UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549


FORM
10-K


ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES
EXCHANGE ACT OF 1934





(Mark
One)


þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934


For
the fiscal year ended June 30, 2009


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934


For
      the transition period
      from          to


Commission
File Number: 0-29901


Cavitation
Technologies, Inc.


(Exact name of
Registrant as Specified in its Charter)


Nevada
              
              20-4907818(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              (I.R.S.
      Employer
                Identification
      No.)


10019 CANOGA AVENUE,CHATSWORTH, CALIFORNIA91311


(Address,
including Zip Code, of
Principal Executive Offices)


(818)718-0905


(Registrant’s telephone number,
including area code)


SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT:


Title of Each
      Class:
              
              Name of Each Exchange on Which
      Registered:None
              
              Over
      the Counter (Bulletin Board)





SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:





Common
Stock, $0.001 par value


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





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





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.101 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.  þ





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





Large
Accelerated Filer o   
Accelerated Filer o  
Non-Accelerated Filer o    
Smaller Reporting Company  x


(Do not
check if a smaller reporting company)





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





State the
aggregate market value of the voting and non voting common equity held by
non-affiliates of the registrant by reference to the price at which the common
equity was last sold, or of the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completely
second fiscal quarter: $33,204,808 as of December 31, 2008 based on the closing
price of $1.17 per share and 28,380,178 shares
outstanding.





The
registrant had 28,380,178 shares of Common Stock, par value $0.001 per share,
outstanding at December 31, 2008 and 35,330,300 shares of common stock
outstanding September 24, 2009.





DOCUMENTS INCORPORATED BY
REFERENCE:


None.


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
annual report on Form 10-K and the exhibits attached hereto contain
“forward-looking” statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements concern our
anticipated results and developments in our operations in future periods,
planned exploration and development of our properties, plans related to our
business and matters that may occur in the future. These statements relate to
analyses and other information that are based on forecasts of future results,
estimates of amounts not yet determinable and assumptions of management. We use
words like “expects,” “believes,” “intends,” “anticipates,” “plans,” “targets,”
“projects” or “estimates” in this annual report. When used, these words and
other, similar words and phrases or statements that an event, action or result
“will,” “may,” “could,” or “should” result, occur, be taken or be achieved,
identify “forward-looking” statements. Such forward-looking statements are
subject to certain risks and uncertainties, both known and unknown, and
assumptions.




Our
management has included projections and estimates in this annual report, which
are based primarily on management’s experience in the industry, assessments of
our results of operations, discussions and negotiations with third parties and a
review of information filed by our competitors with the Securities and Exchange
Commission or otherwise publicly available. We caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. We disclaim any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events, except as required by law.




We
qualify all the forward-looking statements contained in this annual report by
the foregoing cautionary statements.






PART I





ITEM
1.  BUSINESS





The
following discussion includes forward-looking statements, including but not
limited to, management’s expectations of competition; revenues, margin, expenses
and other operating results or ratios; operating efficiencies; economic
conditions; cost savings; capital expenditures; liquidity; capital
requirements; acquisitions and integration costs; operating models; exchange
rate fluctuations and rates of return.  We disclaim any duty to update any
forward-looking statements.




Introduction





Hydrodynamic
Technology, Inc. dba Cavitation Technologies, Inc (“Hydro”, or the “Company”),
incorporated on January 29, 2007 in California, is a development stage
enterprise primarily engaged in the application of environmentally friendly NANO
technology based systems.  We are a “GreenTech”company whose mission is to make
the world better through our patent pending technologies which have unique,
useful, and environmentally friendly commercial applications in markets such as
vegetable oil processing, renewable fuels, alcoholic beverage
enhancement,water recycling
and desalination, water–oil emulsions, and crude oil yield enhancement. The
systems use our patent pending, multi-stage, continuous flow-through,
hydrodynamic NANO Technology in the form of reliable, cost effective, cavitation
reactors. We believe the application of our technology can dramatically reduce
operating costs and improve yields versus competitive solutions while offering
clients an attractive return on investment.





Research
and development has led to products which include the Green D
De-gumming System, a vegetable oil de-gumming system, and the Bioforce
9000Reactor Skid
Systemwhich performs the
transesterification process during the production of biodiesel.





Our GreenD De-gumming
Systemuses a patent pending NANO Cavitation Process that
converts crude non-degummed vegetable oils into high quality de-gummed oils at
lower costs and higher yields. This system is scheduled for operational testing
before the end of 2009. The global target market for ourGreen D
System includes approximately 7,000 worldwide vegetable oil de-gumming
processors.  The global demand for processed vegetable oils has grown
consistently over the past five years from 118 million metric tons in 2005/6 to
about 133 million metric tons in 2008/09.  We believe there will
continue to be growing demand for technology that processes vegetable oils at
lower costs and/or higher yields.


2


We also
offer the fully automated Bioforce
9000NANOReactor Skid
Systemwhich performs the
transesterification process during the production of biodiesel; that is, it
fully converts all mono-, di-, and tri-glycerides contained in feedstock (such
as animal fats and vegetable oils) into methyl esters (biodiesel). The Bioforce
9000 offers many advantages including the ability to use multiple feedstocks
with up to 3% FFA (free fatty acids) simultaneously. The first commercial
installation of our Bioforce
9000is
included in a new biodiesel production plant that is expected to be fully
operational in September 2009 in Moberly, Missouri. The global demand for
petroleum-based diesel is about 345 billion gallons/year. We have been impacted
by the downturn in the worldwide economy and the slowdown in the demand for
biodiesel.  Factors which can spur the demand for biodiesel and our
products include legislation which mandates increased use of biodiesel, a
reduction in the cost of raw materials (feedstock) used in the production of
biodiesel, and an increase in the price of competitive products such as
petroleum-based diesel fuel. These adverse economic conditions may continue to
negatively affect our revenues and profitability over the near term.
Nevertheless, we intend to lease and license our technology through a global
distribution network of engineering consulting firms and others who design,
build, and recommend biodiesel production systems and vegetable oil de-gumming
systems. It is our intention to be a leader in providing the technology that
will replace petroleum-based diesel fuel with biodiesel.





Both the
Bioforce
9000and
the GreenD+
PlusSystems use
our unique patents pending, continuous flow-through, hydrodynamic NANOCavitation Technology in the
form of reliable, cost effective, multi-stage cavitation
reactors.  Our NANOtechnology process creates particles smaller than one micron (nano
particles) and bonds these particles at the molecular level in nano seconds
thereby creating a low cost, high quality finished product that reduces energy
requirements and other operating costs and improves yield versus other
solutions. These reactors have no moving parts and are scalable to any
volume.





Our
success will depend in part on our ability to obtain patents, maintain trade
secrets, and operate without infringing on the proprietary rights of others,
both in the United States and other countries. We have seven patent applications
pending in the US and have applied for three international
patents.  We intend to apply for new patents on a regular basis. Our
patents pending apply to potential commercial
applications in markets such as vegetable oil processing, renewable fuels
production,waste water treatment, water–oil emulsions, crude oil yield
enhancement, and alcoholic beverage enhancement. There can be no assurances that
patents issued to the Company will not be challenged, invalidated, or
circumvented, or that the rights granted hereunder will provide proprietary
protection or competitive advantage to the Company. We are a public company with
stock traded on the Over the Counter Bulletin Board with ticker symbol CVAT. Our
stock is also traded on the Berlin Stock Exchange with symbol WTC-BER. Our only
location is our headquarters in Chatsworth, California. We have four employees
and have engaged approximately  40 consultants and independent
contractors over the past two years.





Employees





As of
June 30, 2009, we employed four full-time employees. We consider our
relationship with employees to be good.





ITEM 1A.QUANTATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are a
Smaller Reporting Company and are not required to provide the information under
this item pursuant to Regulation S-K.





ITEM 1B.UNRESOLVED STAFF
COMMENTS





None


3


ITEM
2.  PROPERTIES




Our
corporate headquarters is located in Chatsworth, California. This 6,000 square
foot facility includes office space and an area to conduct research and
development. As of August 12, 2009, we rented this facility for which we incur a
monthly expense. We do not anticipate any material difficulties with the renewal
of our rental agreement when it expires or in securing replacement facilities on
commercially reasonable terms.





ITEM
3.  LEGAL PROCEEDINGS





We know
of no material, existing or pending legal proceeding against our Company, nor
are we involved as a plaintiff in any material proceeding or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a
material interest adverse to our interest.





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




None





PART II





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





Common Stock.  Our Common Stock
is traded on the Over the Counter Bulletin Board under the symbol CVAT. The
following table sets forth the high and low price per share based on the closing
price of our Common Stock for the periods indicated.





HIGH
                  
                  
                  LOWFiscal
      2009
                  First
      Quarter – No trading
                  
                  $
                  N/A
                  
                  
                  
                  NASecond
      Quarter
                  
                  
                  1.70
                  
                  
                  
                  1.01Third
      Quarter
                  
                  
                  1.20
                  
                  
                  
                  0.71Fourth
      Quarter
                  
                  
                  1.00
                  
                  
                  
                  0.53





We became
a public company through a reverse merger process that was effected in October
2008. The first day of public trading of our stock was November 11,
2008.  Since our fiscal year ends June 30, public trading of our stock
began in the second quarter of fiscal 2009. As of August 12, 2009 there were 57
holders of record of our Common Stock. This does not reflect the number of
persons or entities who hold stock in nominee or “street” name through
various brokerage firms.





Dividend Policy.  We
have neither declared nor paid any dividends on our Common Stock in the
preceding two fiscal years. We currently intend to retain future earnings to
fund ongoing operations and finance the growth and development of our business
and, therefore, do not anticipate declaring or paying cash dividends on our
Common Stock for the foreseeable future. Any future decision to declare or pay
dividends will be at the discretion of the Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and such other factors as the Board of Directors deems relevant.
In addition, certain of our debt facilities contain restrictions on the
declaration and payment of dividends.





Our Series A Preferred Stock bears a
6% cumulative dividend per annum.  Dividends may be paid in cash or in
additional shares of Series A Preferred Stock, at the Company’s
preference.


4


Securities
Authorized for Issuance Under Equity Compensation Plans





We have
no equity compensation plans and accordingly we have no shares authorized for
issuance under an equity compensation plan.





Unregistered
Sales of Equity Securities and Use of Proceeds





The
common stock activity for all periods presented in the accompanying financial
statements have been restated to give retroactive recognition to the stock split
and the conversion to Bio shares. In addition, all references in the financial
statements and notes to financial statements to weighted average number of
shares, per share amounts, and market prices of the Company’s common stock have
been restated to give retroactive recognition to the stock split.





