the event at fair value. The event responsible
      for the change in classification was the issuance of the Convertible Debentures
      on July 17, 2007.


F-25


In
      accordance with EITF 00-19, the warrants were reclassified as of July 17, 2007
      from additional paid-in capital to warrant liabilities on the balance sheet at
      the fair value of $70,029, which the Company calculated using the Black Sholes
      model with the following assumptions: risk free rate of return of 5.02%;
      volatility of 219.89%; dividend yield of 0%; and an expected term of .08 years.




The
      Company then applied EITF 00-19, paragraph 9, which states that all contracts
      classified as liabilities are to be measured at fair value at each balance
      sheet
      date, with changes in fair value reported in earnings and disclosed in the
      financial statements as long as the contracts remain classified as liabilities.




The
      Company determined that the fair value of the warrants was $0 as of September
      30, 2007, due to their expiration.




The
      $70,029 decrease in the fair value of the warrants was recorded to warrant
      liability.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company followed EITF 00-19, paragraph 9, which states
      that subsequent changes in the fair value of contracts should not be recognized
      as long as the contracts continue to be classified as equity. Therefore, changes
      in the fair value of the warrants prior to the reclassification were not
      recorded. Subsequent to reclassifying the warrants as liabilities, the Company
      again followed EITF 00-19, paragraph 9, which requires all contracts classified
      as liabilities to be measured at fair value, with changes in fair value reported
      in earnings as long as the contracts remain classified as liabilities.




The
      change in the fair value of the warrants from July 17, 2007 to September 30,
      2007 was $70,029 and is included in decrease in warrant liability in the other
      income (expense) section of the statement of operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the change in fair value
      of
      the warrants of $70,029 on the statement of operations.




The
      reclassification of the warrants from additional paid-in capital to warrant
      liability was a non-cash transaction.




Beneficial
      Conversion Features




As
      of
      September 30, 2007, the Company had Convertible Notes outstanding totaling
      $1,861,000 that were issued between October 17, 2006 and July 17, 2007. The
      convertible notes included an embedded beneficial conversion feature that
      allowed the holders of the convertible notes to convert their notes into Common
      Stock shares at rates between $0.01 and $0.22. The convertible notes mature
      between June 17, 2008 and December 31, 2008. The convertible notes accrue
      interest at rates between 8% and 10%, and any accrued but unpaid interest is
      also convertible by the holder of the convertible notes into shares of Common
      Stock at the same rate.




*Balance
      Sheet*




On
      the
      date of issuance, the Company applied SFAS 133 *,* paragraph 6 to determine if the embedded beneficial conversion features were
      within the scope and definition of a derivative. The embedded beneficial
      conversion features: had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the embedded beneficial conversion features were
      determined to be derivatives. Next, the Company followed the guidance of SFAS
      133, paragraph 12 to determine if the embedded beneficial conversion features
      should be bifurcated from the convertible notes. The Company determined that:
      the economic characteristics of the embedded beneficial conversion features
      are
      not clearly and closely related to the convertible notes; the embedded
      beneficial conversion feature and convertible notes are not remeasured at fair
      value at each balance sheet date; and a separate contract with the same terms
      would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
      embedded beneficial conversion features were bifurcated from the convertible
      notes to determine the classification and valuation. The Company followed the
      guidance of paragraphs 7 and 8 of EITF 00-19, which state that
      contracts ** that
      require settlement in shares are to be classified as equity
      instruments .
      The
      Company then applied paragraph 9 of EITF 00-19 to determine the value of the
      embedded beneficial conversion features. Paragraph 9 of EITF 00-19 states that
      contracts which require the company to deliver shares as part of a physical
      settlement or net-share settlement should be initially measured at fair value.
      Based on the analysis at the date of issuance, the embedded beneficial
      conversion features were recorded in additional paid-in capital at fair value
      on
      the date of issuance.


F-26


The
      fair
      value of the embedded beneficial conversion features was $1,021,569 computed
      using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 6%; volatility of 122.67%
      to
      195.97%; dividend yield of 0% and an expected term of 1 to 1.5 years. The
      embedded beneficial conversion features discount was $706,186 as of September
      30, 2007, net of amortization of $315,383, prior to the restatement.




The
      Company began the analysis for the restatement by applying SFAS 133 ,
      paragraph 6, to ascertain if the
      embedded beneficial conversion features remained derivatives as of September
      30,
      2007. All of the criteria in the original analysis were met, and the embedded
      beneficial conversion features issued were determined to be within the scope
      and
      definition of a derivative. The Company followed the guidance of SFAS 133,
      paragraph 12, to determine if the embedded beneficial conversion features should
      be bifurcated from the convertible notes. All of the criteria in the original
      analysis were met, and the embedded beneficial conversion features were
      bifurcated from the convertible notes. In order to determine the classification
      of the embedded conversion features, the Company applied paragraphs 7 and 8
      of
      EITF 00-19. Paragraph 7 states that contracts which require net-cash
      settlement are liabilities, and paragraph 8 states that contracts which give
      the
      counterparty (holders of the convertible notes) a choice of net-cash settlement
      or settlement in shares are liabilities. Therefore the embedded conversion
      features were determined to be liabilities. The change in the determination
      of
      the classification from equity to a liability was based on the contractual
      right
      granted to the holders of the convertible notes to convert the notes to shares
      of Common Stock. Therefore, share settlement is not controlled by the Company.
      In order to determine the value of the embedded conversion features, the Company
      followed the guidance of EITF 00-19, paragraph 9, which states that all
      contracts classified as liabilities are to be measured at fair value at each
      balance sheet date, with changes in fair value reported in earnings and
      disclosed in the financial statements as long as the contracts remain classified
      as liabilities.




