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, 2010
 
 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, CALIFORNIA 91311
 (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  o
 (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: $26,216,684 as of December 31, 2009 based on the closing
price of $0.23 per share and 70,186,388 non-affiliate shares
outstanding.
 
 The
registrant had 133,690,665 shares of common stock outstanding September 28,
2010.
 
 DOCUMENTS
INCORPORATED BY REFERENCE:
 None.
 
 
 
 CAVITATION
TECHNOLOGIES, INC.
 FORM
10-K ANNUAL REPORT
 FOR
THE YEAR ENDED JUNE 30, 2010
 TABLE
OF CONTENTS
 
 Table
      of Contents
                PagePART
      IItem
      1.  Business
                3Item
      1A. Risk Factors
                5Item
      1B. Unresolved Staff Comments
                5Item
      2.  Properties
                5Item
      3.  Legal Proceedings
                5Item
      4.  (Removed and Reserved)
                5PART
      IIItem
      5.  Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                5Item
      6.  Selected Financial Data
                11Item
      7.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                11Item
      7A.  Quantitative and Qualitative Disclosures About Market
      Risk
                17Item
      8.  Financial Statements and Supplementary Data
                18Item
      9  Changes In and Disagreements With Accountants on Accounting
      and Financial Disclosure
                37Item
      9A.  Controls and Procedures
                37Item
      9B.  Other Information
                38PART
      IIIItem
      10  Directors, Executive Officers and Corporate
      Governance
                39Item
      11  Executive Compensation
                40Item
      12  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                41Item
      13  Certain Relationships and Related Transactions, and Director
      Independence
                41Item
      14  Principal Accounting Fees and Services
                42PART
      IVItem
      15  Exhibits, Financial Statement Schedules
                42Signatures
                43Certifications
  2
  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
 
 Cavitation
Technologies, Inc. ("the Company") designs and engineers environmentally
friendly NANO technology based systems. These systems have potential commercial
applications in markets such as vegetable oil refining, renewable fuels, water
purification, alcoholic beverage enhancement, algae oil extraction, water-oil
emulsions and crude oil yield enhancement.  Our investment in research
and development since inception on January 29, 2007 through June 30, 2010 is
$4,623,400.
 
 Research
and development has led to products including the Green D+Plus NANO Neutralization
System– a vegetable oil refining system, and the Bioforce 9000 NANO Reactor
System which performs the transesterification process during the
production of biodiesel. Both the Green D+ PlusSystem and the Bioforce 9000NANO Reactor
Systememploy
our proprietary, continuous flow-through, hydrodynamic NANOTechnology in the form of our
multi-stage NANO Series of reactors. To date the Company has sold no products
and has recorded no revenue from product sales.
  3
  Vegetable
Oil Refining
 
 Our Green D+ Plus NANO Refining
Systemuses
a patented  NANO
Refining Technologythat is designed to be used in the vegetable oil
refining process to process crude or de-gummed vegetable oils such as soybean,
rapeseed, and canola into high quality de-gummed oils at lower
costs.
 
 We intend
to license our technology/systems globally through a distribution network of
strategic partners who are recognized leaders in their field and who design,
build, install and recommend our systems. On January 15, 2010, we signed a
worldwide license and distribution agreement with the Desmet Ballestra Group
(DBG) for marketing the Company’s Green D+ Plus NANO RefiningSystems.
 
 In June
2010 we completed a pilot test of our 40 GPM Green D+ Plus NANO Refining
System at a 220 short tons/day commercial crude vegetable oil refining
plant in South Carolina. The system has been integrated and is operating at the
plant. We have received monthly payments from this facility since May 2010, and
we expect to receive monthly payments into the foreseeable future. Because there
is no written agreement with this client, amounts received were recorded as
Deferred Revenue in our balance sheet as of June 30, 2010.
 
 In April
2010 we signed a memorandum of understanding with a vegetable oil refining plant
located in Minnesota for pilot testing a 40 GPM Green D+ Plus NANO Refining
System on a production line that processes 200 ton/day de-gummed oil.
Test results should be known no later than October 30, 2010. We are in the
process of installing and testing a third pilot plant with a vegetable oil
refiner in Oklahoma. Our system should be able to  process 50GPM, or
about 250 tons/day of crude canola oil. This 45-day test period is expected to
be completed by October 30, 2010.
 
 The
global target market for our Green D+ Plus
Systemincludes approximately 300 major (greater than 200 tons per day
processing capability) vegetable oil refining plants. The global demand for
processed vegetable oils has grown consistently from 84.7 million metric tons in
1999 to 126 million metric tons in 2008.
 
 Biodiesel
 
 Our fully
automated Bioforce 9000
NANO Reactor Skid Systemperforms 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 (crude biodiesel).  Given the conditions of the
global biodiesel market and given the limited resources of our company, we do
not intend to focus significant resources to the development of this market in
the foreseeable future.  Instead, we plan to focus the bulk of our
resources on developing our Green D+ Plus line of
business.
 
 Competition
 
 We have a
variety of competitors, large and small. The markets in which we compete are
highly competitive commodity markets where the low-cost producer has the
advantage. Competitors in the edible oil refining industry include well-known
companies which have longer operating histories and stronger financial
capabilities than we. We differentiate ourselves by the designs, processes, and
applications described in our approved patent and patents pending applications.
We compete by offering solutions that we believe can reduce operating expenses
vis-à-vis current technology.
 
 Due to
the nature of our products, we have incurred no costs with respect to
environmental compliance with federal, state, and local laws.  To our
knowledge, our products do not require governmental approval, and we do not
foresee that governmental regulations will have a material impact on our
business.
 
 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.  Our approved patent and
patents pending apply to potential commercial applications in markets such as
vegetable oil refining, renewable fuels production, water purification, crude
oil yield enhancement, and alcoholic beverage enhancement. We plan to continue
to apply for new and improved patents on a regular basis. 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
  4
  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 and
Stuttgart Stock Exchanges with the symbol WTC.  Our single location is
our headquarters in Chatsworth, CA. We have four full-time employees and have
engaged numerous consultants and independent contractors over the past two
years.
 
 ITEM
1A.  QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Not
applicable for smaller reporting companies.
 
 ITEM
1B.  UNRESOLVED STAFF COMMENTS
 
 Not
applicable for smaller reporting companies.
 
 ITEM
2.  PROPERTIES
 
 Our
corporate headquarters is located in Chatsworth, California. This approximate
5,000 square foot facility includes office space and an area to conduct research
and development.  We extended our lease agreement for office space for
a period of two years effective February 1, 2010.  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.  (REMOVED AND RESERVED)
 
 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
              
              
              
              0.53HIGH
              
              
              LOWFiscal
      2010
              First
      Quarter
              
              $
              0.31
              
              
              
              0.21Second
      Quarter
              
              
              0.38
              
              
              
              0.22Third
      Quarter
              
              
              0.26
              
              
              
              0.16Fourth
      Quarter
              
              
              0.21
              
              
              
              0.13
 
 5
 
 We became
a public company through a share exchange  that was effected in
October 2008. The first day of public trading of our stock was November 11,
2008.  Since our fiscal year end was changed to June 30, public
trading of our stock began in the second quarter of fiscal 2009.  As
of September 15, 2010, there were 60 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.
  Securities
Authorized for Issuance Under Equity Compensation Plans
 
 None
 
 Unregistered
Sales of Equity Securities and Use of Proceeds
  The
following is a listing of unregistered security activity during the year ended
June 30, 2010.
  Issuance of Common Stock for
Conversion of Indebtedness
 
 On August
7, 2010, we issued 1,122,375 shares of common stock to accredited non-affiliated
investors for the conversion of $190,803 of outstanding convertible notes
payable and accrued interest.
 