On
October 3, 2008, the Company issued 210,000 units comprised of five shares of
its Series A-1 Preferred Stock (total of 1,050,000 preferred shares) and one
warrant to purchase one share of common stock at $0.75 per share for total
proceeds of $525,000 which were placed in escrow. Upon the closing of escrow on
October 3, 2008, $400,000 was used to purchase 50.5% of the outstanding shares
of Bio (see Note 2 to the consolidated financial statements), and the remaining
$125,000 was distributed to the Company.





On
October 24, 2008, the Company entered into a share exchange agreement with Bio
in which Bio acquired all of the outstanding shares of the Company’s
stockholders. Bio Energy, Inc. issued 18,750,000 shares of its common stock to
the stockholders of Hydrodynamic Technology, Inc. in exchange for all the
outstanding shares of Hydrodynamic Technology, Inc. Under the terms of the
share exchange agreement, Bio performed a 7.5-to-1 forward stock split of its
outstanding shares of common stock.





On
October 24, 2008, in connection with the reverse merger, all shares of Series
A-1 Preferred Stock were converted to common shares of Bio. The accompanying
financial statements have retroactively shown the recapitalization for all
periods presented. As a result of the merger with Bio, the Company no longer has
any Series A-1 Preferred Stock authorized or issued. In connection with the Bio
transaction, 410,000 warrants to purchase 410,000 shares of Common Stock of
Hydro converted into 279,800 warrants to purchase 279,800 shares of Common Stock
of Bio.





On March
17, 2009, the Company filed Amended and Restated Articles of Incorporation,
which authorized the Company to issue up to 100,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock, of which 5,000,000 shares are
designated as Series A Preferred Stock and 5,000,000 shares are designated
Series B Preferred Stock, with the rights, preferences and privileges of the
Series B Preferred Stock to be designated by the Board of
Directors.  Each share of Common Stock and Preferred Stock has a par
value of $0.001.





On March
17, 2009 the Company issued 111,111 shares of Series A Convertible Preferred
Stock at a purchase price of $0.90/share, which was equal to the closing price
of the Company’s Common Stock on the business day immediately preceding the
purchase by the Subscriber. The preferred stock was issued to a foreign
accredited investor for a purchase price of $100,000.  Each share of
Series A Preferred Stock is convertible at the owner’s option into 1.125 shares
of common stock.  The preferred shares are convertible into shares of
Common Stock of the Company at any time at the election of the holder but will
automatically convert to Common Stock on March 17, 2012.





On April
22, 2009, the Company issued 166,666 shares of common stock at $0.60 per share
and 66,666 warrants to purchase 66,666 shares of Common Stock at an exercise
price of $1.50 per share for a total consideration of $100,000.  The
warrants vest immediately and have a contractual life of 3 years. The total
value of the warrants issued amounted to $0.  The value was determined
using the Black-Scholes valuation model with input assumptions of (1) volatility
of 64%, (2) expected life of 1.5 years, (3) risk free rate of 0.76%, and (4)
expected dividends of zero.


5


In June
2009, the Company issued 366,666 shares of common stock at prices ranging from
$0.50 to $0.60 per share along with warrants to purchase 396,666 shares of
Common Stock at exercise prices ranging from $0.60 to $1.25 per share, for a
total consideration of $200,000.  The warrants vest immediately and
have a contractual life ranging from 3 to 5 years. The total value of the
warrants issued amounted to $5,678.  The value was determined using
the Black-Scholes valuation model with input assumptions of (1) volatility of
64%, (2) expected life ranging from 3 to 5 years, (3) risk free rate ranging
from 0.85% to 1.55%, and (4) expected dividends of zero.





In
summary, for fiscal 2009 we issued 661,303 shares of common stock valued at
$639,673 to service providers who provided advertising and marketing
services.  We also received $300,000 in cash in exchange for 533,332
common shares. In fiscal 2009, we also issued 111,111 preferred shares for
$100,000.  In 2008, we issued 3,456,550 shares of  common
stock valued at $1,823,400 to service providers who supported our research and
development activities.  In fiscal 2008, we also issued 1,000,000
shares of  preferred stock for $500,000.  Further, for
fiscal 2009, we issued warrants to purchase 1,374,421 shares of Common Stock
with exercise prices ranging from $0.60 to $1.75 per share.  The
warrants vest immediately and have a contractual life ranging from 1.5 to 5
years. The total value of the warrants issued amounted to
$303,123.  The value was determined using the Black-Scholes valuation
model with input assumptions of (1) volatility of 64% - 148%, (2) expected life
ranging from 1.5 to 2.5 years, (3) risk free rate ranging from 0.85% to 1.55%,
and (4) expected dividends of zero.





ITEM
6.  SELECTED FINANCIAL DATA





Not Applicable.





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




Overview of Our Business




The
following discussion and analysis of should be read in conjunction with the
Company’s financial statements and the related notes. This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements.





Management’s
Plan





The
Company is a development stage entity and is primarily engaged in the
development of a bio-diesel fuel production systems (Bioforce 9000 and the
Reactor Skid). The initial focus of the Company’s research and development will
be the generation of products for our target market of US and International
biodiesel producers. The Company’s success will depend in part on its ability to
obtain patents, maintain trade secrets, and operate without infringing on the
proprietary rights of others, both in the United States and other countries.
There can be no assurances that patents issued to the Company will not be
challenged, invalidated, or circumvented, or that the rights granted hereunder
will provide proprietary protection or competitive advantage to the
Company.





The
Company has no significant operating history and, from January 29, 2007,
(inception), through June 30, 2009, has generated a net loss of $5,177,773. The
Company also has negative cash flow from operations and negative net equity. The
accompanying financial statements for the year ended June 30, 2009, the six
month period ended June 30, 2008, the period from January 29, 2007 (date of
inception) through December 31, 2007, and the period from January 29, 2007
through June 30, 2009 have been prepared in conformity with generally accepted
accounting principles, which contemplate continuation of the Company as a going
concern.


6


Management’s
plan is to raise additional debt and/or equity financing to fund future
operations and to provide additional working capital. However, there is no
assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet the Company’s needs, or that the Company will be able
to meet its future contractual obligations. Should management fail to obtain
such financing, the Company may curtail its operations.





Results
of Operations





In
October 2008, we changed our fiscal year end from December 31st  to
June 30th.
Included in Item 8 of this annual report on Form 10-K are the consolidated
balance sheets at June 30, 2009 and 2008 and the consolidated statements of
operations, consolidated statements of stockholders’ deficit and
consolidated statements of cash flows for the year ended June 30, 2009, the six
month period ended June 30, 2008, the period from January 29, 2007 (date of
inception) through December 31, 2007, and the period from January 29, 2007
through June 30, 2009. In order to provide the reader with meaningful
comparisons, the following analyses provide comparison of the audited year ended
June 30, 2009 with the unaudited year ended June 30, 2008 (derived from the
results of operations of the last six months of fiscal year ended December 31,
2007 and the transition period ended June 30, 2008) and the unaudited year ended
June 30, 2008 with the unaudited period ended June 30, 2007.





We have
no significant operating history and from January 29, 2007 (date of inception)
through June 30, 2009, we have generated net losses aggregating
$5,177,773.





Results
of Operations – Twelve Month Periods ended June 30, 2009 and June 30,
2008





(Unaudited)2009
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        $
      Change
                                                                        
                                                                        %
      ChangeGeneral
      and administrative expenses
                                                                        $
                                                                        2,086,293
                                                                        
                                                                        $
                                                                        303,327
                                                                        
                                                                        
                                                                        $
                                                                        1,782,966
                                                                        
                                                                        588
                                                                        %Research
      and development expenses
                                                                        
                                                                        311,793
                                                                        
                                                                        
                                                                        2,126,966
                                                                        
                                                                        
                                                                        
                                                                        (1,815,173
                                                                        )
                                                                        -85
                                                                        %Total
      operating expenses
                                                                        
                                                                        2,398,086
                                                                        
                                                                        
                                                                        2,430,293
                                                                        
                                                                        
                                                                        
                                                                        (32,207
                                                                        )
                                                                        -1
                                                                        %Loss
      from operations
                                                                        
                                                                        (2,398,086
                                                                        )
                                                                        
                                                                        (2,430,293
                                                                        )
                                                                        
                                                                        
                                                                        32,207
                                                                        
                                                                        -1
                                                                        %Interest
      expense
                                                                        
                                                                        (97,905
                                                                        )
                                                                        
                                                                        (46,420
                                                                        )
                                                                        
                                                                        
                                                                        (51,485
                                                                        )
                                                                        111
                                                                        %Net
      loss
                                                                        $
                                                                        (2,495,991
                                                                        )
                                                                        $
                                                                        (2,476,713
                                                                        )
                                                                        
                                                                        $
                                                                        (19,278
                                                                        )
                                                                        1
                                                                        %





Revenue





During
2009, the Company received a deposit of $26,000 from a customer relating to an
order for our first operational Bioforce 9000 Reactor Skid
System. Because this transaction has not yet been fully completed, this
amount has been reflected in deferred revenue on the accompanying consolidated
balance sheet as of June 30, 2009. As of June 30, 2009, the Company has not
recognized  any revenue, although we expect to achieve revenue during
fiscal 2010.


7


Operating
Expenses





Our
operating expenses for fiscal 2009 amounted to $2,398,086 compared with
$2,430,293 in 2008.  Principle components in 2009 were $793,408 in
consulting fees, $307,512 in share-based compensation for services provided,
$442,767 in salaries, and $307,208 in professional service fees such as legal,
audit, and accounting. Compensation for services in the form of stock, warrants,
and options declined from $1,823,400 in 2008 to $1,093,582 in
2009.  This occurred as our need for consulting and services to
support our R&D efforts in fiscal 2008, our first full year of operations,
were significant.  R&D in 2008 was focused largely on contracting
the services of consultants and independent contractors to help us with the
design and production of various NANO technology reactors and the development of
our Bioforce 9000 Reactor Skid
System.  In 2009 R&D was focused more on the design and
development of our Green D
(Vegetable Oil) De-gumming Systemthat incorporates many of the benefits
derived from R&D conducted in 2008. In 2009, the support we received from
outside consultants and independent contractors was focused more on advertising
and marketing.  In 2009 we also conducted R&D to develop other
potential commercial applications for our technology including alcoholic
beverage enhancement, water recycling and desalination, crude oil yield
enhancement, and water-diesel emulsion. The increase in salary expense from
$139,556 in 2008 to $442,767 in 2009 occurred as we started paying more salary
to employees. Professional service fees increased from $25,205 to $307,208 in
2009 due largely to costs associated with the Company’s reverse merger, auditor
services, engagement of an outside accounting consultant, and legal expenses
associated with patent filings.





