SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-KSB/A


(Amendment
Number 2)




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 January
16, 2009, computed based on the closing price reported on the OTC Bulletin
Board, was $13,668,462.




As of
January 16, 2009, there were 136,684,616 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 responded to the SEC’s comments to our Form 10-KSB
(the “Original Report”) in amendment number 1 (“Amendment 1”) which was filed
with the SEC on November 17, 2008.  On December 17, 2008 we received
further comments from the SEC.  We have responded to these comments in
this Amendment No. 2 to Form 10-KSB (“Amendment 2”). The primary purpose of
Amendment 1 and Amendment 2 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 Amendment 2 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.




Page 2 of
68




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.




Page 3 of
68




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.




Page 4 of
68




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.




Page 5 of
68




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.




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68




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.




Page 7 of
68




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.




Page 8 of
68




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.




Page 9 of
68




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.




Page 10
of 68




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.




Page 11
of 68




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.




Page 12
of 68




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.




Page 13
of 68




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.




Page 14
of 68




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.




Page 15
of 68




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
                  plansEquity
      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.




Page 16
of 68




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.




Page 17
of 68




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 contractsthat
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 classified 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.




Page 18
of 68




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
contractsthat
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 classified 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.




Page 19
of 68




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 contractswhich
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 classified
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.




Page 20
of 68




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 contractsthat
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.




Page 21
of 68




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.




Page 22
of 68




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 contractswhich
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 classified 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.




Page 23
of 68




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.




Page 24
of 69




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
                            
                            
                            RestatedBalance
      SheetAccrued
      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
      conversion feature 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
      accumulated during 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
      in warrant liability
                            
                            
                            -
                            
                            
                            
                            344,965
                            
                            
                            
                            
                            
                            
                            
                            70,029
                            
                            
                            
                            
                            
                            
                            
                            54,317
                            
                            
                            
                            
                            
                            
                            
                            469,311Increase
      in beneficial conversion feature
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,044
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,044
                            )Legal
      settlement
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (89,654
                            )
                            
                            
                            (89,654
                            )Income
      tax expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,592
                            
                            
                            
                            2,592Basic
      and dilutive loss per share
                            
                            
                            0.02
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            0.02Statement
      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
      in warrant liability
                            
                            
                            -
                            
                            
                            
                            344,965
                            
                            
                            
                            
                            
                            
                            
                            70,029
                            
                            
                            
                            
                            
                            
                            
                            54,317
                            
                            
                            
                            
                            
                            
                            
                            469,311Increase
      in beneficial conversion feature
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,044
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,044
                            )Legal
      settlement
                            
                            
                            434,603
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (89,654
                            )
                            
                            
                            344,949Income
      tax expense
                            
                            
                            9,900
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,592
                            
                            
                            
                            12,492Statement
      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 conversion feature liaiblity
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,044
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,044Accrued
      expenses
                            
                            
                            566,278
                            
                            
                            
                            
                            
                            
                            
                            895,044
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (15,376
                            )
                            
                            
                            1,445,946Accrual
      of liquidating damages
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            15,375
                            
                            
                            
                            15,375





Page 25
of 69




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
                    
                    
                    RestatedStatement
      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 conversion feature 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
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    457,433
                    
                    
                    
                    457,433Increase
      in fair value of beneficial conversion features discount at 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




Page 26
of 69




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.




Page 27
of 69




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.




Page 28
of 69




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.




Page 29
of 69




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.




Page 30
of 69




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-9Notes
      to Financial Statements
                            
                            
                            F-10




Page 31
of 69




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.




Page 32
of 69




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.




Page 33
of 69




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
      obsolesence
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (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 ofshares 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.




Page 34
of 69




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 cash October 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 ended September 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.




Page 35
of 69




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.




Page 36
of 69




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
      2001 Executive 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.




Page 37
of 69




SIONIX
CORPORATION


(A
DEVELOPMENT STAGE COMPANY)


STATEMENTS
OF CASH FLOWS




CummulativefromInceptionYears
      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
                            
                            
                            
                            130,268Accrual
      of liquidating damages
                            
                            
                            15,375
                            
                            
                            
                            
                            
                            
                            
                            15,375Other
                            
                            
                            (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
                            
                            
                            (1,117,861
                            )
                            
                            
                            (44,290
                            )
                            
                            
                            (9,107,158
                            )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:Payment
      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
                            
                            
                            1,513,600
                            
                            
                            
                            49,440
                            
                            
                            
                            10,005,185Net
      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.




Page 38
of 69




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.




Page 39
of 69




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 Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. 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:




Page 40
of 69




a.
            A
      brief description of the provisions of this
  Statement




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
                    
                    
                    380,441Auto
      allowance accruals
                    
                    
                    71,768Interest
      payable
                    
                    
                    165,770Other
      accruals
                    
                    
                    68,154TOTAL
      ACCRUED EXPENSES
                    
                    $
                    2,068,114





Page 41
of 69




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 only allow the counterparty to convert the notes into shares of common
stock. Therefore, the convertible notes are not conventional convertible as
defined in EITF 05-02.  To determine the classification of the
conversion feature, we followed the guidance of paragraphs 12-33 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.