 On June
1, 2010, we issued 2,789,217 shares of common stock to Snapshot, Ltd. for the
conversion of $278,922 of outstanding notes payable.
 
 Sales of Restricted Common
Stock
 
 On
October 13, 2009, we issued 208,104 shares of common stock to G Electrical
Service Co. for a total purchase price of $34,364, along with warrants to
purchase 208,104 shares of common stock at an exercise price of $0.42 per
share.
 
 On
October 16, 2009, we issued 1,620,000 shares of common stock to Suzahnna Tepper
for a total purchase price of $270,000, along with warrants to purchase
1,620,000 shares of common stock at an exercise price of $0.42 per
share.
 
 On
October 16, 2009, we issued 420,000 shares of common stock to Boris Zheleznyak
for a total purchase price of $70,000, along with warrants to purchase 420,000
shares of common stock at an exercise price of $0.42 per share.
 
 On
October 16, 2009, we issued 674,934 shares of common stock to Star Tech Electric
Co. for a total purchase price of $112,489, along with warrants to purchase
674,934 shares of common stock at an exercise price of $0.42 per
share.
 
 On
October 16, 2009, we issued 265,800 shares of common stock to G Electrical Co.
for a total purchase price of $44,300, along with warrants to purchase 265,800
shares of common stock at an exercise price of $0.42 per share.
  6
  On
November 4, 2009, we issued 217,117 shares of common stock to G Electrical
Service Co. for a total purchase price of $36,400, along with warrants to
purchase 214,117 shares of common stock at an exercise price of $0.42 per
share.
 
 On
November 17, 2009, we issued 421,529 shares of common stock to G Electrical
Service Co. for a total purchase price of $72,170, along with warrants to
purchase 424,529 shares of common stock at an exercise price of $0.42 per
share.
 
 On
December 4, 2009, we issued 114,923 shares of common stock to G Electrical
Service Co. for a total purchase price of $19,537, along with warrants to
purchase 114,923 shares of common stock at an exercise price of $0.42 per
share.
 
 On
December 4, 2009, we issued 237,528 shares of common stock to Star Tech Electric
Co. for a total purchase price of $40,380, along with warrants to purchase
237,528 shares of common stock at an exercise price of $0.42 per
share.
 
 On
January 6, 2010, we issued 58,058 shares of common stock to G Electrical Service
Co. for a total purchase price of $9,870, along with warrants to purchase 58,058
shares of common stock at an exercise price of $0.42 per share.
 
 On
February 4, 2010, we issued 888,235 shares of common stock to Marina Vergilis
for a total purchase price of $151,000, along with warrants to purchase 888,235
shares of common stock at an exercise price of $0.42 per share.
 
 On March
2, 2010, we issued 44,923 shares of common stock to G Electrical Service Co. for
a total purchase price of $7,637, along with warrants to purchase 44,923 shares
of common stock at an exercise price of $0.42 per share.
 On March
2, 2010, we issued 590,000 shares of common stock to AM-PM Appliance Co. for a
total purchase of $100,300, along with warrants to purchase 590,000 shares of
common stock at an exercise price of $0.42 per share.
 
 On March
2, 2010, we issued 108,823 shares of common stock to Star Tech Electric Co. for
a total purchase price of $18,500, along with warrants to purchase 108,823
shares of common stock at an exercise price of $0.42 per share.
 
 On March
12, 2010, we issued 352,941 shares of common stock to Suzahnna Tepper for a
total purchase price of $60,000, along with warrants to purchase 352,941 shares
of common stock at an exercise price of $0.42 per share.
 
 On April
4, 2010, we issued 125,000 shares of common stock to the Jiores Family Trust for
a total purchase price of $15,000.
 
 On June
1, 2010, we issued 700,000 shares of common stock to Suzahnna Tepper for a total
purchase price of $70,000, along with warrants to purchase 700,000 shares of
common stock at $0.42 per share.
 
 On June
24, 2010, we issued 1,000,000 shares of common stock to West Pointe Partners,
Ltd. for a total purchase price of $100,000.
 
 None of
the aforementioned investors are affiliated with the Company. The shares were
issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.
The shares were not offered via general solicitation to the public but solely to
the aforementioned purchasers.  The Company issued restricted shares
in connection with these issuances. No sales commissions or other remuneration
was paid in connection with these sales.
 
 Issuance of Restricted
Common Stock for Services
 
 On July
27, 2009, we issued 4,500,000 shares of common stock to Bioworld Technology
Management for research and development services.
 
 On July
27, 2009, we issued 2,100,000 shares of common stock to San Francisco
Securities, Inc. for consulting services.
  7
  On July
27, 2009, we issued 600,000 shares of common stock to Maxim Promtov for
consulting services.
 
 On July
27, 2009, we issued 900,000 shares of common stock to Suzahnna Tepper for
consulting services.
 
 On July
27, 2009, we issued 150,000 shares of common stock to Tomer Tal for legal
services.
 
 On July
27, 2009, we issued 75,000 shares of common stock to Paul Knerr for consulting
services.
 
 On July
27, 2009, we issued 75,000 shares of common stock to Todd Strickland for
consulting services.
 
 On July
27, 2009, we issued 75,000 shares of common stock to Lilia Dmitrieva for
consulting services.
 
 On July
27, 2009, we issued 150,000 shares of common stock to Stanley Loft for
consulting services.
 
 On July
27, 2009, we issued 1,725,000 shares of common stock to Sergie Chernov for
research and development services.
 
 On July
27, 2009, we issued 3,000,000 shares of common stock to Roman Gordon, the
Company’s CEO, for services provided.
 
 On July
27, 2009, we issued 3,000,000 shares of common stock to Igor Gorodnitsky, the
Company’s President, for services provided.
 
 On July
27, 2009, we issued 750,000 shares of common stock to RL Hartshorn, the
Company’s CFO, for services provided.
 
 On July
27, 2009, we issued 75,000 shares of common stock to The Adept Group for
consulting services.
 
 On July
27, 2009, we issued 120,000 shares of common stock to Barnhart Holding Ltd. for
consulting services.
 
 On July
27, 2009, we issued 63,000 shares of common stock to Aleksander Denisov for
consulting services.
 
 On August
5, 2009, we issued 75,000 shares of common stock to Princeton Research, Inc. for
consulting services.
 
 On August
5, 2009, we issued 37,500 shares of common stock to Bella Karakis for consulting
services.
 
 On August
5, 2009, we issued 37,500 shares of common stock to Kirk Wiggins for consulting
services.
 
 On August
5, 2009, we issued 15,000 shares of common stock to Irakli Gagua for consulting
services.
 
 On
September 16, 2009, we issued 190,001 shares of common stock to Tomer Tal for
legal services.
 
 On
October 7, 2009, we issued 37,500 shares of common stock to Bernard Reich for
consulting services.
 
 On
October 7, 2009, we issued 37,500 shares of common stock to Stanley Loft for
consulting services.
 
 On
October 7, 2009, we issued 30,000 shares of common stock to Aleksander Denisov
for consulting services.
 
 On
October 7, 2009, we issued 25,500 shares of common stock to Kirk Wiggins for
consulting services.
 
 On
October 16, 2009, we issued 70,911 shares of common stock to Tomer Tal for legal
services.
 
 On
October 16, 2009, we issued 30,000 shares of common stock to Irakli Gagua for
consulting services.
 
 On
October 23, 2009, we issued 30,000 shares of common stock to Varvara Grichko for
research and development services.
  8
  On
October 29, 2009, we issued 37,500 shares of common stock to Stacie Jovancevic
for consulting services.
 
 On
November 3, 2009, we issued 37,500 shares of common stock to Kirk Wiggins for
consulting services.
 
 On
November 10, 2009, we issued 35,102 shares of common stock to Tomer Tal. for
legal services.
 