Interest
Expense





Interest
expense increased 111% from $46,420 in 2008 to $97,905 in fiscal 2009. This 2009
amount consists of $35,056 in interest charges on our revolving bank line of
credit as well as $62,849 in interest expense linked primarily to convertible
notes payable issued in December 2008 and February 2009.  The interest
expense associated with the convertible notes payable included $49,245
attributable to amortization of the warrant value as well as $9,848 in interest
computed on the principle amount at 12% per annum. In 2008, the interest expense
on our revolving bank line of credit amounted to $46,382. There were no notes
outstanding in 2008.





Liquidity
and Capital Resources





Preferred
Shares





During
fiscal 2008, we raised $500,000 through the sale of 1,000,000 shares of
preferred stock. On October 3, 2008, we raised $525,000 through the sale of
1,050,000 shares of preferred stock $400,000 which was used in part to
finance the reverse merger. These series A-1 Preferred Shares were subsequently
converted to common shares when the Company completed its reverse merger in
October 2008. In March 2009 we raised another $100,000 through the sale of
111,111 shares of Series A convertible preferred stock.





Convertible
Notes Payable





In
December 2008 and February 2009 we issued $235,000 in convertible notes payable
which carried an interest rate of 12%. The notes payable subsequently reduced to
$200,000 on June 30, 2009.  In the first quarter of fiscal 2010,
$180,000 of the notes converted to 374,124 shares of common stock and the
remaining $55,000 was repaid.





Bank
Line of Credit





At June
30, 2009, we had an outstanding balance of $636,917 from a $700,000 bank
revolving line of credit compared with an outstanding balance of 627,856 at June
30, 2008.





Common
Stock





During
the 4th quarter
of 2009, the company issued 533,332 shares of common stock and 433,332 warrants
in exchange for an investment of $300,000.   In fiscal 2008 the
Company issued common stock valued at $1,823,400 as payment for
services.





Share-based
Compensation





During
fiscal 2009, we issued warrants and stock options valued at $453,555 as payment
to service providers. During fiscal 2008, we issued no warrants or stock options
to pay service providers.


8


Working
Capital





At June
30, 2009, accounts payable and accrued expenses were $382,615 compared to
$56,706 at June 30, 2008. This $325,909 increase is attributable mostly to the
accrued salary of the president of the company.





Cash
Flow





Net cash
used in operating activities amounted to $995,292 in 2009 compared with $535,961
in 2008. This was due principally to non-cash items, including stock-based
compensation expense, which declined from $1,823,400 in 2008 to $1,093,585 in
2009.  Financing in 2008 was provided by $85,309 in bank financing and
$500,000 in preferred shares.  In 2009, bank financing increased by
$9,061, preferred stock, notes payable, and common stock financed $225,000,
$200,000, and $300,000, respectively.





Results
of Operations – Fiscal Years ended June 30, 2008 and June 30,
2007





Because
of the change in our fiscal year to June 30, and given the fact that our company
was founded January 29, 2007, fiscal 2007 includes only the approximate five
months from January 29, 2007 to June 30, 2007.  When comparing fiscal
2008 with fiscal 2007 therefore, we are comparing a 12-month period to a 5-month
period using information derived from interim filings.





(Unaudited)
                                                                            
                                                                            
                                                                            (Unaudited)2008
                                                                            
                                                                            
                                                                            2007
                                                                            
                                                                            
                                                                            $
      Change
                                                                            
                                                                            
                                                                            %
      ChangeGeneral
      and administrative expenses
                                                                            
                                                                            $
                                                                            303,327
                                                                            
                                                                            
                                                                            $
                                                                            166,976
                                                                            
                                                                            
                                                                            $
                                                                            136,351
                                                                            
                                                                            
                                                                            
                                                                            82
                                                                            %Research
      and development expenses
                                                                            
                                                                            
                                                                            2,126,966
                                                                            
                                                                            
                                                                            
                                                                            7,567
                                                                            
                                                                            
                                                                            
                                                                            2,119,399
                                                                            
                                                                            
                                                                            
                                                                            28,008
                                                                            %Total
      operating expenses
                                                                            
                                                                            
                                                                            2,430,293
                                                                            
                                                                            
                                                                            
                                                                            174,543
                                                                            
                                                                            
                                                                            
                                                                            2,255,750
                                                                            
                                                                            
                                                                            
                                                                            12,924
                                                                            %Loss
      from operations
                                                                            
                                                                            
                                                                            (2,430,293
                                                                            )
                                                                            
                                                                            
                                                                            (174,543
                                                                            )
                                                                            
                                                                            
                                                                            2,255,750
                                                                            
                                                                            
                                                                            
                                                                            12,924
                                                                            %Interest
      expense
                                                                            
                                                                            
                                                                            (46,420
                                                                            )
                                                                            
                                                                            
                                                                            (8,207
                                                                            )
                                                                            
                                                                            
                                                                            (38,213
                                                                            )
                                                                            
                                                                            
                                                                            466
                                                                            %Net
      loss
                                                                            
                                                                            $
                                                                            (2,476,713
                                                                            )
                                                                            
                                                                            $
                                                                            (182,750
                                                                            )
                                                                            
                                                                            $
                                                                            (2,293,963
                                                                            )
                                                                            
                                                                            
                                                                            12,553
                                                                            %





Revenue





The
Company generated no revenue in fiscal 2007 or 2008.





Operating
Expenses





General
and Administrative Expenses increased 82% from $166,976 in 2008 to $303,327 in
2009. R&D Expenses increased dramatically from $7,567 in 2007 to $2,126,966
in 2008 as the Company issued share-based compensation valued at $1,823,400 to
compensate consultants and independent contractors who contributed to our
R&D effort. In fiscal 2007, there were no such expenditures. In fiscal 2008,
salaries of $139,556 and professional service fees such as legal, audit, and
accounting of $25,205 accounted for 13% of total operating
expenses.





Interest
Expense





Interest
expense attributable primarily to our revolving bank line of credit increased
from $8,208 in 2007 to $46,420 in 2008 due largely to the 5-month period in 2007
vs. the 12-month period of fiscal 2008.


9


Liquidity
and Capital Resources





On
February 7, 2007, the Company contracted a $700,000 revolving line of credit
from National Bank of California. The outstanding balance on June 30, 2008 and
June 30, 2007 was $627,856 and $457,389 respectively.  During fiscal
2008, we issued common stock valued at $1,823,400 to pay consultants and
independent contractors for services provided. We had no such expenses in fiscal
2007.  During fiscal 2008, we raised $500,000 through the sale of
1,000,000 shares of preferred stock, which were then converted into 682,438
shares of common stock. We issued no preferred shares in 2007. Our accounts
payable and accrued expenses increased to $56,706 at June 30, 2008 from
approximately $6,789 at June 30, 2007.





Cash
Flow





Net cash
used in operating activities increased from $421,043 in 2007 to $535,961 in
2008. We financed our cash needs with a line of credit in 2007. In 2008, we
financed our cash flow deficiency with the line of credit and the issuance of
preferred stock.





It is our
intent to raise additional debt and/or equity financing to fund operations. In
addition, we expect to fund our operations from revenue generated in fiscal
2010. However, there is no assurance that such financing will be consummated or
obtained in sufficient amounts necessary to meet the Company’s needs, or that
the Company will be able to meet its future contractual obligations. Should we
fail to obtain such financing, the company may curtail its
operations.





ITEM
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


10





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Cavitation
Technologies, Inc.





We have
audited the accompanying consolidated balance sheets of Cavitation Technologies,
Inc. (a development stage company) as of June 30, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ deficit, and
cash flows for the year ended June 30, 2009, the six month period ended June 30,
2008, the period from January 29, 2007 (date of inception) through December 31,
2007, and the period from January 29, 2007 through June 30, 2009. 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.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cavitation Technologies,
Inc. as of June 30, 2009 and 2008, and the results of its operations and its
cash flows for the year ended June 30, 2009, the six month period ended June 30,
2008, the period from January 29, 2007 through December 31, 2007, and the period
from January 29, 2007 through June 30, 2009, in conformity with accounting
principles generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has not generated revenues since
inception, has incurred losses in developing its business, and further losses
are anticipated. The Company requires additional funds to meet its obligations
and the costs of operations. These factors, among others, raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans in this regard are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





/s/ Rose,
Snyder & Jacobs


A
Corporation of Certified Public Accountants





Encino,
California


September
28, 2009


11




Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Balance Sheets
 
 June
      30,
                      
                      
                      June
      30,2009
                      
                      
                      2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      5,038
                      
                      
                      $
                      310,929Prepaid
      expenses and other current assets
                      
                      
                      2,341
                      
                      
                      
                      1,445Total
      current assets
                      
                      
                      7,379
                      
                      
                      
                      312,374Property
      and equipment, net
                      
                      
                      62,753
                      
                      
                      
                      25,306Other
      assets
                      
                      
                      9,500
                      
                      
                      
                      9,500Total
      assets
                      
                      $
                      79,632
                      
                      
                      $
                      347,180LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      382,615
                      
                      
                      $
                      56,706Deferred
      revenue
                      
                      
                      26,000
                      
                      
                      
                      —Convertible
      notes payable
                      
                      
                      200,000
                      
                      
                      
                      —Line
      of credit
                      
                      
                      636,917
                      
                      
                      
                      627,856Total
      current liabilities
                      
                      
                      1,245,532
                      
                      
                      
                      684,562Commitments
      and contingencies, note 10Stockholders'
      deficit:Preferred
      stock ,$0.001 par value, 10,000,000 shares authorized, 111,111 shares and
      0 shares issued and outstanding of Series A Preferred Stock as of June 30,
      2009 and June 30, 2008, respectively
                      
                      
                      111
                      
                      
                      
                      —Common
      stock, $0.001 par value, 100,000,000 shares authorized, 29,661,531 shares
      and 18,470,198 shares issued and outstanding as of June 30, 2009 and
      June 30, 2008, respectively
                      
                      
                      29,661
                      
                      
                      
                      18,470Additional
      paid-in capital
                      
                      
                      4,148,926
                      
                      
                      
                      2,373,809Deficit
      accumulated during the development stage
                      
                      
                      (5,344,598
                      )
                      