Page 42
of 69




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.





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 only allow the counterparty to convert the notes into shares of common
stock. Therefore, the convertible notes are not conventional convertible as
defined in EITF 05-02.  To determine the classification of the
conversion feature, we followed the guidance of paragraphs 12-33 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.




Page 43
of 69




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 amortized 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.




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 only allow the counterparty to convert the notes into shares of common
stock. Therefore, the convertible notes are not conventional convertible as
defined in EITF 05-02.  To determine the classification of the
conversion feature, we followed the guidance of paragraphs 12-33 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.




Page 44
of 69




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.




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 contractsthat
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 classified 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.




Page 45
of 69




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.




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 contractswhich
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 classified
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 contractsthat 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.




Page 46
of 69




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).




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
contractsthat
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 classified 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.




Page 47
of 69




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 classified 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.




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
                %




Page 48
of 69




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.




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.




Page 49
of 69




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
                  
                  
                  $
                  -




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




Warrants
outstanding:


Exercise
                                        Price
                                      
                                      
                                      Number
      of
                                          Warrants
                                      
                                      
                                      Weighted
                                          Average
                                          Remaining
                                          Contractual
                                          Life
                                      
                                      
                                      Weighted
                                            Average
                                            Exercise
                                            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.




Page 50
of 69




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.




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.




Page 51
of 69




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.




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.




Page 52
of 69





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.




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.




Page 53
of 69




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 contractsthat
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 classified 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 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.




Page 54
of 69




Balance
Sheet




The
Company began the analysis for the restatement by applying paragraph 6 of SFAS
133to 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 contractsthat
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 classified 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. 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.




Page 55
of 69




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 contractswhich
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 classified
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.




Page 56
of 69




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 contractsthat
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 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.




Page 57
of 69




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 contractswhich
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 classified 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.




Page 58
of 69




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.




Page 59
of 69




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 -
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
                  
                  
                  RestatedBalance
      SheetAccrued
      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
      conversion feature 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
      accumulated during 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
      in warrant liability
                  
                  
                  -
                  
                  
                  
                  344,965
                  
                  
                  
                  
                  
                  
                  
                  70,029
                  
                  
                  
                  
                  
                  
                  
                  54,317
                  
                  
                  
                  
                  
                  
                  
                  469,311Increase
      in beneficial conversion feature
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,044
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,044
                  )Legal
      settlement
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (89,654
                  )
                  
                  
                  (89,654
                  )Income
      tax expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,592
                  
                  
                  
                  2,592Basic
      and dilutive loss per share
                  
                  
                  0.02
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0.02Statement
      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
      in warrant liability
                  
                  
                  -
                  
                  
                  
                  344,965
                  
                  
                  
                  
                  
                  
                  
                  70,029
                  
                  
                  
                  
                  
                  
                  
                  54,317
                  
                  
                  
                  
                  
                  
                  
                  469,311Increase
      in beneficial conversion feature
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,044
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,044
                  )Legal
      settlement
                  
                  
                  434,603
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (89,654
                  )
                  
                  
                  344,949Income
      tax expense
                  
                  
                  9,900
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,592
                  
                  
                  
                  12,492Statement
      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 conversion feature liaiblity
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,044
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,044Accrued
      expenses
                  
                  
                  566,278
                  
                  
                  
                  
                  
                  
                  
                  895,044
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (15,376
                  )
                  
                  
                  1,445,946Accrual
      of liquidating damages
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  15,375
                  
                  
                  
                  15,375





Page 60
of 69




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
                      
                      
                      RestatedStatement
      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 conversion feature 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
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      457,433
                      
                      
                      
                      457,433Increase
      in fair value of beneficial conversion features discount at 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




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
                                                        
                                                        
                                                        RestatedStatement
      of Operations (for the year ended September 30,
2006)General
      and administrative
                                                        
                                                        $
                                                        639,259
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        274,432
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        913,691Basic
      and dilutive earnings per share
                                                        
                                                        
                                                        0.01
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        0.01Statement
      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
  Page 61
of 69




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.




Page 62
of 69




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




During
the last fiscal quarter, the Company has not made any change to internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




Page 63
of 69




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.




Page 64
of 69




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.




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.




Page 65
of 69




ITEM11.
            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
      3rd
      Avenue, 38th
      Floor, 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.




ITEM12
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.




None.




Page 66
of 69




ITEM13
            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.




Page 67
of 69




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.




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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:
February 3, 2009




SIONIX, INC.By:
                  /s/
      James J. HoutzJames
      J. Houtz, Chief Executive OfficerBy:
                  /s/ Rodney AndersonRodney
      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/s/
      James J. Houtz
            Chief
      Executive Officer, President and Director
            February
      3, 2009James
      J. Houtz/s/
      Rodney Anderson
            Chief
      Financial Officer and Director
            February
      3, 2009Rodney
      Anderson/s/
      John Pavia
            Director
            February
      3, 2009John
      Pavia




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