 On
November 16, 2009, we issued 5,000 shares of common stock to Jim Gregath for
consulting services.
 
 On
November 16, 2009, we issued 500,000 shares of common stock to Vastani Company
for consulting services.
 
 On
November 16, 2009, we issued 1,000,000 shares of common stock to Adamatos
Investment Ltd. for consulting services.
 
 On
November 30, 2009, we issued 60,000 shares of common stock to Varvara Grichko
for research and development services.
 
 On
December 4, 2009, we issued 49,157 shares of common stock to Tomer Tal. for
legal services.
 
 On
January 11, 2010, we issued 41,369 shares of common stock to Tomer Tal. for
legal services.
 
 On
January 11, 2010, we issued 34,917 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On
January 11, 2010, we issued 12,500 shares of common stock to Stanley Loft for
consulting services.
 
 On
January 11, 2010, we issued 12,500 shares of common stock to Bella Karakis for
consulting services.
 
 On
January 11, 2010, we issued 10,000 shares of common stock to Irakli Gagua for
consulting services.
 
 On
January 11, 2010, we issued 10,000 shares of common stock to Aleksander Denisov
for consulting services.
 
 On
February 1, 2010, we issued 5,000,000 shares of common stock to Snapshot, Ltd.
for marketing services.
 
 On
February 1, 2010, we issued 12,500 shares of common stock to Bernard Reich for
consulting services.
 
 On
February 1, 2010, we issued 37,500 shares of common stock to Kirk Wiggins for
consulting services.
 
 On
February 1, 2010, we issued 39,450 shares of common stock to Tomer Tal for legal
services.
 
 On
February 1, 2010, we issued 35,652 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On
February 11, 2010, we issued 500,000 shares of common stock to Undiscovered
Equity, Inc. for consulting services.
 
 On
February 15, 2010, we issued 75,000 shares of common stock to Crown Equity
Holdings, Inc. for consulting services.
 
 On
February 15, 2010, we issued 37,500 shares of common stock to Jim Fuller for
consulting services.
 
 On
February 15, 2010, we issued 15,000 shares of common stock to Viktor Grichko for
consulting services.
 
 On
February 23, 2010, we issued 45,000 shares of common stock to Luis Vance Taylor
for consulting services.
 
 On
February 23, 2010, we issued 45,000 shares of common stock to Stephen Carey for
consulting services.
 
 On
February 23, 2010, we issued 45,000 shares of common stock to David McWhorter
for consulting services.
  9
  On March
5, 2010, we issued 74,313 shares of common stock to Tomer Tal. for legal
services.
 
 On March
5, 2010, we issued 34,285 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On March
5, 2010, we issued 12,500 shares of common stock to Stanley Loft for consulting
services.
 
 On March
5, 2010, we issued 225,000 shares of common stock to RL Hartshorn, the Company’s
CFO, for services provided.
 
 On March
12, 2010, we issued 60,000 shares of common stock to Viktor Grichko for
consulting services.
 
 On March
12, 2010, we issued 10,000 shares of common stock to Jim Gregath for consulting
services.
 
 On March
22, 2010, we issued 50,000 shares of common stock to Stanley Loft for consulting
services.
 
 On April
12, 2010, we issued 10,000 shares of common stock to Irakli Gagua for consulting
services.
 
 On April
12, 2010, we issued 24,000 shares of common stock to Varvara Grichko for
research and development services.
 
 On April
12, 2010, we issued 38,970 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On April
12, 2010, we issued 54,312 shares of common stock to Tomer Tal for legal
services.
 
 On April
19, 2010, we issued 100,000 shares of common stock to Fred G. Ramburg for
consulting services.
 
 On April
29, 2010, we issued 1,500,000 shares of common stock to Strategic IR, Inc. for
consulting services.
 
 On April
29, 2010, we issued 200,000 shares of common stock to Fred G. Ramburg for
consulting services.
 
 On May
10, 2010, we issued 386,250 shares of common stock to Sergei Chernov for
research and development services.
 
 On May
10, 2010, we issued 150,000 shares of common stock to Kirk Wiggins for
consulting services.
 
 On May
10, 2010, we issued 75,000 shares of common stock to Viktor Grichko for
consulting services.
 
 On May
10, 2010, we issued 37,500 shares of common stock to Jim Fuller for consulting
services.
 
 On May
10, 2010, we issued 125,000 shares of common stock to RL Hartshorn, the
Company’s CFO, for services provided.
 
 On May
24, 2010, we issued 152,842 shares of common stock to Tomer Tal for legal
services.
 
 On May
24, 2010, we issued 66,250 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On June
1, 2010, we issued 87,388 shares of common stock to Tomer Tal for legal
services.
 
 On June
1, 2010, we issued 76,406 shares of common stock to Frehiwet Asefaw for
accounting services.
 
 On June
9, 2010, we issued 333,333 shares of common stock to Aviva Spectrum, Inc. for
accounting services.
 
 On June
14, 2010, we issued 11,544 shares of common stock to Frehiwet Asefaw for
accounting services.
  10
  On June
14, 2010, we issued 35,000 shares of common stock to Varvara Grichko for
research and development services.
  In all
the aforementioned cases, the shares were issued in reliance on Section 4(2) of
the Securities Act of 1933, as amended. The shares were not offered via general
solicitation to the public but solely to the aforementioned purchasers in
consideration of services. The Company issued restricted shares in connection
with these issuances. No sales commissions or other remuneration was paid in
connection with these sales. With the exception of R.L. Hartshorn, Varvara
Grichko and Jim Fuller, who are affiliates of the company, none of the
aforementioned service providers are affiliates of the Company.
 
 Issuance of
Warrants
 
 On July
15, 2009, we issued Cheryl Burns warrants to purchase 90,000 shares of common
stock at an exercise price of $0.42 per share for consulting
services.
 
 On
February 11, 2010, we issued Undiscovered Equity, Inc. warrants to purchase
1,000,000 shares of common stock at an exercise price of $0.30 per share for
consulting services.
 
 The total
value of the above warrants issued for consulting services amounted to
$144,581.  The value was determined using the Black-Scholes valuation
model with input assumptions of (1) volatility of 132.1%, (2) expected life
ranging from 2 to 3 years, (3) risk free rate ranging from 0.91% to 1.60%, and
(4) expected dividends of zero.
  We have
granted all such securities described above in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
 
 ITEM
6.  SELECTED FINANCIAL DATA
 
 Not
applicable for smaller reporting companies.
 
 ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
 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.
 
 Overview
of Our Business
 
 We design
and engineer environmentally friendly NANO technology based systems. These
systems have potential commercial applications in markets such as vegetable oil
refining, renewable fuels, water purification, alcoholic beverage enhancement,
algae oil extraction, water-oil emulsions and crude oil yield
enhancement.  Our investment in research and development since
inception on January 29, 2007 through June 30, 2010 is $4,623,400.
 
 Research
and development has led to products including the Green D+Plus NANO Neutralization
System– a vegetable oil refining  system, and the Bioforce 9000 NANO Reactor
System which performs the transesterification process during the
production of biodiesel. Both the Green D+ PlusSystem and the Bioforce 9000 NANO Reactor
Systememploy
our patent approved and patents pending, continuous flow-through, hydrodynamic
NANOTechnology in the
form of our multi-stage NANO Series of reactors. To date the Company has sold no
products and has recorded no revenue from product sales.
  11
  Management’s
Plan
 
 We are a
development stage entity engaged in the development of the Green D+ Plus NANO Neutralization
System which is designed to partially refine vegetable oils such as
soybean, canola, and rapeseed. Our near term goal is to successfully complete
operational testing of three Green D+Plus Neutralization
Systems.Given the conditions in the biodiesel market, we have
no plans to actively pursue sales of our Bioforce 9000 System in the
foreseeable future.
  We have
no significant operating history and, from January 29, 2007, (inception),
through June 30, 2010, generated a net loss of $13,374,235. We also have
negative cash flow from operations and negative net equity. The accompanying
financial statements for the years ended June 30, 2010 and 2009, and the period
from January 29, 2007 (date of inception) through June 30, 2010 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 generate income from operations after successfully completing trial
tests. We will also attempt 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.
 