                      
                      (2,729,661
                      )Total
      stockholders' deficit
                      
                      
                      (1,165,900
                      )
                      
                      
                      (337,382
                      )Total
      liabilities and stockholders' deficit
                      
                      $
                      79,632
                      
                      
                      $
                      347,180
 
 See
accompanying notes, which are an integral part of these financial
statements
  12
 
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Operations
 
 January 29, 2007,January 29, 2007
                    
                    
                    Inception,Six Month
                    
                    
                    (date of inception)
                    
                    
                    ThroughYear Ended
                    
                    
                    Period Ended
                    
                    
                    through
                    
                    
                    June 30,June 30, 2009
                    
                    
                    June 2008
                    
                    
                    December 31, 2007
                    
                    
                    2009General
      and administrative expenses
                    
                    $
                    2,086,293
                    
                    
                    $
                    235,631
                    
                    
                    $
                    264,819
                    
                    
                    $
                    2,586,743Research
      and development expenses
                    
                    
                    311,793
                    
                    
                    
                    1,893,024
                    
                    
                    
                    233,681
                    
                    
                    
                    2,438,498Total
      operating expenses
                    
                    
                    2,398,086
                    
                    
                    
                    2,128,655
                    
                    
                    
                    498,500
                    
                    
                    
                    5,025,241Loss
      from operations
                    
                    
                    (2,398,086
                    )
                    
                    
                    (2,128,655
                    )
                    
                    
                    (498,500
                    )
                    
                    
                    (5,025,241
                    )Interest
      expense
                    
                    
                    (97,905
                    )
                    
                    
                    (19,942
                    )
                    
                    
                    (34,685
                    )
                    
                    
                    (152,532
                    )Loss
      before income taxes
                    
                    
                    (2,495,991
                    )
                    
                    
                    (2,148,597
                    )
                    
                    
                    (533,185
                    )
                    
                    
                    (5,177,773
                    )Income
      tax expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      loss
                    
                    $
                    (2,495,991
                    )
                    
                    $
                    (2,148,597
                    )
                    
                    $
                    (533,185
                    )
                    
                    $
                    (5,177,773
                    )Net
      loss available to common stockholders per share:Basic
      and Diluted
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.13
                    )
                    
                    
                    (0.04
                    )Weighted
      average shares outstanding:Basic
      and Diluted
                    
                    
                    25,646,898
                    
                    
                    
                    16,399,770
                    
                    
                    
                    14,331,210
 
 See
accompanying notes, which are an integral part of these financial
statements
  13
 
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Changes In Stockholders' Deficit
 
 Preferred
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    Additional
                    
                    
                    AccumulatedShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Paid-In
      Capital
                    
                    
                    Deficit
                    
                    
                    TotalIssuance
      of common stock for services on January 29, 2007,
inception
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    14,331,210
                    
                    
                    $
                    14,331
                    
                    
                    $
                    6,669
                    
                    
                    $
                    —
                    
                    
                    $
                    21,000Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (533,185
                    )
                    
                    
                    (533,185
                    )Balance
      at December 31, 2007
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    14,331,210
                    
                    
                    $
                    14,331
                    
                    
                    $
                    6,669
                    
                    
                    $
                    (533,185
                    )
                    
                    $
                    (512,185
                    )Common
      stock sold for cash
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    682,438
                    
                    
                    
                    682
                    
                    
                    
                    499,318
                    
                    
                    
                    —
                    
                    
                    
                    500,000Common
      stock issued as payment for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,456,550
                    
                    
                    
                    3,457
                    
                    
                    
                    1,819,943
                    
                    
                    
                    —
                    
                    
                    
                    1,823,400Amortization
      of discount on convertible preferred stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    47,879
                    
                    
                    
                    (47,879
                    )
                    
                    
                    —Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,148,597
                    )
                    
                    
                    (2,148,597
                    )Balance
      at June 30, 2008
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    18,470,198
                    
                    
                    $
                    18,470
                    
                    
                    $
                    2,373,809
                    
                    
                    $
                    (2,729,661
                    )
                    
                    $
                    (337,382
                    )Preferred
      stock sold in connection with reverse merger for cash
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    716,520
                    
                    
                    
                    717
                    
                    
                    
                    124,283
                    
                    
                    
                    —
                    
                    
                    
                    125,000Preferred
      stock sold for cash
                    
                    
                    111,111
                    
                    
                    
                    111
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    99,889
                    
                    
                    
                    —
                    
                    
                    
                    100,000Preferred
      stock - Beneficial Conversion Feature
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    11,111
                    
                    
                    
                    (11,111
                    )
                    
                    
                    —Bio
      shares outstanding before reverse merger
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9,280,178
                    
                    
                    
                    9,280
                    
                    
                    
                    (9,280
                    )
                    
                    
                    —
                    
                    
                    
                    —Common
      stock issued as payment for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    661,303
                    
                    
                    
                    661
                    
                    
                    
                    639,012
                    
                    
                    
                    —
                    
                    
                    
                    639,673Common
      stock sold for cash
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    533,332
                    
                    
                    
                    533
                    
                    
                    
                    299,467
                    
                    
                    
                    —
                    
                    
                    
                    300,000Warrants
      issued in connection with issuance of convertible debt
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    49,245
                    
                    
                    
                    —
                    
                    
                    
                    49,245Amortization
      of discount on convertible preferred stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    107,835
                    
                    
                    
                    (107,835
                    )
                    
                    
                    —Warrants
      issued as payment for services
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    146,043
                    
                    
                    
                    —
                    
                    
                    
                    146,043Stock
      option compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    307,512
                    
                    
                    
                    —
                    
                    
                    
                    307,512Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,495,991
                    )
                    
                    
                    (2,495,991
                    )Balance
      at June 30, 2009
                    
                    
                    111,111
                    
                    
                    $
                    111
                    
                    
                    
                    29,661,531
                    
                    
                    $
                    29,661
                    
                    
                    $
                    4,148,926
                    
                    
                    $
                    (5,344,598
                    )
                    
                    $
                    (1,165,900
                    )
 
 See
accompanying notes, which are an integral part of these financial
statements
  14
 
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Statements
of Cash Flows
 
 January 29,2007
                        
                        
                        January 29, 2007,Six Month
                        
                        
                        (date of inception)
                        
                        
                        Inception,Year Ended
                        
                        
                        Period Ended
                        
                        
                        through
                        
                        
                        ThroughJune 30, 2009
                        
                        
                        June 30, 2008
                        
                        
                        December 31, 2007
                        
                        
                        June 30, 2009Operating
      activities:Net
      loss
                        
                        
                        (2,495,991
                        )
                        
                        
                        (2,148,597
                        )
                        
                        $
                        (533,185
                        )
                        
                        
                        (5,177,773
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        7,212
                        
                        
                        
                        2,263
                        
                        
                        
                        3,143
                        
                        
                        
                        12,618Warrants
      issued in connection with convertible notes payable
                        
                        
                        49,245
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        49,245Common
      stock issued for services
                        
                        
                        640,027
                        
                        
                        
                        1,823,400
                        
                        
                        
                        20,990
                        
                        
                        
                        2,484,417Stock
      option compensation
                        
                        
                        307,512
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        307,512Warrants
      issued for services
                        
                        
                        146,043
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        146,043Effect
      of changes in:Prepaid
      expenses and other current assets
                        
                        
                        (897
                        )
                        
                        
                        (1,445
                        )
                        
                        
                        —
                        
                        
                        
                        (2,342
                        )Deposits
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (9,500
                        )
                        
                        
                        (9,500
                        )Accounts
      payable and accrued expenses
                        
                        
                        325,557
                        
                        
                        
                        49,917
                        
                        
                        
                        6,799
                        
                        
                        
                        382,273Deferred
      revenue
                        
                        
                        26,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        26,000Net
      cash used in operating activities
                        
                        
                        (995,292
                        )
                        
                        
                        (274,462
                        )
                        
                        
                        (511,753
                        )
                        
                        
                        (1,781,507
                        )Investing
      activities:Purchase
      of Property and Equipment
                        
                        
                        (44,660
                        )
                        
                        
                        —
                        
                        
                        
                        (30,712
                        )
                        
                        
                        (75,372
                        )Net
      investing activities
                        
                        
                        (44,660
                        )
                        
                        
                        —
                        
                        
                        
                        (30,712
                        )
                        
                        
                        (75,372
                        )Financing
      activities:Proceeds
      from line of credit borrowings
                        
                        
                        9,061
                        
                        
                        
                        85,309
                        
                        
                        
                        542,547
                        
                        
                        
                        636,917Proceeds
      from sales of preferred stock
                        
                        
                        225,000
                        
                        
                        
                        500,000
                        
                        
                        
                        —
                        
                        
                        
                        725,000Payments
      on convertible notes payable
                        
                        
                        235,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        235,000Proceeds
      from convertible notes payable
                        
                        
                        (35,000
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (35,000
                        )Proceeds
      from sale of common stock
                        
                        
                        300,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        300,000—
                        
                        
                        
                        —
                        
                        
                        
                        —Net
      cash provided by financing activities
                        
                        
                        734,061
                        
                        
                        
                        585,309
                        
                        
                        
                        542,547
                        
                        
                        
                        1,861,917Net
      increase (decrease) in cash
                        
                        
                        (305,891
                        )
                        
                        
                        310,847
                        
                        
                        
                        82
                        
                        
                        
                        5,038Cash,
      beginning of period
                        
                        
                        310,929
                        
                        
                        
                        82
                        
                        
                        
                        —
                        
                        
                        
                        —Cash,
      end of period
                        
                        
                        5,038
                        
                        
                        
                        310,929
                        
                        
                        
                        82
                        
                        
                        
                        5,038Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                        
                        
                        48,660
                        
                        
                        
                        19,942
                        
                        
                        
                        34,685
                        
                        
                        
                        103,287Cash
      paid for income taxes
                        
                        
                        1,619
                        
                        
                        
                        800
                        
                        
                        
                        1,050
                        
                        
                        
                        3,469Supplemental
      disclosure of non-cash investing and financing activities:Warrants
      issued in connection with Preferred Shares
                        
                        
                        107,835
                        
                        
                        
                        47,879
                        
                        
                        
                        —
                        
                        
                        
                        155,714Beneficial
      Conversion feature of Preferred Stock
                        
                        
                        11,111
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        11,111Conversion
      of preferred to common shares in reverse merger
                        
                        
                        —
                        
                        
                        
                        625,000
                        
                        
                        
                        —
                        
                        
                        
                        625,000Proceeds
      from sales of preferred sharesused to purchase
      shares of Bio
                        
                        
                        400,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        400,000
 
 See
accompanying notes, which are an integral part of these financial
statements
  15





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
1 - Organization





Hydrodynamic
Technology, Inc. dba Cavitation Technologies, Inc (“Hydro”, or the “Company”)
was incorporated on January 29, 2007, in California. The Company designs and
engineers environmentally friendly NANO technology based systems that use our
patents pending, multi-stage, continuous flow-through, hydrodynamic cavitation
reactors with systems that have  commercial application in industries
such as vegetable oil de-gumming, renewable fuels, water recycling
and desalination, alcoholic beverage enhancement, and crude oil yield
enhancement.