The
      fair
      value of the embedded beneficial conversion features was recalculated and
      determined to be $1,430,812 at the date of issuance using the Black Sholes
      model with
      the
      following assumptions: risk free rate of return of 2.02% to 5.09%; volatility
      of
      108.5% to 274.86%; dividend yield of 0% and an expected term of 1 to 1.5 years.
      Based on the recalculation, the embedded beneficial conversion features discount
      was $779,300 at September 30, 2007, net of amortization of $651,511, subsequent
      to the restatement.




The
      increase in the fair value of $409,242 ($1,430,811-$1,021,569) of the embedded
      beneficial conversion features was recorded to the beneficial conversion
      features and netted against convertible notes on the balance sheet. The increase
      in the amortization of the beneficial conversion features discount of $336,129
      ($651,511-$315,382) was recorded to convertible notes.




The
      fair
      value of the embedded beneficial conversion features was $1,430,812 as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0% and an expected term of .58 to 1.25 years.




*Statement
      of Operations*




Prior
      to
      the reclassification, the Company applied EITF 00-19, paragraph 9 which states
      that subsequent changes in fair value of contracts are not to be recognized
      as
      long as the contracts continue to be classified as equity. Therefore, the
      Company did not record changes in the fair value of the beneficial conversion
      features. Subsequent to reclassifying the beneficial conversion features, the
      Company again followed the guidance of paragraph 9 of EITF 00-19, which requires
      all contracts classified as liabilities to be measured at fair value, with
      changes in fair value reported in earnings as long as the contracts remain
      classified as liabilities. There was no change in the fair value of the
      beneficial conversion features from the date of issuance and September 30,
      2007.




The
      increase in the amortization of the beneficial conversion features discount
      of
      $336,129 was included in interest expense in the other income (expense) section
      of the statement of operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the change in the amortization
      of the beneficial conversion features discounts of $336,129 on the statement
      of
      operations.




Warrants
      related to Convertible Debentures




On
      July
      17, 2007 the Company completed an offering of $1,025,000 of Convertible
      Debentures to a group of institutional and accredited investors which included
      warrants to purchase 2,795,454 shares of Common Stock (2,329,546 shares of
      Common Stock to holders of the Convertible Debentures and 465,908 shares of
      Common Stock as a placement fee) at an exercise price of $0.50 per share.




*Balance
      Sheet*




On
      the
      grant date, the Company applied SFAS 133 *,* paragraph 6 to determine if the warrants were within the scope and definition
      of
      a derivative. The warrants: had one or more underlings and one or more notional
      amounts, required no initial investment and required or permitted net
      settlement. Therefore, the warrants were determined to be derivatives. In order
      to determine the classification of the warrants, the Company followed the
      guidance of paragraphs 7 and 8 of EITF 00-19, which state that
      contracts ** which
      require settlement in shares are equity instruments .
      In
      order to determine the value of the warrants, the Company followed the guidance
      of paragraph 9 of EITF 00-19, which states that contracts which require the
      company to deliver shares as part of a physical settlement or net-share
      settlement are to be initially measured at fair value. In accordance with EITF
      00-19, the warrants were recorded in additional paid-in capital at fair value
      on
      the date of issuance.


F-27


The
      fair
      value of the warrants was calculated as $340,583 ( $304,259
      attributable to the holders of the Convertible Debentures and $36,324
      attributable to the placement fee) at the
      date of issuance prior to the restatement using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 6%; volatility of 122.67%
      to
      195.97%; dividend yield of 0% and an expected term of 5 years.




The
      Company began the analysis for the restatement by applying SFAS 133 ,
      paragraph 6 to ascertain if the
      warrants issued remained derivatives as of September 30, 2007. All of the
      criteria in the original analysis were met, and the warrants issued were
      determined to be within the scope and definition of a derivative. In order
      to
      determine the classification of the warrants, the Company followed the guidance
      of paragraph 19 of EITF 00-19, which states that if a company is required to
      obtain shareholder
      approval to increase the company’s authorized shares in order to net-share or
      physically settle a contract, share settlement is not controlled by the company
      and the contract is required to be c lassified
      as a liability. In order to determine the value of the warrants, the Company
      followed the guidance of paragraph 9 of EITF
      00-19, which states that all contracts classified as liabilities are to be
      measured at fair value at each balance sheet date, with changes in fair value
      reported in earnings and disclosed in the financial statements as long as the
      contracts remain classified as liabilities.




Based
      on
      the change in the determination of the classification of the warrants, $340,583
      was reclassified from additional paid-in capital to warrant
      liabilities.




The
      fair
      value of the warrants was recalculated and was determined to be $554,249
      ($430,189 attributable to the holders of the Convertible Debentures and $124,060
      attributable to the placement fee) at the date of issuance calculated using
      the
      Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.96% to 5.02%; volatility
      of
      219.89% to 226.04%; dividend yield of 0% and an expected term of 5 years.