 Critical
Accounting Policies
 
 Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amount of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
stock options, warrants, and common stock issued for services, among others.
Management bases its estimates and judgments on historical experience and
various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
 
 Revenue
Recognition
 
 The
Company recognizes revenue 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 collectability is reasonably assured.
 
 The
Company received total deposits of $50,761 and $26,000 as of June 30, 2010 and
2009, respectively, from prospective customers relating to orders of the
Company’s NANO Neutralization
Systemand Bioforce
9000 Reactor Skid Systems.  Because these transactions have not
yet been fully completed, these amount has been reflected in deferred revenue on
the accompanying consolidate balance sheet as of June 30, 2010 and
2009.
 
 Patents
 
 Capitalized
patent costs represent legal fees associated with procuring and filing patent
applications.  The Company accounts for patents in accordance with ASC
360 (formerly SFAS No. 142, Goodwill and Other Intangible
Assets).  During the year ended June 30, 2010, the Company
incurred $92,284 in patent costs, which are capitalized in the accompanying
consolidated balance sheet.  The Company is awaiting final approval
and issuance of its pending patents. Once the patents are issued, the Company
will begin amortizing the capitalized patent costs over their estimated useful
lives.
 
 Intangible
and Long-Lived Assets
  In
accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), the Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows
associated with the related asset or group of assets over their estimated useful
lives against their respective carrying amount. Impairment, if any, is based on
the excess of the carrying amount over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. The Company’s
management believes there is no impairment of its long-lived assets. There can
be no assurance, however, that market conditions will not change or demand for
the Company’s products under development will continue. Either of these could
result in future impairment of long-lived assets.
  12
  Stock-Based
Compensation
 
 The
Company accounts for its share-based compensation in accordance ASC 718-20
(formerly SFAS No. 123R, Share-Based
Payment).  Stock-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and is recognized as
expense over the requisite vesting period.
 
 The fair
value of each stock option and warrant is estimated on the date of grant using
the Black-Scholes option pricing model.Assumptions
relative to volatility and anticipated forfeitures are determined at the time of
grant.  There were no stock options granted during the year ended June
30, 2010.  The following were the assumptions used to value the stock
options during the year ended June 30, 2009.
  Year
      EndedJune
      30,2009Expected
      life in years
                
                1 -
      10Stock
      price volatility
                
                64.0%
      - 148.0%Risk
      free interest rate
                
                1.06%
      - 3.23%Expected
      dividends
                
                NoneForfeiture
      rate
                
                0%
  The fair
value of warrants is estimated on the date of grant using the Black-Scholes
option pricing model. Assumptions relative to volatility and anticipated
forfeitures are determined at the time of grant, and were based on the following
for warrants granted during the years ended June 30, 2010 and 2009.
 
 Year
      Ended
                
                Year
      EndedJune
      30,
                
                June
      30,2010
                
                2009Expected
      life in years
                
                2 -
      3
                
                1.5
      - 5.0Stock
      price volatility
                
                132.1%
                
                64.0%
      - 148.0%Risk
      free interest rate
                
                0.91%
      - 1.60%
                
                0.68%
      - 1.86%Expected
      dividends
                
                None
                
                NoneForfeiture
      rate
                
                0%
                
                0%
 
 Income
Taxes
  The
Company accounts for income taxes in accordance with ASC 740-10 (formerly SFAS
No. 109, Accounting for Income
Taxes and FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109. The Company
recognizes deferred tax assets and liabilities to reflect the estimated future
tax effects, calculated at currently effective tax rates, of future deductible
or taxable amounts attributable to events that have been recognized on a
cumulative basis in the financial statements. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
of the deferred tax asset will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates of
the date of enactment.
  13
  ASC
740-10 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition issues. The Company classifies
interest and penalties as a component of interest and other expenses. To date,
there have been no interest or penalties assessed or paid.
  The
Company measures and records uncertain tax positions by establishing a threshold
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return.  Only tax positions meeting
the more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized.
 
 Deferred
costs
 
 Deferred
costs represent costs associated with customizing specific units of the
Company’s NANO Neutralization
System that it plans to sell, lease, or rent in the short
term.  The direct costs incurred by the Company associated with
manufacturing the products have been capitalized and reflected as deferred
costs.  When sales of the specific products are made, the amounts
recorded as deferred costs will be expensed.
 
 Results
of Operations
 
 We have
no significant operating history and from January 29, 2007 (date of inception)
through June 30, 2010, we generated net losses aggregating
$13,374,235.  The following is a comparison and analysis of our
results of operations for the years ended June 30, 2010 and 2009.
 
 For
      the Years EndedJune
      30,2010
                
                
                2009
                
                
                $
      Change
                
                
                %
      ChangeGeneral
      and administrative expenses
                
                $
                5,675,627
                
                
                $
                2,086,293
                
                
                $
                3,589,334
                
                
                
                172.0
                %Research
      and development expenses
                
                
                2,184,902
                
                
                
                311,793
                
                
                
                1,873,109
                
                
                
                600.8
                %Total
      operating expenses
                
                
                7,860,529
                
                
                
                2,398,086
                
                
                
                5,462,443
                
                
                
                227.8
                %Loss
      from operations
                
                
                (7,860,529
                )
                
                
                (2,398,086
                )
                
                
                (5,462,443
                )
                
                
                227.8
                %Interest
      expense
                
                
                (335,933
                )
                
                
                (97,905
                )
                
                
                (238,028
                )
                
                
                243.1
                %Loss
      before income taxes
                
                
                (8,196,462
                )
                
                
                (2,495,991
                )
                
                
                (5,700,471
                )
                
                
                228.4
                %Income
      tax expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0.0
                %Net
      loss
                
                $
                (8,196,462
                )
                
                $
                (2,495,991
                )
                
                
                (5,700,471
                )
                
                
                228.4
                %
  Operating
Expenses
 
 Our
operating expenses for fiscal 2010 amounted to $7,860,529 compared with
$2,398,086 in 2009, an increase of $5,462,443, or 227.8%.  The
increase consisted of an increase in general and administrative expenses in
fiscal 2010 as compared to fiscal 2009 of $3,589,334, or 172.0%, and an increase
in research and development expenses of $1,873,109, or 600.8%.  These
components of our operating expenses increased primarily due to the
following.
 
 Our
general and administrative expenses increased during fiscal 2010 primarily due
to an increase in the amount of share-based compensation issued during the year
of $3,579,518.  During the year ended June 30, 2010, we issued an
increased amount of shares of restricted common stock and warrants to various
employees and consultants as payment for services.  The total amount
included in general and administrative expenses during fiscal 2010 relating to
these issuances amounted to $4,673,100.  During fiscal 2009, our total
share-based compensation for services in the form of restricted common stock,
warrants and options amounted to $1,093,582.  The increase in fiscal
2010 resulted in an increased number of shares issued to individuals for
consulting services, as well as 8,475,000 shares of restricted common stock
issued to members of senior management as compensation which resulted in general
and administrative expenses of $1,473,726.
 