Note
2 – Basis of Presentation and Going Concern





Management’s Plan Regarding
Going Concern





The
Company is a development stage entity and is primarily engaged in the
development of a bio-diesel fuel production systems (Bioforce 9000 and the
Reactor Skid). The initial focus of the Company’s research and development will
be the generation of products for our target market of US and International
biodiesel producers. The Company’s success will depend in part on its ability to
obtain patents, maintain trade secrets, and operate without infringing on the
proprietary rights of others, both in the United States and other countries.
There can be no assurances that patents issued to the Company will not be
challenged, invalidated, or circumvented, or that the rights granted hereunder
will provide proprietary protection or competitive advantage to the
Company.





The
Company has no significant operating history and, from January 29, 2007,
(inception), through June 30, 2009, has generated a net loss of $5,177,773. The
Company also has negative cash flow from operations and negative net equity. The
accompanying financial statements for the year ended June 30, 2009, the six
month period ended June 30, 2008, the period from January 29, 2007 (date of
inception) through December 31, 2007, and the period from January 29, 2007
through June 30, 2009 have been prepared in conformity with generally accepted
accounting principles, which contemplate continuation of the Company as a going
concern.





Management’s
plan is to raise additional debt and/or equity financing to fund future
operations and to provide additional working capital. However, there is no
assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet the Company’s needs, or that the Company will be able
to meet its future contractual obligations. Should management fail to obtain
such financing, the Company may curtail its operations.





The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from an
inability of the Company to continue as a going concern.





Basis of
Presentation





On
October 24, 2008, the Company effected a transaction with Bio Energy, Inc., a
non-operating shell company (“Bio”) (the “Transaction”). Under the terms of the
Transaction, Bio performed a 7.5-to-1 forward stock split of its outstanding
shares of common stock. Bio issued 19,186,759 (post forward split) of its shares
of common stock and assumed 410,000 warrants and 675,000 common stock options in
exchange for 100% of the outstanding shares of the Company. Immediately after
the Transaction, there were a total of 28,030,176 shares of common stock
outstanding, consisting of 19,186,759 shares owned by the Company, as well as an
additional 9,280,178 owned by others. The Company warrants and options
converted into warrants and options to purchase 740,430 shares of Bio Common
Stock


16


From a
legal perspective, Bio acquired Hydro. However from an accounting perspective,
the Transaction is viewed as a recapitalization of Hydro accompanied by an
issuance of stock by Hydro for the net assets of Bio. This is because Bio did
not have operations immediately prior to the merger, and following the merger,
Hydro is the operating company. Hydro's officers and directors will serve as the
officers and directors of the new combined entity. Additionally, Hydro's
stockholders own over 80% of the outstanding shares of Bio after the completion
of the transaction. In connection with the transaction, Bio also changed its
name to Cavitation Technologies, Inc.





In 2008,
the Company changed its fiscal year-end from December 31st to June 30th.
Accordingly, the Company is reporting operating results for the six month period
from January 1, 2008 through June 30, 2008





Note 3 -  Significant
Accounting Policies





Principles
of Consolidation





The
consolidated financial statements include the accounts of Cavitation
Technologies, Inc. and its wholly owned subsidiaryHydrodynamic Technology, Inc.
All significant inter-company transactions and balances have been eliminated
through consolidation.





Fair Value
Measurement





Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”).
FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. In February 2008, the Financial
Accounting Standards Board issued Staff Position Nos. 157-1 and 157-2, which
partially deferred the effective date of FAS 157 for one year for certain
nonfinancial assets and liabilities and removed certain leasing transactions
from its scope. The Company does not expect the implementation of FSP 157-1
and 157-2 to have a material impact on the Company’s consolidated financial
position, results of operations or cash flows. In October 2008, the Financial
Accounting Standards Board issued Staff Position No. 157-3, which clarifies
the application of FAS 157 and demonstrates how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP 157-3 became effective upon issuance. The implementation of
this standard did not have any impact on the Company’s consolidated financial
positions, results of operations, or cash flows.




The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and other accrued expenses approximate fair value because of the short
maturity of these items. The carrying amounts of outstanding debt issued
pursuant to credit agreements approximate fair value because interest rates over
the term of these instruments approximate current market interest
rates.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S.”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the financial
statement date, and reported amounts of revenue and expenses during the
reporting period. Significant estimates are used in valuing our stock
options, warrants, and common stock issued for services, among other items.
Actual results could differ from these estimates.


17


Revenue
Recognition




Revenue
is recognized when: an arrangement exists; delivery has occurred, including
transfer of title and risk of loss for product sales, or services have been
rendered for service revenues; the price to the buyer is fixed or determinable;
and collectibility is reasonably assured. The Company recognizes revenues in
accordance wih Securities and Exchange Commission Staff Accounting Bulletin
(“SAB” No. 101, Revenue
Recognition,as amended by SAB No. 104. During 2009 ,the Company received
a deposit of $26,000 from a customer relating to an order for our first
operational Bioforce 9000
Reactor Skid System. Because this transaction has not yet been fully
completed, this amount has been reflected in deferred revenue on the
accompanying balance sheet as of June 30, 2009.





Cash





The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.





Property
and Equipment





Property
and equipment presented at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the assets. Betterments, renewals, and
extraordinary repairs that extend the life of the assets are capitalized; other
repairs and maintenance charges are expensed as incurred. The cost and
related accumulated depreciation and amortization applicable to retired assets
are removed from the Company's accounts, and the gain or loss on dispositions,
if any, is recognized in the consolidated statements of operations





Stock-Based
Compensation





Compensation
costs related to stock options are determined in accordance with SFAS
No. 123R, “Share-Based Payments”. Under this method, stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the applicable vesting period of the
stock award using the straight-line method.





Income
Taxes





The
Company accounts for income taxes under the liability method, which requires the
recognition of deferred income 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 income
tax assets to the amount expected to be realized. The provision for income
taxes, if any, represents the tax payable for the period and the change during
the period in deferred income tax assets and liabilities.





Advertising
costs





Advertising
costs incurred in the normal course of operations are expensed as incurred.
Advertising expenses amounted to $37,390, $2,204, $ 52,989, and $92,584 for the
year ended June 30, 2009, the six month period ended June 30, 2008, the period
from January 29, 2007 through December 31, 2007, and the period from January 29,
2007 through June 30, 2009, respectively.


18




Research and
Development Costs





Research
and development costs, which relate primarily to the development, design, and
testing of preproduction prototypes and models, are expensed as incurred. Such
costs, were $311,793, $1,893,024, $233,681, and $2,438,948 for the year ended
June 30, 2009, the six month period ended June 30, 2008, the period from January
29, 2007 through December 31, 2007, and the period from January 29, 2007 through
June 30, 2009, respectively.





Subsequent
Events





In
accordance with SFAS No. 165, “Subsequent Events”, the
Company has performed a review of events subsequent to the balance sheet date
through September 28, 2009, the date that the consolidated financial
statements were issued. See note 12 for a discussion of subsequent
events.





Note4- Net Loss Per Share–Basic and
Diluted





The
Company computes loss per common share using SFAS No. 128, Earnings Per
Share.  The net loss per common share, both basic and diluted,
is computed based on the weighted average number of shares outstanding for the
period.  The diluted loss per common share is computed by dividing the
net loss attributable to common stockholders by the weighted average shares
outstanding assuming all potential dilutive common shares were issued. Diluted
EPS uses the treasury stock method or the if-converted method, where applicable,
to compute the potential dilution that would occur if stock-based awards and
other commitments to issue common stock were exercised.





On June
30, 2009, the Company had 750,646 stock options and 1,510,901 warrants
outstanding to purchase common stock that were not included in the diluted net
loss per common share because their effect would be anti-dilutive.  In
addition, the Company had 111,111 shares of Series A Preferred Stock
outstanding, which are convertible into approximately 125,000 shares of common
stock. The Company also had $200,000 of convertible notes payable outstanding
that are convertible into approximately 285,714 shares of common stock of the
Company. These items were not included in the calculation of diluted net loss
per common share because their effect would be anti-dilutive.





The components of basic and diluted
earnings per share for the year ended June 30, 2009, the six
month  period ended June 30, 2008, and the period from January 29,
2007 through December 31, 2007 are as follows:





June 30, 2009
                    
                    
                    June 30, 2008
                    
                    
                    December 31, 2007NumeratorNet
      loss
                    
                    $
                    (2,495,991
                    )
                    
                    $
                    (2,148,597
                    )
                    
                    $
                    (533,185
                    )Amortization
      of discount on preferred stock
                    
                    
                    (107,835
                    )
                    
                    
                    (47,879
                    )
                    
                    
                    —Net
      loss attributable to common stockholders
                    
                    
                    (2,603,826
                    )
                    
                    
                    (2,196,476
                    )
                    
                    
                    (533,185
                    )DenominatorWeighted-average
      common shares outstanding
                    
                    
                    25,646,898
                    
                    
                    
                    16,399,770
                    
                    
                    
                    14,331,210


19


Note
5 -  Property and Equipment





Property
and equipment consisted of the following as of June 30, 2009 and June 30,
2008





2009
                    
                    
                    2008Leasehold
      improvements
                    
                    
                    2,475
                    
                    
                    
                    2,475Furniture
                    
                    
                    26,837
                    
                    
                    
                    26,837Office
      equipment
                    
                    
                    1,400
                    
                    
                    
                    1,400Equipment
                    
                    
                    44,660
                    
                    
                    
                    —Total
      Property and Equipment
                    
                    
                    75,372
                    
                    
                    
                    30,712Accumulated
      depreciation
                    
                    
                    (12,619
                    )
                    
                    
                    (5,406
                    )Property
      and Equipment, Net
                    
                    $
                    62,753
                    
                    
                    $
                    25,306





Property
and equipment are recorded at cost and depreciated using the straight-line
method over the following estimated useful lives





Leasehold
      improvements
                
                Shorter
      of life of asset or leaseFurniture
                
                5-7
      YearsOffice
      equipment
                
                5-7
      YearsEquipment
                
                5-7
      Years





Note 6 - Bank Revolving Line of
Credit





On
February 7, 2007, the Company contracted a $700,000 revolving line of credit
from National Bank of California. The line of credit bears interest at Prime
plus 1%, which was 7% at June 30, 2009 and 6% (1% plus 5% Prime rate) at June
30, 2008. The balance outstanding under this line of credit was $636,917 and
$627,856 at June 30, 2009 and 2008, respectively. The revolving line of credit
renewed four times.  On August 1, 2009, the revolving line of credit
was replaced by a one-year variable rate loan which matures on August 1,
2010.  This loan bears interest at Prime + 2.75% and will be repaid
with equal monthly installments of $7,396 beginning September 1,
2009.  A final payment of $599,322 is due August 1, 2010. This line of
credit is secured by personal guarantees of the Company’s principals and
assets.