The
      increase in the fair value of the warrants attributable to the holders of the
      Convertible Debentures was $125,930 ($430,189-$304,259) and was recorded to
      warrant liabilities and netted against convertible notes. The increase in the
      fair value of the warrants attributable to the placement fee was $87,736
      ($124,060-$36,324) and was recorded in warrant liability and general and
      administrative expenses.




Based
      on
      the increase in the warrant discount, the amortization of warrant discount
      increased by $55,179, and was recorded to convertible notes.




The
      fair
      value of the warrants was determined to be $499,932 ($379,672 attributable to
      the
      holders of the Convertible Debentures and $120,260 attributable to the placement
      fee) as of
      September 30, 2007, which was calculated using the Black Sholes model with
      the
      following assumptions: risk free rate of return of 4.05%; volatility of 126.94%;
      dividend yield of 0%; and an expected term of 4.67 to 4.75 years.




The
      decrease in the fair value of the warrants was recorded by decreasing warrant
      liabilities on the balance sheet by $54,317 ($50,518 attributable
      to the holders of the Convertible Debentures and $3,799 attributable to the
      placement fee) .




*Statement
      of Operations*




The
      Company followed the guidance of EITF 00-19, paragraph 9, which requires all
      contracts classified as liabilities to be measured at fair value, with changes
      in fair value reported in earnings as long as the contracts remain classified
      as
      liabilities. The change in the fair value of the warrants was $54,317 for the
      year ended September 30, 2007, and recorded in decrease in warrants in the
      other
      income (expense) section of the statement of operations.




The
      increase in the amortization of the warrant discount of $124,961 is included
      in
      interest expense in the other income (expense) section of the statement of
      operations.




*Statement
      of Cash Flows*




Changes
      in the statement of cash flows were the result of the decrease in the fair
      value
      of the warrant liability of $54,317, increase in the amortization of the warrant
      discount of $55,179 on the balance sheet, and the change in fair value of the
      warrants at the date of issuance of $87,736 on the statement of
      operations.




In
      addition to the analysis of the securities exercisable or convertible into
      Common Stock, the Company analyzed the classification of general and
      administrative expenses for the year ended September 30, 2007, and determined
      that research and development costs of $526,466, a legal settlement of $89,654
      and income tax expense of $2,592 were incorrectly classified as general and
      administrative expenses. See below for the specific line items affected in
      the
      statement of operations by the reclassification.


F-28


Table
      1
      shows the effect of each of the changes discussed above on the Company’s balance
      sheet, statement of operation, statement of equity, and statement of cash flows
      for the year ended September 30, 2007.




F-29




Table
      1 -
      2007




Beneficial
            
            WarrantsConversion
            
            Related toFeatures
            
            $1,025,000 of2001
            
            
            
            Warrants
            
            and
            
            ConvertibleExecutive
            
            
            
            Related to
            
            Beneficial
            
            Bridge NotesAs
            
            Officers
            
            Advisory
            
            2004 Stock
            
            Conversion
            
            andPreviously
            
            Option
            
            Board
            
            Purchase
            
            Features
            
            Warrant
            
            
            
            AsStated
            
            Plan
            
            Compensation
            
            Agreement
            
            Discount
            
            Discount
            
            Reclassifications
            
            Restated**Balance Sheet**Accrued
                expenses
            
            $
            1,687,673
            
            
            
            
            $
            380,441
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,068,114Convertible
                Notes, net
            
            
            920,337
            
            
            
            
            
            
            
            
            
            
            
            (73,114
            )
            
            (70,751
            )
            
            
            
            
            776,472Warrant
                liability
            
            
            -
            
            
            1,926,914
            
            
            
            
            
            
            
            
            
            
            
            499,932
            
            
            
            
            
            2,426,846Beneficial
                conversionfeature
                liability
            
            
            
            
            
            
            
            
            576,000
            
            
            
            
            
            1,430,812
            
            
            
            
            
            
            
            
            2,006,812Additional
                paid-in capital
            
            
            14,712,527
            
            
            (2,271,879
            )
            
            (269,851
            )
            
            (45,663
            )
            
            (1,021,569
            )
            
            (340,583
            )
            
            
            
            
            10,762,982Deficit
                accumulatedduring
                development stage
            
            
            (17,300,147
            )
            
            344,965
            
            
            (686,590
            )
            
            45,663
            
            
            (336,129
            )
            
            (88,598
            )
            
            
            
            
            (18,020,836
            )**Statement
                of Operations (for the****year
                ended September 30, 2007)**General
                and administrative
            
            $
            1,423,347
            
            
            
            
            $
            153,354
            
            
            
            
            
            
            
            $
            87,736
            
            $
            (618,712
            )
            $
            1,045,725Research
                and development
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            526,466
            
            
            526,466Interest
                expense
            
            
            (550,935
            )
            
            
            
            
            
            
            
            
            
            
            (336,129
            )
            
            (55,179
            )
            
            
            
            
            (942,243
            )Decrease
                inwarrant
                liability
            
            
            -
            
            
            344,965
            
            
            
            
            
            70,029
            
            
            
            
            
            54,317
            
            
            
            
            
            469,311Increase
                inbeneficial
                conversion feature
            
            
            
            
            
            
            
            
            (4,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,044
            )Legal
                settlement
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (89,654
            )
            
            (89,654
            )Income
                tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,592
            
            
            2,592**Statement
                of Operations (since****inception)**General
                and administrative
            