 Our
research and development expenses increased during fiscal 2010 primarily due to
$1,947,208 of share-based compensation issued to consultants involved in
research and development.  This increase is primarily due to an
aggregate of 6,825,000 shares of restricted common stock issued to three
consultants in July 2009 as compensation for research and development activities
performed on the design and development of our Green D+ Plus (vegetable
oil)  Neutralization System.  These shares had an
aggregate total value of $1,820,000, which were included as part of research and
development expenses recorded during 2010.  There were no such share
issuances in 2009.
  14
  Interest
Expense
 
 Our
interest expense for fiscal 2010 amounted to $112,796 compared to $97,905 for
fiscal 2009, an increase of $14,891, or 15.2%.  The increase during
fiscal 2010 was primarily due to a beneficial conversion feature charge of
approximately $64,000 resulting from the modification of convertible notes
payable outstanding in July 2009, and the resulting conversion into common
stock.  We also had an increase in interest expense during fiscal 2010
of approximately $14,000 on our bank loan due to the replacement of our line of
credit with a one-year variable rate loan in August 2009, the terms of which
resulted in an increase in  the interest rate from the Prime rate plus
1% to the Prime rate plus 2.75%.  These increases in fiscal 2010 were
offset by increased interest expense of approximately $63,000 in fiscal 2009
related to convertible notes payable issued in December 2009 and February
2009.  As these convertible notes payable were converted into common
stock in July 2009, interest expense incurred on them during fiscal 2010 was not
significant.
 
 During
fiscal 2010, we also had a charge of $223,137 on the issuance of common stock as
payment of debt.  On June 1, 2010, Snapshot, Ltd., a holder of Company
debt securities, agreed to convert an outstanding note payable into shares of
the Company’s common stock at a conversion rate of $0.10 per
share.  As a result, the Company issued 2,789,217 shares of common
stock as payment of the note payable of $278,922.  A resulting charge
on the conversion of the note payable of $223,137 was recorded, representing the
difference between the market value of the stock issued and the book value of
the note payable.
 
 Liquidity
and Capital Resources
 
 Convertible
Notes Payable
 
 In
December 2008 and February 2009 we issued $235,000 in convertible notes payable
which carried an interest rate of 12%.  During the year ended June 30,
2009, we repaid $35,000 of the outstanding principal balances, and the balance
outstanding at June 30, 2009 was $200,000.  In the first quarter of
fiscal 2010, $20,000 of the outstanding principal amounts were repaid, and the
remaining $180,000 outstanding balance, along with accrued interest, converted
to 1,122,375 shares of common stock.  As of June 30, 2010, there were
no balances outstanding relating to convertible notes payable.
 
 Bank
Line of Credit and Loan
 
 At June
30, 2009, we had an outstanding balance of $636,917 from a $700,000 bank
revolving line of credit.  On August 1, 2009, the revolving line of
credit was replaced by a one-year variable rate loan which matured on August 1,
2010.   This loan bears interest at Prime + 2.75%, (7% as of June
30, 2010), and was to be repaid with equal monthly installments of $7,396
beginning September 1, 2009, with any unpaid amounts due on August 1,
2010.  This line of credit is secured by personal guarantees of the
Company’s principals and assets.  The amount outstanding under this
bank loan was $524,750 as of June 30, 2010.
 
 On August
1, 2010, we extended the term of the note payable from August 1, 2010 to
November 1, 2010.  The other existing terms of the note payable
remained unchanged.
 
 Common
Stock
 
 During
the year ended June 30, 2010, we sold an aggregate of 8,047,915 shares of
restricted common stock for aggregate total proceeds of $1,231,947.
  15
  Share-based
Compensation
 
 We paid a
significant amount of our operating expenses through the issuance of shares of
common stock, warrants and options.  During fiscal 2009, we issued
restricted common stock amounting to $639,673, as well as warrants and stock
options valued at a combined amount of $453,555 as payments to service
providers.  During fiscal 2010, we issued restricted common stock
amounting to $6,475,727, as well as warrants valued at $144,581 as payments to
service providers.
  Cash
Flow
 
 Net cash
used in operating activities during fiscal 2010 amounted to $1,025,761 compared
with $995,292 in fiscal 2009.  During fiscal 2010, our net loss
amounted to $8,196,462 including non-cash operating expenses of $6,924,014
arising primarily from common stock and warrants issued for
services.  Net cash used in operating activities of $1,025,761 was
used largely to pay salary related expenses of $436,853, professional service
fees such as attorneys and accountants of $304,313, as well as interest on bank
debt of $47,695.  In fiscal 2009, our net loss amounted to $2,495,991
including non-cash operating expenses of $640,027 in common stock, $307,512 in
stock options, and $146,043 in warrants issued to service
providers.  Net cash used in operating activities of $995,292 was used
largely to pay salary related expenses of $442,767, professional service fees
such as attorneys and accountants of $307,207, as well as interest on bank debt
of $48,660.
 
 Net cash
used in investing activities during fiscal 2010 amounted to $187,787, which was
the result of $23,820 spent for the purchase of property and equipment, $71,683
for the payment of customization of systems, and $92,284 in amounts associated
with the costs of filing for   patents.  During fiscal
2009, our net cash used in investing activities amounted to $44,660, which
resulted from amounts spent for the purchase of property and
equipment.
 
 Net cash
provided by financing activities during fiscal 2010 amounted to
$1,208,780.  This resulted primarily from proceeds from the sale of
common stock of $1,231,947.  We also received $109,000 in proceeds
from short-term loans in fiscal 2010.  These proceeds were offset by
$112,167 in payments on borrowings from our bank loan, as well as a repayment of
$20,000 on convertible notes payable that were outstanding as of June 30,
2009.  During fiscal 2009, our net cash provided by financing
activities amounted to $734,061.  This resulted from proceeds of
$225,000 in sales of preferred stock, proceeds of $300,000 in sales of common
stock, proceeds of $235,000 from the issuance of convertible notes payable, and
net borrowings of $9,061 from the line of credit.  These amounts were
offset by repayments of $35,000 on convertible notes payable
borrowings.
 
 Commitments
 
 Lease
Agreements
 
 On
December 30, 2009, we extended through February 1, 2012 our existing lease
agreement for approximately 5,000 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 $4,250 per month.  As of
June 30, 2010 and 2009, the Company had a security deposit of $9,500 associated
with this lease.
 
 
 Future
minimum lease payments under non-cancelable operating leases are as
follows.
 
 Year
      EndedJune
      30,2011
                
                
                51,0002012
                
                
                29,750Total
                
                $
                80,750
  Royalty
Agreements
 
 We have
entered into Patent Assignment Agreements with both our President and our CEO,
where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and CEO have been assigned to the
Company.  In exchange, we agreed to pay a royalty of 5% of future
gross revenues to each of the CEO and President for future licensing, leasing,
and/or rental revenue generated from products using the assigned
technologies.
  16
  In
connection with an employment agreement with a key employee, for any
technologies invented by the employee, the Company shall pay a royalty of 5% of
future revenues received in the first year and 3% in subsequent years
from  licensing,  leasing, and rental revenues associated
with patents assigned from this employee .
 
 As of
June 30, 2010, we have not paid any amounts related to these
royalties.
 
 ITEM
7A.  Quantitative and Qualitative Disclosures About Market
Risk.
 
 Not
applicable for smaller reporting companies.
 