Note
7 - Convertible Notes Payable





In
December 2008, the Company entered into a Note and Warrant Purchase Agreement
(the “Agreement”),
where the Company issued an aggregate of $125,000 in Convertible Notes Payable
which accrue interest at a rate of 12% per annum and are due in April 2009. In
January, 2009 the Company entered into an additional Agreement where the Company
issued an aggregate of $110,000 of notes payable which accrue interest at a rate
of 12% per annum and are due in April and August 2009.  Under the
terms of the Agreements, the lenders may convert all principal and accrued
interest into shares of the Company’s common stock at a conversion rate equal to
the average closing price of the Company’s stock for the 10 days immediately
preceding the conversion request.


20


In June
2009, the Company repaid $35,000 of the outstanding balance of the notes payable
plus accrued interest, which resulted in an outstanding balance of $200,000 on
June 30, 2009.





Note
8 – Stockholders’ Equity





Common
Stock





During
the year ended June 30, 2009, the Company completed the following
transactions:





On
October 3, 2008, the Company issued 210,000 units, which are comprised of five
shares of its Series A-1 Preferred Stock (total of 1,050,000 preferred shares)
and one warrant to purchase one share of common stock at $0.75 per share for a
net proceed of $525,000 which were placed in Escrow. Upon the closing of the
escrow, $400,000 was used to purchase 50.5% of the outstanding shares of BIO
(See Note 2) and the remaining $125k was distributed to the
company.





On
October 24, 2008, the Company entered into a share exchange agreement with Bio
in which Bio acquired all of the outstanding shares of the Company’s
stockholders. Bio Energy, Inc. issued 19,186,759 shares of its common stock to
the stockholders of Hydrodynamic Technology, Inc. in exchange for all the
outstanding shares of Hydrodynamic Technology, Inc. Under the terms of the
share exchange agreement, Bio performed a 7.5-to-1 forward stock split of its
outstanding shares of common stock.





On
October 24, 2008, in connection with the reverse merger, all shares of Series
A-1 Preferred Stock were converted to common shares of Bio. The accompanying
financial statements have retroactively shown the recapitalization for all
periods presented. As a result of the merger with Bio, the Company no longer has
any Series A-1 Preferred Stock authorized or issued. In connection with the Bio
transaction, 410,000 warrants to purchase 410,000 shares of Common Stock
of  Hydro, which include the 210,000 warrants above, converted into
279,800 warrants to purchase 279,800 shares of Common Stock of Bio.





On April
22, 2009, the Company issued 166,666 shares of common stock at $0.60 per share
..





In June
2009 the Company issued 366,666 shares of common stock at prices ranging from
$0.50 to $0.60 per share





During
2009, the Company issued 661,303 shares of common stock as payment for services
rendered by outside parties.





Preferred
Stock





On March
17, 2009, the Company  filed Amended and Restated Articles of
Incorporation and created two  new series of preferred stock, the
first of which is designated Series A Preferred Stock and the second of which is
designated as Series B Preferred Stock .  The total number of shares
of Common Stock which this corporation shall have authority to issue is
100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of
which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000
shares are designated as Series B Preferred Stock, with the rights, preferences
and privileges of the Series B Preferred Stock to be designated by the Board of
Directors. Each share of Common Stock and Preferred Stock has a par value of
$0.001.





Series A
Preferred Stock The total number of shares of this preferred stock which
this corporation shall have the authority to issue is 5,000,000 shares of
Preferred Stock at a purchase price equal to the closing price of the Company’s
Common Stock the business day immediately preceding the purchase by the
Subscriber. Each share of this preferred stock has a par value of $0.001,
together with warrants, exercisable for a number of shares of common stock of
the Company, $0.001 par value per share equal to 100% of the number of shares of
Common Stock that would be issuable upon initial conversion of the Preferred
Stock, at an exercise price of $1.25 per share.  This stock is
convertible into shares of Common Stock of the Company at any time at the
election of the holder.


21


Series B
Preferred Stock.  The Company has authorized 5,000,000 shares of
Preferred Stock as Series B Preferred Stock.  The Board of Directors
can establish the rights, preferences and privileges of the Series B Preferred
Stock.  There are no shares of Series B Preferred Stock
outstanding.





During
the year ended June 30, 2009, the Company completed the following
transactions:





On March
17, 2009 the Company issued 111,111 shares of Series A Convertible Preferred
Stock at a purchase price of $0.90/share, which was equal to the closing price
of the Company’s Common Stock the business day immediately preceding the
purchase by the Subscriber. The preferred stock was issued to a foreign
accredited investor for a purchase price of $100,000.  Each share of
Series A Preferred Stock is convertible at the owner’s option into 1.125 shares
of common stock.  The preferred shares are convertible into shares of
Common Stock of the Company at any time at the election of the holder but will
automatically convert to Common Stock on March 17, 2012.





The
holders of the Series A Preferred Stock are entitled to receive out of any funds
legally available, dividends at the rate of 6% per annum, payable on September
30 and March 30. Dividends shall accrue and be cumulative whether or not they
have been declared.  Dividends may be paid in cash or through the
issuance of additional shares of Series A Preferred Stock at the Company’s
option. As of June 30, 2009, cumulative dividends amounted to approximately
$1,733.





Stock
Options





The
Company's stock option plan permits the granting of stock options to its
employees, directors, consultants and independent contractors. The Company
believes that such awards encourage employees to remain employed by the Company
and also to attract persons of exceptional ability to become employees of the
Company.




The
Company adopted the provisions of SFAS No. 123R,Share-Based Payment (“SFAS
123R”), which requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and non-employee
directors.





Number of
                  Options
                
                
                Weighted-
                  Average
                  Exercise
                  PriceOutstanding,
      July 1, 2008
                
                
                —
                
                
                $
                —Granted
                
                
                750,646
                
                
                $
                1.72Exercised
                
                
                —
                
                
                $
                —Forfeited
                
                
                —
                
                
                $
                —Outstanding,
      June 30, 2009
                
                
                750,646
                
                
                $
                1.72Exercisable,
      June 30, 2009
                
                
                750,646
                
                
                $
                1.72





The fair
value of the options granted during FY09 is estimated at $307,512. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following range of assumptions for
the fiscal year ended June 30, 2009:





Expected
      Life
                      
                      1.0
      - 10.0 yearsStock
      Price Volatility
                      
                      64%
      and 148%Risk
      Free Interest Rate
                      
                      1.06%
      - 3.23%Expected
      Dividends
                      
                      None





These
stock options were fully vested upon being granted and, as a result, the fair
value of these stock options were recorded as an expense on the grant
date.


22





The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which do not have vesting  restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.





The
weighted-average remaining contractual life of options outstanding and
exercisable under the Plan was 8.39 years at June 30, 2009. The exercise prices
for the options outstanding at June 30, 2009 ranged from $1.00 to $2.00. The
intrinsic value of options outstanding and exercisable at June 30, 2009 was
$0.





Warrants





A summary
of the Company’s warrant activity and related information for the year ended
June 30, 2009, the transition period ended June 30, 2008, and the fiscal year
ended December 31, 2007 are shown below.





Warrants
                                                  
                                                  
                                                  Weighted Average Exercise PriceJune 30, 2009
                                                  
                                                  
                                                  June 30, 2008
                                                  
                                                  
                                                  December
                                                    31, 2007
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007O
      Outstanding, beginning of year
                                                  
                                                  
                                                  136,480
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  1.10
                                                  
                                                  
                                                  $
                                                  —
                                                  
                                                  
                                                  $
                                                  —Granted
                                                  
                                                  
                                                  1,374,421
                                                  
                                                  
                                                  
                                                  136,480
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  1.34
                                                  
                                                  
                                                  $
                                                  1.10
                                                  
                                                  
                                                  
                                                  —Exercised
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Forfeited
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Expired
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Outstanding
      — end of year
                                                  
                                                  
                                                  1,510,901
                                                  
                                                  
                                                  
                                                  136,480
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  1.32
                                                  
                                                  
                                                  $
                                                  1.10
                                                  
                                                  
                                                  
                                                  —Exercisable
      at end of year
                                                  
                                                  
                                                  1,510,901
                                                  
                                                  
                                                  
                                                  136,480
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  1.32
                                                  
                                                  
                                                  $
                                                  1.10
                                                  
                                                  
                                                  $
                                                  —Weighted
      average fair value of warrants granted during the year:
                                                  
                                                  $
                                                  0.24
                                                  
                                                  
                                                  $
                                                  0.35
                                                  
                                                  
                                                  $
                                                  —





The fair
value of the warrants granted during FY09 is estimated at $303,123. The fair
value of these warrants was estimated at the date of grant using the
Black-Scholes option-pricing model with the following range of assumptions for
the fiscal year ended June 30, 2009:





Expected
      Life
                      
                      1.5-
      5.0 yearsStock
      Price Volatility
                      
                      
                      64%
      - 148%Risk
      Free Interest Rate
                      
                      
                      0.68%
      – 1.86%Expected
      Dividends
                      
                      None





The
following table summarizes additional information concerning warrants
outstanding and exercisable at June 30, 2009:




23




Warrants
      OutstandingRange
      of Exercise
                                Prices
                              
                              Number
      of
                                Warrants
                              
                              
                              Weighted
                                Average
                                Remaining
                                Contractual
      Life
                                (years)
                              
                              
                              Weighted
                                Average
                                Exercise
      Price
                              
                              
                              Warrants
                                Number
                                of
      Shares
                                Exercisable$
                              0.60
      – 1.25
                              
                              
                              787,569
                              
                              
                              
                              3.97
                              
                              
                              $
                              1.00
                              
                              
                              
                              787,569$
                              1.50
      – 1.75
                              
                              
                              723,332
                              
                              
                              
                              4.25
                              
                              
                              $
                              1.67
                              
                              
                              
                              723,3321,510,901
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,510,901





Note
9 - Income Taxes





On July
15, 2006, FASB released FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109 (“FIN 48”). These new
rules clarify Statement 109 and indicate criteria that an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in the financial statements. Because FIN 48 includes a higher
standard that tax benefits must meet before they can be recognized in a
company’s financial statements, the Interpretation dramatically changes how
companies account for uncertain income tax positions. As the Company has no
uncertain tax positions as defined in FIN 48, there are no corresponding
unrecognized tax benefits. Any future changes in the unrecognized tax benefit
will have no impact on the Company’s effective tax rate due to the existence of
the valuation allowance. The Company estimates that the unrecognized tax benefit
will not change significantly within the next twelve months. It is the Company’s
policy to classify income tax penalties and interest, if any, as part of general
and administrative expense in its Statements of Operations. The Company has not
incurred any interest or penalties since inception.