            $
            13,585,568
            
            
            
            
            $
            250,546
            
            $
            24,367
            
            
            
            
            $
            87,736
            
            $
            (618,712
            )
            $
            13,329,505Research
                and development
            
            
            1,449,474
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            526,466
            
            
            1,975,940Interest
                expense
            
            
            (785,621
            )
            
            
            
            
            
            
            
            
            
            
            (336,129
            )
            
            (55,179
            )
            
            
            
            
            (1,176,929
            )Decrease
                inwarrant
                liability
            
            
            -
            
            
            344,965
            
            
            
            
            
            70,029
            
            
            
            
            
            54,317
            
            
            
            
            
            469,311Increase
                inbeneficial
                conversion feature
            
            
            
            
            
            
            
            
            (4,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,044
            )Legal
                settlement
            
            
            434,603
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (89,654
            )
            
            344,949Income
                tax expense
            
            
            9,900
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,592
            
            
            12,492**Statement
                of Cash Flows (for the****year
                ended September 30, 2007)**Net
                loss
            
            $
            (2,001,095
            )
            $
            344,965
            
            $
            (157,398
            )
            $
            70,029
            
            $
            (336,129
            )
            $
            (88,598
            )
            
            
            
            $
            (2,168,226
            )Other
            
            
            
            
            
            
            
            
            (799,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (799,044
            )Stock
                based compensation expense-consultant
            
            
            84,292
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            124,697
            
            
            
            
            
            208,989Decrease
                in warrant liability
            
            
            -
            
            
            (344,965
            )
            
            
            
            
            (70,029
            )
            
            
            
            
            (54,317
            )
            
            
            
            
            (469,311
            )Increase
                in beneficial conversionfeature
                liaiblity
            
            
            
            
            
            
            
            
            4,044
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,044Accrued
                expenses
            
            
            566,278
            
            
            
            
            
            895,044
            
            
            
            
            
            
            
            
            
            
            
            (15,376
            )
            
            1,445,946Accrual
                of liquidating damages
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,375
            
            
            15,375





F-30




Beneficial
            
            WarrantsConversion
            
            Related to2001
            
            
            
            
            
            Features
            
            $1,025,000 ofExecutive
            
            
            
            Warrants
            
            and
            
            ConvertibleOfficers
            
            
            
            Related to
            
            Beneficial
            
            Bridge NotesAs
            
            Stock
            
            Advisory
            
            2004 Stock
            
            Conversion
            
            andPreviously
            
            Option
            
            Board
            
            Purchase
            
            Features
            
            Warrant
            
            
            
            AsStated
            
            Plan
            
            Compensation
            
            Agreement
            
            Discount
            
            Discount
            
            Reclassifications
            
            Restated**Statement
                of Cash Flows (since****inception)**Net
                loss
            
            $
            (17,030,296
            )
            $
            344,965
            
            $
            (956,441
            )
            $
            45,663
            
            $
            (336,129
            )
            $
            (88,598
            )
            
            
            
            $
            (18,020,836
            )Other
            
            
            
            
            
            
            
            
            (799,044
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (799,044
            )Stock
                based compensation expense-consultant
            
            
            2,840,172
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            124,697
            
            
            
            
            
            2,964,869Decrease
                in warrant liability
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -Increase
                in beneficial conversionfeature
                liaiblity
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Amoritzation
                of consulting fees
            
            
            13,075
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,075
            )
            
            -Increase
                in warranty liability
            
            
            -
            
            
            (344,965
            )
            
            -
            
            
            (70,029
            )
            
            
            
            
            (54,317
            )
            
            
            
            
            (469,311
            )Decrease
                in other assets
            
            
            40,370
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (40,370
            )
            
            -Increase
                in advances to employees
            
            
            (512,077
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            512,077
            
            
            -Decrease
                in other receivables
            
            
            3,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,000
            )
            
            -Increase
                in deposits
            
            
            (104,600
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            104,600
            
            
            -Other
                current assets
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,350
            )
            
            (1,350
            )Other
                assets
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (104,600
            )
            
            (104,600
            )Accrued
                expenses
            
            
            2,021,239
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,427
            )
            
            2,006,812Accrual
                of liquidating damages
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,375
            
            
            15,375Proceeds
                from issuance of notes
            
            
            2,318,433
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (457,433
            )
            
            1,861,000Proceeds
                from notes payable, related party
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            457,433
            
            
            457,433Increase
                in fair value of beneficialconversion
                features discountat
                date of issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,044
            
            
            
            
            
            
            
            
            4,044Issuance
                of common stock for cash
            
            
            7,376,094
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            7,386,094Receipt
                of cash for stock to be issued
            
            
            53,900
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,000
            )
            
            43,900--


Table
      2 -
      2006




Beneficial
            
            WarrantsConversion
            
            Related to2001
            
            
            
            
            
            Features
            
            $1,025,000 ofExecutive
            
            
            
            Warrants
            
            and
            
            ConvertibleOfficers
            
            
            
            Related to
            
            Beneficial
            
            Bridge NotesAs
            
            Stock
            
            Advisory
            
            2004 Stock
            
            Conversion
            
            andPreviously
            
            Option
            
            Board
            
            Purchase
            
            Features
            
            Warrant
            
            
            
            AsStated
            
            Plan
            
            Compensation
            
            Agreement
            
            Discount
            
            Discount
            
            Reclassifications
            
            Restated**Statement of Operations (for the****year
                ended September 30, 2006)**General
                and administrative
            