 17
  ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 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, 2010 and 2009, and the related
consolidated statements of operations, changes in stockholders’ deficit, and
cash flows for the years ended June 30, 2010 and 2009, and the period from
January 29, 2007 through June 30, 2010. 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, 2010 and 2009, and the results of its operations and its
cash flows for the years ended June 30, 2010 and 2009, and the period from
January 29, 2007 through June 30, 2010, 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, 2010
 18
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Balance Sheets
 
 June
      30,
                
                
                June
      30,2010
                
                
                2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                270
                
                
                $
                5,038Prepaid
      expenses and other current assets
                
                
                3,158
                
                
                
                2,341Total
      current assets
                
                
                3,428
                
                
                
                7,379Property
      and equipment, net
                
                
                69,605
                
                
                
                62,753Deferred
      costs
                
                
                71,683
                
                
                
                -Patents
                
                
                92,284
                
                
                
                -Other
      assets
                
                
                9,500
                
                
                
                9,500Total
      assets
                
                $
                246,500
                
                
                $
                79,632LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Bank
      overdraft
                
                $
                2,747
                
                
                $
                -Accounts
      payable and accrued expenses
                
                
                160,179
                
                
                
                109,311Accrued
      expenses
                
                
                75,656
                
                
                
                57,914Accrued
      payroll
                
                
                83,051
                
                
                
                215,390Deferred
      revenue
                
                
                50,761
                
                
                
                26,000Convertible
      notes payable, net of discounts
                
                
                -
                
                
                
                200,000Short-term
      loan
                
                
                109,000
                
                
                
                -Bank
      loan
                
                
                524,750
                
                
                
                636,917Total
      current liabilities
                
                
                1,006,144
                
                
                
                1,245,532Commitments
      and contingenciesStockholders'
      deficit:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, 111,111 shares
      issued and outstanding as of June 30, 2010 and 2009,
      respectively
                
                
                111
                
                
                
                111Common
      stock, $0.001 par value, 1,000,000,000 shares authorized, 130,581,562
      shares and 88,984,593 shares are issued and outstanding as of June 30,
      2010 and June 30, 2009, respectively
                
                
                130,582
                
                
                
                88,985Additional
      paid-in capital
                
                
                12,656,723
                
                
                
                4,089,602Deficit
      accumulated during the development stage
                
                
                (13,547,060
                )
                
                
                (5,344,598
                )Total
      stockholders' deficit
                
                
                (759,644
                )
                
                
                (1,165,900
                )Total
      liabilities and stockholders' deficit
                
                $
                246,500
                
                
                $
                79,632
 See
accompanying notes, which are an integral part of these financial
statements
 19
  Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Operations
  January
      29, 2007,Inception,For
      the Years Ended
                
                
                ThroughJune
      30,
                
                
                June
      30,2010
                
                
                2009
                
                
                2010General
      and administrative expenses
                
                $
                5,675,627
                
                
                $
                2,086,293
                
                
                $
                8,262,370Research
      and development expenses
                
                
                2,184,902
                
                
                
                311,793
                
                
                
                4,623,400Total
      operating expenses
                
                
                7,860,529
                
                
                
                2,398,086
                
                
                
                12,885,770Loss
      from operations
                
                
                (7,860,529
                )
                
                
                (2,398,086
                )
                
                
                (12,885,770
                )Interest
      expense
                
                
                (335,933
                )
                
                
                (97,905
                )
                
                
                (488,465
                )Loss
      before income taxes
                
                
                (8,196,462
                )
                
                
                (2,495,991
                )
                
                
                (13,374,235
                )Income
      tax expense
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                $
                (8,196,462
                )
                
                $
                (2,495,991
                )
                
                $
                (13,374,235
                )Deemed
      dividends to preferred stockholders
                
                
                (6,000
                )
                
                
                (118,946
                )
                
                
                (172,825
                )Net
      loss available to common stockholders
                
                $
                (8,202,462
                )
                
                $
                (2,614,937
                )
                
                $
                (13,547,060
                )Net
      loss available to common shareholders per share:Basic
      and Diluted
                
                $
                (0.07
                )
                
                $
                (0.03
                )Weighted
      average shares outstanding:Basic
      and Diluted
                
                
                114,739,605
                
                
                
                76,940,694
 
  20
  Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Changes in Stockholders' Deficit
  DeficitAccumulatedAdditional
                
                
                During
      theSeries
      A Preferred
                
                
                Common
      Stock
                
                
                Paid-in
                
                
                DevelopmentShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stage
                
                
                TotalBalance
      at inception, January 29, 2007
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Issuance
      of common stock for services on January 29, 2007
                
                
                
                
                
                
                
                
                
                
                42,993,630
                
                
                
                42,994
                
                
                
                (21,994
                )
                
                
                
                
                
                
                21,000Common
      stock issued as payment for services on March 31, 2008
                
                
                
                
                
                
                
                
                
                
                6,428,904
                
                
                
                6,429
                
                
                
                1,123,971
                
                
                
                
                
                
                
                1,130,400Common
      stock issued as payment for services on April 16, 2008
                
                
                
                
                
                
                
                
                
                
                51,180
                
                
                
                51
                
                
                
                8,949
                
                
                
                
                
                
                
                9,000Common
      stock issued as payment for services on April 22, 2008
                
                
                
                
                
                
                
                
                
                
                102,360
                
                
                
                102
                
                
                
                17,898
                
                
                
                
                
                
                
                18,000Common
      stock issued as payment for services on June 18, 2008
                
                
                
                
                
                
                
                
                
                
                3,787,320
                
                
                
                3,788
                
                
                
                662,212
                
                
                
                
                
                
                
                666,000Common
      stock sold for cash on June 30, 2008
                
                
                
                
                
                
                
                
                
                
                2,047,200
                
                
                
                2,047
                
                
                
                497,953
                
                
                
                
                
                
                
                500,000Amortization
      of discount on convertible preferred stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                47,879
                
                
                
                (47,879
                )
                
                
                -Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,681,782
                )
                
                
                (2,681,782
                )Balance
      at June 30, 2008
                
                
                -
                
                
                $
                -
                
                
                
                55,410,594
                
                
                $
                55,411
                
                
                $
                2,336,868
                
                
                $
                (2,729,661
                )
                
                $
                (337,382
                )Common
      stock sold in connection with reverse merger for cash on October 3,
      2008
                
                
                
                
                
                
                
                
                
                
                2,149,560
                
                
                
                2,150
                
                
                
                122,850
                
                
                
                
                
                
                
                125,000Preferred
      stock sold for cash on March 17, 2009
                
                
                111,111
                
                
                
                111
                
                
                
                
                
                
                
                
                
                
                
                99,889
                
                
                
                
                
                
                
                100,000Preferred
      stock - beneficial conversion feature
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,111
                
                
                
                (11,111
                )
                
                
                -Common
      stock sold for cash on April 22, 2009
                
                
                
                
                
                
                
                
                
                
                499,998
                
                
                
                500
                
                
                
                99,500
                
                
                
                
                
                
                
                100,000Common
      stock sold for cash on June 4, 2009
                
                
                
                
                
                
                
                
                
                
                499,998
                
                
                
                500
                
                
                
                99,500
                
                
                
                
                
                
                
                100,000Common
      stock sold for cash on June 22, 2009
                
                
                
                
                
                
                
                
                
                
                300,000
                
                
                
                300
                
                
                
                49,700
                
                
                
                
                
                
                
                50,000Common
      stock sold for cash on June 30, 2009
                
                
                
                
                
                
                
                
                
                
                300,000
                
                
                
                300
                
                
                
                49,700
                
                
                
                
                
                
                
                50,000Bio
      common stock outstanding before reverse merger on October 3,
      2008
                
                
                
                
                
                
                
                
                
                
                27,840,534
                
                
                
                27,840
                
                
                
                (27,840
                )
                
                
                
                
                
                
                -Common
      stock issued as payment for services on September 22, 2008
                
                
                
                
                
                
                
                
                
                
                150,000
                
                
                
                150
                
                
                
                17,850
                
                
                
                
                
                
                
                18,000Common
      stock issued as payment for services on December 3, 2008
                
                
                
                
                
                
                
                
                
                
                450,000
                
                
                
                450
                
                
                
                187,150
                
                
                
                
                
                
                
                187,600Common
      stock issued as payment for services on December 17, 2008
                
                
                
                
                
                
                
                
                