The
Company files income tax returns with state and federal jurisdictions. The
Company’s state and federal income tax returns for the tax years ended December
31, 2007 and June 30, 2008 are subject to examination by the taxing authorities
as of June 30, 2009.





The
Company has sustained significant net operating losses since inception and has
generated corresponding net operating loss carryforwards. We are in the process
of evaluating those losses.





At June
30, 2009 and 2008, based on the weight of available evidence, including
cumulative losses in recent years and expectations of future taxable income, we
determined that it was not more likely than not that our deferred income tax
assets would not be realized. Consequently we have recorded a 100% valuation
allowance, which is presented as a reduction of our deferred income tax asset,
which principally arose from our net operating loss carryforwards.





Note
10 – Commitments and Contingencies





Credit and Concentration
Risk





The
Company maintains deposit accounts in a single financial institution. From time
to time, cash deposits may exceed federally insured limits.





Lease
Agreements





On
January 9, 2007, the Company entered into a 3-year lease agreement for
approximately 6,000 square feet of office space located at 10019 Canoga Ave.,
Chatsworth, CA 91311. The lease provides for monthly rental payments, including
parking and utilities of $4,750 for the first 12 months, and cost of living
adjustments according to the Consumer Price Index for All Urban Customers at a
rate not less than 3% per annum, and not greater than 6% per annum. As of June
30, 2009, the Company has a security deposit of $9,500 associated with this
lease.


24





The
Company’s total future minimum lease payments amount to $62,479 for the year
ending June 30, 2010.




Total
rental expense was $64,198, $28,500, $52,250, and $144,048 for the year ended
June 30, 2009, the six month period ended June 30, 2008, the period from January
29, 2007 through  December 31, 2007, and the period from January 29,
2007 through June 30, 2009, respectively.





Note
11 – Recent Accounting Standards





Accounting
standards promulgated by the Financial Accounting Standards Board (“FASB”) change periodically.
Changes in such standards may have an impact on the Company’s future financial
position. The following are a summary of recent accounting
developments.





n
February 2007, the FASB issued SFAS No. 159, The Fair Value Option of Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on items for which
the fair value option has been elected be reported in earnings. SFAS No. 159 is
effective as of the beginning of the entity’s first fiscal year that begins
after November 15, 2007. The adoption of SFAS No. 159 did not have a significant
impact on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51. SFAS No. 160
establishes accounting and reporting standards for the non—controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests, of
which the Company currently has none. All other requirements of SFAS No. 160
shall be applied prospectively. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The adoption of SFAS No. 160 did not have an
significant impact on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations, which revises current purchase accounting guidance in SFAS 141,
Business Combinations. SFAS No. 141R requires most assets acquired and
liabilities assumed in a business combination to be measured at their fair
values as of the date of acquisition. SFAS No. 141R also modifies the initial
measurement and subsequent re-measurement of contingent consideration and
acquired contingencies, and requires that acquisition related costs be
recognized as expense as incurred rather than capitalized as part of the cost of
the acquisition. SFAS No. 141R is effective for fiscal years beginning after
December 15, 2008 and is to be applied prospectively to business combinations
occurring after adoption. The impact of SFAS No. 141R on the Company’s financial
statements will depend on the nature and extent of the Company’s future
acquisition activities.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161
requires enhanced disclosures about a company's derivative and hedging
activities. These enhanced disclosures will discuss (a) how and why a company
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under FASB Statement No. 133 and its related
interpretations and (c) how derivative instruments and related hedged items
affect a company's financial position, results of operations and cash flows.
SFAS No. 161 is effective for fiscal years beginning on or after November 15,
2008, with earlier adoption allowed. The adoption of SFAS No. 161 on the
Company’s financial statements will depend on the nature and extent of the
Company’s future use of hedging and derivatives.





In April
2008, the Financial Accounting Standards Board, or FASB issued FASB Staff
Position (“FSP”) No.
FAS 142-3 “Determination of
the Useful Life of Intangible Assets.”This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other
Intangible Assets.”The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under FASB Statement No. 141 (revised 2007), “Business Combinations”and
other U.S. generally accepted accounting principles (GAAP). This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company will adopt this FSP beginning July 1, 2009 and it is
not believed that this will have a significant impact on the Company’s financial
position, results of operations, or cash flow.


25




In May
2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).”FSP APB 14-1 addresses instruments commonly referred to as
Instrument C from Emerging Issues Task Force No. 90-19, which requires the
issuer to settle the principal amount in cash and the conversion spread in cash
or net shares at the issuer's option. FSP APB 14-1 requires that issuers of
these instruments account for their liability and equity components separately
by bifurcating the conversion option from the debt instrument, classifying the
conversion option in equity, and then accreting the resulting discount on the
debt as additional interest expense over the expected life of the debt. FSP APB
14-1 is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, and requires retrospective application to all
periods presented. Early application is not permitted. Management is currently
evaluating the impact of the adoption of this statement; however, but believes
any impact with respect to future debt transactions could be
material.





In May
2009 FASB issued Statement 165, Subsequent Events. The
objective of this Statement is to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this Statement sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. It also includes the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements.  And thirdly, it addresses the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. An entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009.  The adoption of this
accounting pronouncement did not have a material effect on our financial
statements.





In June
2009 FASB issued SFAS 167 which is an amendment to FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest
Entities, to require an enterprise to perform an analysis to determine
whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity. This Statement amends
Interpretation 46(R) to require ongoing reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity.  This
Statement amends Interpretation 46(R) to eliminate the quantitative-based risks
and rewards calculation previously required for determining the primary
beneficiary of a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance.  This Statement shall be effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009.  This pronouncement is expected to have no material impact on the
Company’s financial statements.





FSP FAS
107-1 and APB 28-1—Interim Disclosures about Fair Value of Financial
Instruments.  This FASB Staff Position (FSP) issued April 9, 2009
amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments,to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting,to require those disclosures in summarized financial
information at interim reporting periods. This FSP shall be effective for
interim reporting periods ending after June 15, 2009. This pronouncement is
expected to have no material impact on the Company’s financial
statements.


26


In June
2009 FASB issued Statement No. 168 - The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles —a replacement of FASB Statement No.
162.FASB Statement No.
162, The Hierarchy of
Generally Accepted Accounting Principles, which became effective on
November 13, 2008, identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial
statements of nongovernmental entities that are presented in conformity with
GAAP.  Statement 162 arranged these sources of GAAP in a hierarchy for
users to apply accordingly. Once the Codification is in effect, all of its
content will carry the same level of authority, effectively superseding
Statement 162. In other words, the GAAP hierarchy will be modified to include
only two levels of GAAP: authoritative and non-authoritative. This pronouncement
is expected to have no material impact on the Company’s financial
statements.





As a
result, this Statement replaces Statement 162 to indicate this change to the
GAAP hierarchy.  The Codification will supersede all then-existing non-SEC
accounting and reporting standards. In the Board’s view, the issuance of this
Statement and the Codification will not change GAAP, and as a result, we do not
believe will have a material impact on the financial reporting responsibilities
of the company. This Statement is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.  We
do not anticipate that the adoption of this accounting pronouncement will have a
material effect on our financial statements.





Note
12 – Subsequent Events





Convertible Notes
Payable





On August
17, 2009, $180,000 in notes payable plus accrued interest were converted into
374,124 shares of common stock. Immediately prior to the conversion, the Company
changed the conversion rate to be equal to 75% of  the average closing
price of the Company’s stock for the 10 days immediately preceding the
conversion request.





Common
and Preferred Stock





From
July1, 2009 through
September 28, 2009, the Companyissued no preferred stock andhad
the following common stockissuances:   On
July 24, 2009, the Company issued a total of 5,811,000 shares of Common Stock to
service providers to the Company.





On July
27, 2009, the Company issued another 100,000 shares of Common Stock to an
investor in the Company for the amount of $50,000.00.





On August
3, 2009 the Company issued 55,000 shares of Common Stock to consultants to the
Company..





On August
7, 2009, the Company issued 374,125 shares of Common Stock for the conversion of
indebtedness owed to noteholders.





On
September 16, 2009, the Company issued 63,337 of Common Stock to its legal
counsel for the conversion of all previously outstanding legal
bills.




Line of
Credit





On August
1, 2009, the Company’s revolving line of credit was replaced by a one-year
variable rate loan, which matures on August 1, 2010.  This loan bears
interest at Prime + 2.75%, and will be repaid with equal monthly installments of
$7,396 beginning September 1, 2009.  A final payment of $599,322 is
due on August 1, 2010.




27




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





None.





ITEM
9A(T).  CONTROLS AND PROCEDURES





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as of June 30, 2009, the end of the period covered by this
annual report. Based on their evaluation, our principal executive officer and
principal financial officer concluded that, due to the existence of material
weaknesses, our disclosure controls and procedures are not effective as of June
30, 2009.





Report
of Management on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; providing reasonable assurance that receipts and
expenditures of company assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition,
use or disposition of company assets that could have a material effect on our
financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.





Our
management has evaluated, under the supervision and with the participation of
our chief executive officer and chief financial officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
(“the Exchange Act”).   Based on that evaluation, our chief
executive officer and chief financial officer have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures are
effective in ensuring that information required to be disclosed in our Exchange
Act reports is (1) recorded, processed, and summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms and (2) accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.