            $
            639,259
            
            
            
            
            $
            274,432
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            913,691**Statement
                of Cash Flows (for the****year
                ended September 30, 2006)**Net
                loss
            
            $
            (774,887
            )
            
            
            
            $
            (274,432
            )
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (1,049,319
            )Accrued
                expenses
            
            
            554,903
            
            
            
            
            
            274,432
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            829,335-


F-31




**ITEM
      8****CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




None




**ITEM
      8A****CONTROLS
      AND PROCEDURES**




Regulations
      under the Securities Exchange Act of 1934 require public companies to maintain
      “disclosure controls and procedures,” which are defined to mean a company’s
      controls and other procedures that are designed to ensure that information
      required to be disclosed in the reports that it files or submits under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
      within the time periods specified in the Commission’s rules and
      forms.




We
      conducted an evaluation, with the participation of our Chief Executive Officer
      and Chief Financial Officer, of the effectiveness of the design and operation
      of
      our disclosure controls and procedures, as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
      Act, as of September 30, 2007, to ensure that information required to be
      disclosed by us in the reports filed or submitted by us under the Exchange
      Act
      is recorded, processed, summarized and reported within the time periods
      specified in the Securities Exchange Commission’s rules and forms, including to
      ensure that information required to be disclosed by us in the reports filed
      or
      submitted by us under the Exchange Act is accumulated and communicated to our
      management, including our principal executive and principal financial officers,
      or persons performing similar functions, as appropriate to allow timely
      decisions regarding required disclosure. Based on that evaluation, our Chief
      Executive Officer and Chief Financial Officer have concluded that as of
      September 30, 2007, our disclosure controls and procedures were not effective
      at
      the reasonable assurance level due to the material weaknesses described
      below.




In
      light
      of the material weaknesses described below, we performed additional analysis
      and
      other post-closing procedures to ensure our financial statements were prepared
      in accordance with generally accepted accounting principles. We have determined
      that our financial statements for the annual period ended September 30, 2007
      could no longer be relied upon and, as described in Note 14 to the restated
      financial statements have restated our financial position as of September 30,
      2007 and results of operations, changes in stockholders’ equity and cash flows
      for the year ended September 30, 2007 and the cumulative period from October
      3,
      1994 (inception) to September 30, 2007. Accordingly, we believe that the
      restated financial statements, included in this report, fairly present, in
      all
      material respects, our financial condition, results of operations and cash
      flows
      for the periods presented.




A
      material weakness is a control deficiency (within the meaning of the Public
      Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
      combination of control deficiencies, that results in more than a remote
      likelihood that a material misstatement of the annual or interim financial
      statements will not be prevented or detected. Management has identified the
      following three material weaknesses which have caused management to conclude
      that, as of September 30, 2007, our disclosure controls and procedures were
      not
      effective at the reasonable assurance level:




1.  We
      do not
      have written documentation of our internal control policies and procedures.
      Written documentation of key internal controls over financial reporting is
      a
      requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable
      to
      us for the year ending December 31, 2009. Management evaluated the impact of
      our
      failure to have written documentation of our internal controls and procedures
      on
      our assessment of our disclosure controls and procedures and has concluded
      that
      the control deficiency that resulted represented a material
      weakness.




2.  We
      do not
      have sufficient segregation of duties within accounting functions, which is
      a
      basic internal control. Due to our size and nature, segregation of all
      conflicting duties may not always be possible and may not be economically
      feasible. However, to the extent possible, the initiation of transactions,
      the
      custody of assets and the recording of transactions should be performed by
      separate individuals. Management evaluated the impact of our failure to have
      segregation of duties on our assessment of our disclosure controls and
      procedures and has concluded that the control deficiency that resulted
      represented a material weakness.




3.  We
      have
      had, and continue to have, a significant number of audit adjustments. Audit
      adjustments are the result of a failure of the internal controls to prevent
      or
      detect misstatements of accounting information. The failure could be due to
      inadequate design of the internal controls or to a misapplication or override
      of
      controls. Management evaluated the impact of our significant number of audit
      adjustments and has concluded that the control deficiency that resulted
      represented a material weakness.




To
      address these material weaknesses, management performed additional analyses
      and
      other procedures to ensure that the financial statements included herein fairly
      present, in all material respects, our financial position, results of operations
      and cash flows for the periods presented.


F-32


**Remediation
      of Material Weaknesses**




We
      have
      attempted to remediate the material weaknesses in our disclosure controls and
      procedures identified above by working with our independent registered public
      accounting firm and refining our internal procedures. In addition, we hired
      two
      consultants with significant experience in financial accounting and reporting,
      as well as redesigning poorly conceived accounting systems. The consultants
      are
      in the process of reviewing our internal controls and financial accounting
      and
      reporting and the restatement of the financial statements is a result of these
      efforts. To date, we have not been successful in reducing the number of audit
      adjustments, but will continue our efforts in the coming fiscal
      year.




**Changes
      in Internal Control over Financial Reporting**




We
      are
      working diligently to restructure the Company’s internal control over financial
      reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
      Exchange Act) and are making significant improvements in this
      area.


F-33


**ITEM
      8B****OTHER
      INFORMATION**




None




**PART
      III**




**ITEM
      9****DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.**




Set
      forth
      below is certain information regarding our directors, executive officers and
      key
      personnel.