                
                300,000
                
                
                
                300
                
                
                
                131,800
                
                
                
                
                
                
                
                132,100Common
      stock issued as payment for services on February 27, 2009
                
                
                
                
                
                
                
                
                
                
                590,565
                
                
                
                591
                
                
                
                156,893
                
                
                
                
                
                
                
                157,484Common
      stock issued as payment for services on March 11, 2009
                
                
                
                
                
                
                
                
                
                
                86,550
                
                
                
                86
                
                
                
                26,853
                
                
                
                
                
                
                
                26,939Common
      stock issued as payment for services on March 22, 2009
                
                
                
                
                
                
                
                
                
                
                150,000
                
                
                
                150
                
                
                
                50,350
                
                
                
                
                
                
                
                50,500Common
      stock issued as payment for services on April 23, 2009
                
                
                
                
                
                
                
                
                
                
                29,415
                
                
                
                29
                
                
                
                9,285
                
                
                
                
                
                
                
                9,314Common
      stock issued as payment for services on May 28, 2009
                
                
                
                
                
                
                
                
                
                
                152,379
                
                
                
                152
                
                
                
                38,959
                
                
                
                
                
                
                
                39,111Common
      stock issued as payment for services on June 4, 2009
                
                
                
                
                
                
                
                
                
                
                37,500
                
                
                
                38
                
                
                
                9,837
                
                
                
                
                
                
                
                9,875Common
      stock issued as payment for services on June 30, 2009
                
                
                
                
                
                
                
                
                
                
                37,500
                
                
                
                38
                
                
                
                8,712
                
                
                
                
                
                
                
                8,750Warrants
      issued with convertible debt in December 2008, January 2009 and February
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                49,245
                
                
                
                
                
                
                
                49,245Amortization
      of discount on convertible preferred stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                107,835
                
                
                
                (107,835
                )
                
                
                -Warrants
      issued as payment for services on May 27, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                56,146
                
                
                
                
                
                
                
                56,146Warrants
      issued as payment for services on June 3, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                84,219
                
                
                
                
                
                
                
                84,219Warrants
      issued as payment for services on June 30, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,678
                
                
                
                
                
                
                
                5,678Issuance
      of stock options as payment for services on August 8, 2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                229,493
                
                
                
                
                
                
                
                229,493Issuance
      of stock options as payment for services on October 1,
2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,598
                
                
                
                
                
                
                
                4,598Issuance
      of stock options as payment for services on October 7,
2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,770
                
                
                
                
                
                
                
                22,770Issuance
      of stock options as payment for services on October 21,
    2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                47
                
                
                
                
                
                
                
                47Issuance
      of stock options as payment for services on October 28,
    2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                33
                
                
                
                
                
                
                
                33Issuance
      of stock options as payment for services on January 19,
    2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                50,571
                
                
                
                
                
                
                
                50,571Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,495,991
                )
                
                
                (2,495,991
                )Balance
      at June 30, 2009
                
                
                111,111
                
                
                $
                111
                
                
                
                88,984,593
                
                
                $
                88,985
                
                
                $
                4,089,602
                
                
                $
                (5,344,598
                )
                
                $
                (1,165,900
                )
  21
 
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Changes in Stockholders' Deficit (Continued)
  DeficitAccumulatedAdditional
                
                
                During
      theSeries
      A Preferred
                
                
                Common
      Stock
                
                
                Paid-in
                
                
                DevelopmentShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stage
                
                
                TotalBalance
      at June 30, 2009
                
                
                111,111
                
                
                $
                111
                
                
                
                88,984,593
                
                
                $
                88,985
                
                
                $
                4,089,602
                
                
                $
                (5,344,598
                )
                
                $
                (1,165,900
                )Common
      stock issued as payment for services on July 27, 2009
                
                
                
                
                
                
                
                
                
                
                17,358,000
                
                
                
                17,358
                
                
                
                3,886,279
                
                
                
                
                
                
                
                3,903,637Common
      stock issued as payment for services on August 5, 2009
                
                
                
                
                
                
                
                
                
                
                165,000
                
                
                
                165
                
                
                
                44,935
                
                
                
                
                
                
                
                45,100Common
      stock issued as payment for services on September 16, 2009
                
                
                
                
                
                
                
                
                
                
                190,011
                
                
                
                190
                
                
                
                42,209
                
                
                
                
                
                
                
                42,399Common
      stock issued as payment for services on October 7, 2009
                
                
                
                
                
                
                
                
                
                
                130,500
                
                
                
                131
                
                
                
                42,500
                
                
                
                
                
                
                
                42,631Common
      stock issued as payment for services on October 16, 2009
                
                
                
                
                
                
                
                
                
                
                100,911
                
                
                
                101
                
                
                
                34,209
                
                
                
                
                
                
                
                34,310Common
      stock issued as payment for services on October 23, 2009
                
                
                
                
                
                
                
                
                
                
                30,000
                
                
                
                30
                
                
                
                9,270
                
                
                
                
                
                
                
                9,300Common
      stock issued as payment for services on October 29, 2009
                
                
                
                
                
                
                
                
                
                
                37,500
                
                
                
                38
                
                
                
                13,463
                
                
                
                
                
                
                
                13,501Common
      stock issued as payment for services on November 3, 2009
                
                
                
                
                
                
                
                
                
                
                37,500
                
                
                
                37
                
                
                
                13,464
                
                
                
                
                
                
                
                13,501Common
      stock issued as payment for services on November 10, 2009
                
                
                
                
                
                
                
                
                
                
                35,102
                
                
                
                35
                
                
                
                12,251
                
                
                
                
                
                
                
                12,286Common
      stock issued as payment for services on November 16, 2009
                
                
                
                
                
                
                
                
                
                
                1,505,000
                
                
                
                1,505
                
                
                
                405,944
                
                
                
                
                
                
                
                407,449Common
      stock issued as payment for services on November 30, 2009
                
                
                
                
                
                
                
                
                
                
                60,000
                
                
                
                60
                
                
                
                17,340
                
                
                
                
                
                
                
                17,400Common
      stock issued as payment for services on December 4, 2009
                
                
                
                
                
                
                
                
                
                
                49,157
                
                
                
                49
                
                
                
                12,240
                
                
                
                
                
                
                
                12,289Common
      stock issued as payment for services on January 11, 2010
                
                
                
                
                
                
                
                
                
                
                121,286
                
                
                
                121
                
                
                
                30,200
                
                
                
                
                
                
                
                30,321Common
      stock issued as payment for services on February 1, 2010
                
                
                
                
                
                
                
                
                
                
                5,125,102
                
                
                
                5,125
                
                
                
                1,071,146
                
                
                
                
                
                
                
                1,076,271Common
      stock issued as payment for services on February 11, 2010
                
                
                
                
                
                
                
                
                
                
                500,000
                
                
                
                500
                
                
                
                109,500
                
                
                
                
                
                
                
                110,000Common
      stock issued as payment for services on February 15, 2010
                
                
                
                
                
                
                
                
                
                
                127,500
                
                
                
                128
                
                
                
                26,648
                
                
                
                
                
                
                
                26,776Common
      stock issued as payment for services on February 23, 2010
                
                
                
                
                
                
                
                
                
                
                135,000
                
                
                
                135
                
                
                
                26,865
                
                
                
                
                
                
                
                27,000Common
      stock issued as payment for services on March 5, 2010
                
                
                
                
                
                
                
                
                
                
                346,098
                
                
                
                346
                
                
                
                82,897
                
                
                
                
                
                
                
                83,243Common
      stock issued as payment for services on March 12, 2010
                
                
                
                
                
                
                
                
                
                
                70,000
                
                
                
                70
                
                
                
                13,455
                
                
                
                
                
                
                