Our
Principal Executive Officer and Principal Financial Officer do not expect that
our disclosure controls or internal controls will prevent all error and all
fraud. Although our disclosure controls and procedures were designed to provide
reasonable assurance of achieving their objectives and our principal executive
and financial officer have determined that our disclosure controls and
procedures are not effective at doing so, a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute assurance that
the objectives of the system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented if there exists in an individual a desire to do so. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.


28





Furthermore,
smaller reporting companies face additional limitations. Smaller reporting
companies employ fewer individuals and find it difficult to properly segregate
duties. Often, one or two individuals control every aspect of the Company's
operation and are in a position to override any system of internal control.
Additionally, smaller reporting companies tend to utilize general accounting
software packages that lack a rigorous set of software controls.




In
assessing the effectiveness of our internal control over financial reporting, we
use the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based
on our assessment using those criteria, under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we concluded that for the period ending June 30,
2009, our internal controls over financial reporting are ineffective. We are
searching for additional capital in order to be in a position to address these
material weaknesses. We are also assessing how we can improve our internal
control over financial reporting with the current employees in an effort to
remedy these deficiencies. This annual report does not include an attestation
report of our independent registered public accounting firm regarding internal
control over financial reporting.


ITEM
9B.  Other Information





Not
applicable




Part
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE





Person
                            
                            Age
                            
                            Position
                            
                            TermMr.
      Roman Gordon (1)
                            
                            59
                            
                            CEO,
      Secretary & Director
                            
                            2
      YearMr.
      Igor Gorodnitsky
                            
                            59
                            
                            President
      & Director
                            
                            2
      YearMr.
      R.L. Hartshorn
                            
                            61
                            
                            CFO
      and Director
                            
                            1
      Year




We do not
have an audit committee, nor do we have a compensation committee.  We
anticipate forming these committees at a future Board of Directors’
meeting.





Roman Gordon.Mr.
Gordon is co-founder and has been our Chief Executive Officer and Chairman
of the Board since our founding January 29, 2007.  With more than 15
years combined experience in energy risk management and business management, he
is one of the inventors of our intellectual properties. From 2003 to 2005 Mr.
Gordon was president of Bubble Bee Corp., a car wash development company. Mr.
Gordon was in charge of engineering, construction and development of
environmentally friendly car wash water recycling systems. From 1997 to 2002, he
was Chairman of a publicly traded electric service provider company (ESP),
PowerSource Corp., where he participated in the power marketing of renewable
energy and in evaluation and environmental compliance. PowerSource Energy
Service Provider Corporation was an active participant in the "PowerGreen - 100"
and "PowerGreen - 25" programs. Mr. Gordon received his bachelor degree in 1974
from Polytechnical Institute in Civil Engineering.


29


Mr. Igor
Gorodnitsky.Mr. Gorodnitsky  is co-founder and has
been our President since our founding January 29, 2007.  He is an
entrepreneur who has built a successful business. Mr. Gorodnitsky has developed
expertise in the handling and processing of hazardous waste material, and as a
Senior Haz-Mat Specialist, he has coordinated and successfully completed more
than 500 emergency response Haz-mat clean-ups over the past 20 years. He has
coordinated and supervised Haz Mat projects, emergency and routine spill
clean-ups, and confined space entry tasks. He has coordinated and scheduled
manpower and purchased and scheduled equipment and materials for containment and
treatment of spills. He has successfully managed, coordinated and supervised
projects including Hazscanning, sampling, lab-packing, manifesting, profiling,
labeling, and other special procedures for clients including Pennzoil,
Anheuser-Busch, Pepsi-Cola Bottling, and Tosco Oil Refinery. He has worked with
municipalities including the city
of Beverly Hills, Gardena, Glendale, Monrovia, Vernon, and Westminster. He
worked seven years with the City of Los Angeles, Bureau of Street Maintenance
and Services, on many specialized situations both emergency and routine. He is a
chemist by training and holds several certifications and licenses in Hazwoper
Training Program, Confined Space Entry and Gas Vapour HazCating, Certified
Uniform Waste Manifest Training, Basic and Intermediate HazCating, On-Scene
Incident Commander Emergency, Site Remediation Methods, Underground Storage Tank
Removal, Underground Storage Tank Removal, Health & Safety Supervisor
Certification, Hazardous


Certification,
Tosco Refinery Safety.





Mr. R.L.
Hartshorn.  Mr. Hartshorn,
age 61, has been our Chief Financial Officer since September 22,
2008.  He previously served as a consultant to the company beginning
in December 2007.  He also serves as a board member.  He
served 15 years in a variety of leadership and operational positions in
international banking with Chase Manhattan and other banks in Europe, New York,
and Latin America. As a vice president at Chase and other banks, he was largely
responsible for credit and marketing activities associated with more than 400
corporate clients. Mr. Hartshorn has advised numerous banking transactions
involving significant amounts. He also held sales and sales management positions
for 10 years with two public companies in the IT industry including a 7-year
adventure as VP Marketing & International Sales for a software and
advertising company. Overall, R.L.’s operational experience includes 14 years
with a sales quota and/or P&L responsibility. He has been involved in the
start-up of four business units and a turn-around.He earned a B.S from
the U.S. Naval Academy
and an MBA from The
Thunderbird School of Global Management.





ITEM
11.  EXECUTIVE COMPENSATION





Our Chief
Executive Officer, Roman Gordon, received a salary of $172,856 in fiscal 2009
and $50,034 in fiscal 2008.  Our President, Igor Gorodnitsky, accrued
salary of $224,542 in 2009 and $28,000 in 2008.  R.L. Hartshorn, CFO,
received compensation in the form of 76,986 common stock shares in
2009.





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




SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The
following table sets forth certain information concerning the number of shares
of our common stock known by us to be owned beneficially as of June 30, 2009 and
the date hereof by: (i) each person (including any group) that owns more than 5%
of any class of the voting securities of our company; (ii) each director and
officer of our company; and (iii) directors and officers as a group. Unless
otherwise indicated, the stockholders listed possess sole voting and investment
power with respect to the shares shown. The address for all directors and
officers, unless otherwise indicated, is 10019 Canoga Avenue, Chatsworth, CA
91311.




30




Name and Address
                                                      of Beneficial Owner(1)
                                                    
                                                    Title of Class
                                                    
                                                    Amount and Nature of
                                                      Beneficial Owner
                                                    
                                                    
                                                    Percent of Class(1)(2)Roman
      Gordon,
                                                      CEO
      & Secretary
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    7,107,825
                                                    
                                                    
                                                    
                                                    20.2
                                                    %Igor
      Gorodnistky
                                                      President
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    7,107,825
                                                    
                                                    
                                                    
                                                    20.2
                                                    %R.L.
      Hartshorn
                                                      CFO
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    384,122
                                                    
                                                    
                                                    
                                                    1
                                                    %BioWorld
      Management Technology
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    2,864,877
                                                    
                                                    
                                                    
                                                    8.1
                                                    %Directors
      and Officers
                                                      (as
      a group; threee individuals)
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    14,599,772
                                                    
                                                    
                                                    
                                                    41.42




(1)A
beneficial owner of a security is any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
has or shares: (i) voting power, which includes the power to vote, or to direct
the voting of shares; and (ii) investment power, which includes the power to
dispose or direct the disposition of shares. Certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is deemed
to include the amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in this table does not necessarily
reflect the person’s actual ownership or voting power with respect to the number
of shares of common stock actually outstanding on June 30, 2009, and the date of
this 10-K filing




(2)Based
upon 35,330,300 issued and outstanding shares of common stock as of June 30,
2009 and as of the date of this Current Report.




*
Represents less than 1%





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





In
accordance with item 404 (a) of regulation S-K, the company has had no related
party transactions for  the fiscal years ended June 30, 2009, 2008, or
December 31, 2007





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit





Our
principal auditing firm is Rose, Snyder, and Jacobs.  During fiscal
2009 we paid $85,755 for professional services rendered for the audit of our
annual financial statements and review of financial statements included on Form
10-Q.  We incurred no such charges in fiscal 2008.





Tax Fees





The
aggregate fees billed in fiscal 2009 and fiscal 2008 for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax
planning amounted to $13,250 and $0 respectively.  Registrants shall
describe the nature of the services comprising the fees disclosed under this
category.





Audit
Committee





We are in
the process of implementing pre-Approval Policies and Procedures in accordance those
described in paragraph (c)(7)(i) of Rule 2-01 of Regulation
S-X.


31




Part
IV





ITEM 15.Exhibits, Financial Statement
Schedules





The
following documents are filed as part of this report:





Consolidated
balance sheets June 30, 2009 and 2008 (page 12)





Consolidated
statements of operations — Year ended June 30, 2009, six month transition period
ended June 30, 2008, fiscal year ended December 31, 2007, and the period from
January 29, 2007 (date of inception) through June 30, 2009 (page
13)





Consolidated
statements of changes in stockholders’ deficit — Year ended June 30, 2009, six
month transition period ended June 30, 2008, fiscal year ended December 31, 2007
(page 14)





Consolidated
statements of cash flows — Year ended June 30, 2009, six month transition period
ended June 30, 2008, fiscal year ended December 31, 2007, and the period from
January 29, 2007 (date of inception) through June 30, 2009 (page
15)





Notes to
consolidated financial statements — June 30, 2009 (pages 16 to
27)





In
accordance with article 8 of regulation S-X, CTI is a Smaller Reporting Company and
financial schedules are not required for Smaller Reporting
Companies.




SIGNATURES





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/ Roman
      Gordon
              
              Chief
      Executive Officer and Director
              
              September
      28,
      2009Roman
      Gordon
              
              (Principal
      Executive Officer)
                Chairman
      of the Board/s/  Igor
      Gorodnitsky
              
              President
              
              September28,
      2009Igor
      Gorodnitsky/s/  R.L.
      Hartshorn
              
              Chief
      Financial Officer
              
              September28,
      2009R.L.
      Hartshorn
              
              (Principal
      Financial Officer andAccounting
      Officer)




The
following exhibits are included as a part of this report by
reference:




3.1
Amendment to Certificate of Incorporation





31.1
Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002





31.2
Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002




32.1
Certification of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002


32




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Date:    September
      28, 2009
                Date:  September
      28, 2009By:
      /s/ Roman Gordon
                By:
      /s/ R.L. Hartshorn, Chief Financial OfficerRoman
      Gordon, Chief Executive Officer
                R.L.
      Hartshorn, Chief Financial
Officer




33