Name
            Age
            Position
            Director
                SinceDr.
                John H. Foster
            60
            Chairman
                of the Board of Directors
            2007Richard
                H. Papalian
            52
            Chief
                Executive Officer and Director
            2007James
                J. Houtz
            69
            President
                and Director
            1998Robert
                E. McCray
            72
            Chief
                Financial Officer and Director
            1998Rodney
                Anderson
            81
            Director
            2001David
                Ross
            69
            Director
            2007Dr
                W. Richard Laton
            43
            Director
            2007Mark
                S. Maron
            51
            Special
                Advisor
            N/A




Dr.
      Foster has been a consultant to Sionix since early 2004, and has served as
      Chairman of the Board of Directors since 2007. He is a Professor at California
      State University, Fullerton where he has taught for over 15 years. Prior to
      teaching he was employed as a senior geologist for the Irvine Consulting Group
      and Schaefer Dixon Associates, where he supervised the environmental
      division.




Mr.
      Papalian became Chief Executive Officer in December 2007. He founded Papalian
      Capital Partners, Inc., a real estate investment and development firm, in
      January 2007 and has served as its CEO since then. Prior to founding Papalian
      Capital Partners, Mr. Papalian was Co-President and COO of JRK Asset Management
      Inc., a privately held owner and operator of hotels and multi-family housing
      complexes throughout the United States. Prior to joining JRK, Mr. Papalian
      was
      COO and co-founder of Waybid Technologies LLC, a business-to-business Internet
      multi-listing service that utilized dynamic pricing models to optimize pricing
      for its clients. Previously, from 1977 to 1994, Mr. Papalian was founder CEO
      of
      The Promotion Agency, Inc., a marketing consulting/sales promotion agency with
      international clients.




Mr.
      Houtz
      has been President and a director of the Company since March 1998.




Mr.
      McCray has been Chief Financial Officer and a director of the Company since
      July
      1998.




Mr.
      Anderson was President of R.J. Metal Products, Anaheim, California, a high
      technology research and development machine shop operation focused on commercial
      and military aircraft and aerospace projects, for more than 20 years. Sionix
      acquired RJ Metal Products in November of 2007. He has served on the Company's
      Board of Directors since 2001.




Mr.
      Ross
      has consulted with the Company since 2004, and has served on the Board of
      Directors since 2007. He is a principal of Ross/Katagiri and Associates, a
      management consulting practice, specializing in early stage technology-driven
      organizations. He is a board member and former chairman of the Orange County
      Taxpayers Association, a member of the Water Advisory Committee of Orange
      County, a former member of the Orange County Sanitation District Bio-solids
      Advisory Committee and sits on the boards of several Orange County charitable
      organizations. He is a graduate of the University of Colorado with a B. S.
      in
      Finance and brings over 40 years of widely diversified national and
      international business experience.




Dr.
      Laton
      has served on the Board of Directors since 2007. He brings over 15 years of
      water related experience, including consulting, sales and education. Dr. Laton
      is an Associate Professor of Hydrogeology at California State University,
      Fullerton. He has served as a director of the National Ground Water Association
      and has published, presented and taught water- related research throughout
      the
      world.




Mr.
      Maron
      was appointed as Special Advisor to the Board of Directors in December of 2007.
      He is a principal with Birchmont Capital Advisors, LLC, a real estate private
      equity firm founded in September 2005. Prior to joining Birchmont, Mr. Maron
      served as a Managing Director of investment banking in the Los Angeles office
      of
      Lehman Brothers, Inc. from 2000 to 2005. Previously, Mr. Maron was with Credit
      Suisse First Boston Corporation from 1983 to 2000 where he was responsible
      for
      managing the firm's western region investment banking effort and coverage of
      CSFB's financial institution clients in the western United States. Mr. Maron
      is
      a member of the Board of Directors of True Religion Apparel, Inc., a company
      whose securities are traded on Nasdaq.




Directors
      serve for one year and until their successors are duly elected and qualified.
      The Company has not established an executive committee of the Board of Directors
      or any committee that would serve similar functions such as an audit, incentive
      compensation or nominating committee.




SECTION
      16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE




Section
      16(a) of the Securities Exchange Act of 1934, as amended, and the rules
      thereunder require the Company’s officers and directors, and persons who own
      more than 10% of a registered class of the Company’s equity securities, to file
      reports of ownership and changes in ownership with the Securities and Exchange
      Commission and to furnish the Company with copies. Based solely on its review
      of
      the copies of the Section 16(a) forms received by it, or written representations
      from certain reporting persons, the Company believes that, during the last
      fiscal year, all Section 16(a) filing requirements applicable to its officers,
      directors and greater than 10% beneficial owners were complied
      with.


F-34


**ITEM
      10**  **EXECUTIVE
      COMPENSATION** .




**Summary
      Compensation Table**




The
      following table sets forth the information required by Securities and Exchange
      Commission Regulation S-B Item 402 as to the compensation paid or
      accrued by us for the years ended September 30, 2007 and 2006 for services
      rendered in all capacities, by all persons who served as our Chief Executive
      Officer or Chief Financial Officer and the other most highly compensated
      executive officer during the fiscal year ended September 30, 2007 (the
“Named Executive Officers”).




Name
            
            James J. Houtz
              President
            
            Robert E. McCray
              Chief Financial Officer
            
            Joan C. Horowitz
              Secretary
            
            TotalFiscal Year
            
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Salary
                (1)
            
            $
            172,446
            
            $
            159,673
            
            $
            151,200
            
            $
            144,000
            
            $
            36,867
            
            $
            34,136
            
            $
            360,623
            
            $
            337,809Bonus
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                Awards
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Option
                Awards
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Non-Equity
                Incentive Plan Compensation
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Non-Qualified
                Deferred Compensation Earnings
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -All
                Other Compensation
            
            
            20,582
            
            
            18,711
            
            
            15,000
            
            
            7,200
            
            
            -
            
            
            -
            
            
            35,582
            
            
            25,911Total
            
            $
            193,028
            
            $
            178,384
            
            $
            166,200
            
            $
            151,200
            
            $
            36,867
            
            $
            34,136
            
            $
            396,205
            
            $
            363,720




(1)
      All
      amounts shown represent accrued salary. None of the amounts shown have been
      paid.




The
      following table sets forth certain information as of September 30, 2007 with
      respect to options held by the Named Executive Officers. The Company has no
      outstanding stock appreciation rights, either freestanding or in tandem with
      options. No options were issued during the past fiscal year.




**Outstanding
      Equity Awards at Fiscal Year-End**




The
      following table sets forth for each named executive officer certain information
      concerning the outstanding equity awards as of September 30, 2007.




Name
            
            James J. Houtz
            
            Robert E.
              McCray
            
            Joan C.
              Horowitz
            
            TotalOption Awards:Number
                of Securities Underlying Unexercised Options Exercisable
            
            
            6,171,000
            
            
            583,200
            
            
            279,940
            
            
            7,034,140Number
                of Securities Underlying Unexercised Options Unexercisable
            
            
            -
            
            
            -
            
            
            -
            
            
            -Equity
                Incentive Plan Awards; Number of Securities Underlying Unexercised
                Unearned Options
            
            
            -
            
            
            -
            
            
            -
            
            
            -Option
                Exercise Price
            
            $
            0.15
            
            $
            0.15
            
            $
            0.15
            
            $
            0.15Option
                Expiration Date
            
            April
                20, 2011Stock
                Awards:Number
                of Shares, or Units of Stock that have not Vested
            
            
            -
            
            
            -
            
            
            -
            
            
            -Market
                Value of Shares or Units of Stock that have not Vested
            
            
            -
            
            
            -
            
            
            -
            
            
            -Equity
                Incentive Plan Awards: Number of Unearned Shares, or Units or Other
                Rights
                that have not Vested
            
            
            -
            
            
            -
            
            
            -
            
            
            -Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                or Units
                or Other Rights that have not Vested
            
            
            -
            
            
            -
            
            
            -
            
            
            -




**Compensation
      of Directors**




No
      director received any compensation during the fiscal year, except for consulting
      fees of $15,000 paid to Dr. W. Richard Laton for hydrogeology
      consulting.


F-35


**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND**




**RELATED
      STOCKHOLDER MATTERS.**




The
      following table sets forth certain information regarding the beneficial
      ownership of our Common Stock as of September 30, 2007. The table sets forth
      the
      beneficial ownership of each person who, to our knowledge, beneficially owns
      more than 5% of the outstanding shares of Common Stock, each of our directors
      and executive officers, and all of our directors and executive officers as
      a
      group.




Name
            
            Address
            
            Number of
              Shares
            
            PercentageE.
                David Kailbourne
            
            
            3830
                Hillcrest Drive, Brighton, MI 48116
            
            
            8,473,044
            
            
            5.6
            %Calico
                Capital Management (2)
            
            
            767
                3rdAvenue, 38thFloor, New York, NY 10017
            
            
            8,233,025
            
            
            5.4
            %James
                J. Houtz (1)
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            6,268,167
            
            
            4.1
            %Robert
                E. McCray * (1)
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            933,200
            
            
            0.6
            %Joan
                C. Horowitz *
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            346,607
            
            
            0.2
            %Rodney
                Anderson *
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            300,901
            
            
            0.2
            %Dr.
                John H. Foster *
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            150,000
            
            
            0.1
            %David
                Ross *
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            115,000
            
            
            0.1
            %Dr.
                W. Richard Laton *
            
            
            2082
                Michelson Drive, Suite 306, Irvine, CA 92612
            
            
            50,000
            
            
            0.0
            %All
                Directors and Officers as a Group [6 Persons] (1)
            
            
            
            
            
            8,162,974
            
            
            5.4
            %




*
      Less
      than 1%


____________________




(1)
            Consists
                principally of shares issuable upon exercise of currently exercisable
                options.




(2)
            A
                majority of shares issuable upon conversion convertible notes
                payable.




Beneficial
      ownership percentages are calculated based on Common Stock issued and
      outstanding as of September 30, 2007. Beneficial ownership is determined in
      accordance with Rule 13d-3 of the Exchange Act. The number of shares
      beneficially owned by a person includes shares of Common Stock underlying
      options or warrants held by that person that are currently exercisable or
      exercisable within 60 days of September 30, 2007. The shares issuable pursuant
      to the exercise of those options or warrants are deemed outstanding for
      computing the percentage ownership of the person holding those options and
      warrants but are not deemed outstanding for the purposes of computing the
      percentage ownership of any other person. The persons and entities named in
      the
      table have sole voting and sole investment power with respect to the shares
      set
      forth opposite that person’s name, subject to community property laws, where
      applicable, unless otherwise noted in the applicable footnote.




**ITEM
      12****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.**




None.


F-36


**ITEM
      13**  **EXHIBITS**




The
      following exhibits are filed herewith or incorporated by reference:




No.
            
            Description3.1
            
            Amended
                and Restated Articles of Incorporation of the Company
                (1)3.2
            
            Amended
                and Restated Bylaws of the Company (1)10.1
            
            Lease
                between the Company and J. C. Brown Enterprises, dated February 19,
                2007
                (2)10.2
            
            Employment
                Agreement, dated September 30, 2003, between the Registrant and James
                J.
                Houtz (2)10.3
            
            Employment
                Agreement, dated October 1, 2005 between the Registrant and Robert
                E.
                McCray (2)10.4
            
            Form
                of Securities Purchase Agreement, dated as of June 18, 2007, between
                the
                Company and certain investors (3)10.5
            
            Form
                of Convertible Debenture, dated as of June 18, 2007, issued by the
                Company
                to certain investors. (3)10.6
            
            Form
                of Registration Rights Agreement, dated as of June 18, 2007, between
                the
                Company and certain investors (3).10.7
            
            Form
                of Warrant, dated as of June 18, 2007, issued by Sionix Corporation
                to
                certain investors. (3)10.8
            
            Lease
                between the Company and   Klein Investments Family Limited
                Partnership, dated August 30, 2007 (4)10.9
            
            Share
                Exchange Agreement, dated November 7, 2007, between the Company and
                the
                shareholders of RJ Metals, Inc. (4)10.10
            
            Employment
                Agreement, dated   December 19, 2007 between the Registrant
                and Richard H. Papalian (5)31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.32.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




(1)
            Incorporated
                by reference from Registrant’s Current Report on Form 8-K, filed with the
                Commission on July 15, 2003, and incorporated herein by
                reference.




(2)
            Incorporated
                by reference from Registrant's Annual Report on Form 10-KSB, filed
                with
                the Commission on June 8, 2007, and incorporated herein by
                reference.




(3)
            Incorporated
                by reference from Registrant's Current Report on Form 8-K, filed
                with the
                Commission on August 14, 2007, and incorporated herein by
                reference.




(4)
            Incorporated
                by reference from Registrant's Registration Statement on Form SB-2,
                filed
                with the Commission on November 14, 2007, and incorporated herein
                by
                reference.




(5)
            Incorporated
                by reference from Registrant’s Current Report on Form 8-K, filed with the
                Commission on December 20, 2007, and incorporated herein by
                reference.


F-37


**ITEM
      14**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




Fee
                Category
            
            Fiscal 2007
            
            Fiscal 2006Audit
                fees
            
            $
            72,250
            
            $
            30,000Audit-related
                fees
            
            
            -
            
            
            -Tax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            -
            
            
            -Total
                fees
            
            $
            72,250
            
            $
            30,000




The
      following is a summary of the fees billed to the Company by Kabani &
Company, Inc. for professional services rendered for the fiscal years ended
      September 30, 2007 and 2006:




Audit
      Fees consists of fees billed for professional services rendered for the audit
      of
      the Company’s consolidated financial statements and review of the interim
      consolidated financial statements included in quarterly reports and services
      that are normally provided by Kabani & Company, Inc. in connection with
      statutory and regulatory filings or engagements.




Audit-Related
      Fees consists of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of the Company’s
      consolidated financial statements and are not reported under "Audit Fees."
      There
      were no Audit-Related services provided in fiscal 2006 or 2005.




Tax
      Fees
      consists of fees billed for professional services for tax compliance, tax advice
      and tax planning.




All
      Other
      Fees consists of fees for products and services other than the services reported
      above. There were no management consulting services provided in fiscal 2006
      or
      2005.




Policy
      On
      Audit Committee Pre-Approval Of Audit And Permissible Non-Audit Services Of
      Independent Auditors




The
      Company has no audit committee. The Board of Directors’ policy is to pre-approve
      all audit and permissible non-audit services provided by the independent
      auditors. These services may include audit services, audit-related services,
      tax
      services and other services. Pre-approval would generally be provided for up
      to
      one year and any pre-approval would be detailed as to the particular service
      or
      category of services, and would be subject to a specific budget. The independent
      auditors and management are required to periodically report to the Board of
      Directors regarding the extent of services provided by the independent auditors
      in accordance with this pre-approval, and the fees for the services performed
      to
      date. The Board of Directors may also pre-approve particular services on a
      case-by-case basis.


F-38


**SIGNATURES**




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




Dated:
      ,
      2008




SIONIX,
                INC.By:
            /s/James
                J. Houtz, Chief Executive OfficerBy:
            /s/Rodney
                Anderson, Chief Financial Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, 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(1)
                Principal Executive Officer/s/
            Chief
                Executive Officer, President and a Director
            ,
                2008James
                J. Houtz(2)
                Principal Financial and Accounting Officer/s/
            Chief
                Financial Officer and a Director
            ,
                2008Rodney
                Anderson(3)
                Directors/s/
            Director
            ,
                2008Marcus
                Woods/s/
            Director
            ,
                2008John
                Pavia/s/
            Director
            ,
                2008Richard
                Papalian


F-39