                13,525Common
      stock issued as payment for services on March 22, 2010
                
                
                
                
                
                
                
                
                
                
                50,000
                
                
                
                50
                
                
                
                8,450
                
                
                
                
                
                
                
                8,500Common
      stock issued as payment for services on April 12, 2010
                
                
                
                
                
                
                
                
                
                
                127,282
                
                
                
                127
                
                
                
                16,420
                
                
                
                
                
                
                
                16,547Common
      stock issued as payment for services on April 19, 2010
                
                
                
                
                
                
                
                
                
                
                100,000
                
                
                
                100
                
                
                
                16,900
                
                
                
                
                
                
                
                17,000Common
      stock issued as payment for services on April 29, 2010
                
                
                
                
                
                
                
                
                
                
                1,700,000
                
                
                
                1,700
                
                
                
                253,300
                
                
                
                
                
                
                
                255,000Common
      stock issued as payment for services on May 10, 2010
                
                
                
                
                
                
                
                
                
                
                773,750
                
                
                
                774
                
                
                
                115,288
                
                
                
                
                
                
                
                116,062Common
      stock issued as payment for services on May 24, 2010
                
                
                
                
                
                
                
                
                
                
                219,092
                
                
                
                219
                
                
                
                43,599
                
                
                
                
                
                
                
                43,818Common
      stock issued as payment for services on June 1, 2010
                
                
                
                
                
                
                
                
                
                
                163,794
                
                
                
                164
                
                
                
                29,319
                
                
                
                
                
                
                
                29,483Common
      stock issued as payment for services on June 9, 2010
                
                
                
                
                
                
                
                
                
                
                333,333
                
                
                
                333
                
                
                
                59,667
                
                
                
                
                
                
                
                60,000Common
      stock issued as payment for services on June 14, 2010
                
                
                
                
                
                
                
                
                
                
                46,544
                
                
                
                47
                
                
                
                8,331
                
                
                
                
                
                
                
                8,378Common
      stock issued for debt and accrued interest conversion on August 7,
      2009
                
                
                
                
                
                
                
                
                
                
                1,122,375
                
                
                
                1,122
                
                
                
                189,681
                
                
                
                
                
                
                
                190,803Conversion
      feature on convertible notes payable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                63,601
                
                
                
                
                
                
                
                63,601Common
      stock sold for cash on October 13, 2009
                
                
                
                
                
                
                
                
                
                
                208,104
                
                
                
                208
                
                
                
                34,156
                
                
                
                
                
                
                
                34,364Common
      stock sold for cash on October 16, 2009
                
                
                
                
                
                
                
                
                
                
                2,980,734
                
                
                
                2,981
                
                
                
                493,808
                
                
                
                
                
                
                
                496,789Common
      stock sold for cash on November 4, 2009
                
                
                
                
                
                
                
                
                
                
                217,117
                
                
                
                217
                
                
                
                36,183
                
                
                
                
                
                
                
                36,400Common
      stock sold for cash on November 17, 2009
                
                
                
                
                
                
                
                
                
                
                421,529
                
                
                
                422
                
                
                
                71,748
                
                
                
                
                
                
                
                72,170Common
      stock sold for cash on December 4, 2009
                
                
                
                
                
                
                
                
                
                
                352,451
                
                
                
                352
                
                
                
                59,565
                
                
                
                
                
                
                
                59,917Common
      stock sold for cash on January 6, 2010
                
                
                
                
                
                
                
                
                
                
                58,058
                
                
                
                58
                
                
                
                9,812
                
                
                
                
                
                
                
                9,870Common
      stock sold for cash on February 4, 2010
                
                
                
                
                
                
                
                
                
                
                888,235
                
                
                
                888
                
                
                
                150,112
                
                
                
                
                
                
                
                151,000Common
      stock sold for cash on March 2, 2010
                
                
                
                
                
                
                
                
                
                
                743,746
                
                
                
                744
                
                
                
                125,693
                
                
                
                
                
                
                
                126,437Common
      stock sold for cash on March 12, 2010
                
                
                
                
                
                
                
                
                
                
                352,941
                
                
                
                353
                
                
                
                59,647
                
                
                
                
                
                
                
                60,000Common
      stock sold for cash on April 19, 2010
                
                
                
                
                
                
                
                
                
                
                125,000
                
                
                
                125
                
                
                
                14,875
                
                
                
                
                
                
                
                15,000Common
      stock sold for cash on June 1, 2010
                
                
                
                
                
                
                
                
                
                
                700,000
                
                
                
                700
                
                
                
                69,300
                
                
                
                
                
                
                
                70,000Common
      stock issued for conversion of note payable on June 1,
2010
                
                
                
                
                
                
                
                
                
                
                2,789,217
                
                
                
                2,789
                
                
                
                276,133
                
                
                
                
                
                
                
                278,922Common
      stock sold for cash on June 24, 2010
                
                
                
                
                
                
                
                
                
                
                1,000,000
                
                
                
                1,000
                
                
                
                99,000
                
                
                
                
                
                
                
                100,000Warrants
      issued as payment for services on July 15, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13,205
                
                
                
                
                
                
                
                13,205Warrants
      issued as payment for services on February 11, 2010
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                131,376
                
                
                
                
                
                
                
                131,376Conversion
      feature of note payable on June 1, 2010
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                223,137
                
                
                
                
                
                
                
                223,137Dividends
      on preferred stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,000
                )
                
                
                (6,000
                )Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,196,462
                )
                
                
                (8,196,462
                )Balance
      at June 30, 2010
                
                
                111,111
                
                
                $
                111
                
                
                
                130,581,562
                
                
                $
                130,582
                
                
                $
                12,656,723
                
                
                $
                (13,547,060
                )
                
                $
                (759,644
                )
  
 22
 
 Cavitation
Technologies, Inc
 (A
Development Stage Company)
 Consolidated
Statements of Cash Flows
 
 January
      29, 2007,Inception,ThroughYears
      Ended June 30,
                
                
                June
      30,2010
                
                
                2009
                
                
                2010Operating
      activities:Net
      loss
                
                $
                (8,196,462
                )
                
                $
                (2,495,991
                )
                
                $
                (13,374,235
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                16,968
                
                
                
                7,212
                
                
                
                29,587Warrants
      issued in connection with convertible notes payable
                
                
                -
                
                
                
                49,245
                
                
                
                49,245Beneficial
      conversion feature on convertible notes payable
                
                
                286,738
                
                
                
                -
                
                
                
                286,738Common
      stock issued for services
                
                
                6,475,727
                
                
                
                640,027
                
                
                
                8,960,144Stock
      option compensation
                
                
                -
                
                
                
                307,512
                
                
                
                307,512Warrants
      issued for services
                
                
                144,581
                
                
                
                146,043
                
                
                
                290,624Effect
      of changes in:Prepaid
      expenses and other current assets
                
                
                (817
                )
                
                
                (897
                )
                
                
                (3,158
                )Deposits
                
                
                -
                
                
                
                -
                
                
                
                (9,500
                )Bank
      overdraft
                
                
                2,747
                
                
                
                -
                
                
                
                2,747Accounts
      payable and accrued expenses
                
                
                73,413
                
                
                
                110,167
                
                
                
                240,294Accrued
      payroll
                
                
                146,583
                
                
                
                215,390
                
                
                
                361,973Deferred
      revenue
                
                
                24,761
                
                
                
                26,000
                
                
                
                50,761Net
      cash used in operating activities
                
                
                (1,025,761
                )
                
                
                (995,292
                )
                
                
                (2,807,268
                )Investing
      activities:Purchase
      of property and equipment
                
                
                (23,820
                )
                
                
                (44,660
                )
                
                
                (99,192
                )Payments
      for systems
                
                
                (71,683
                )
                
                
                -
                
                
                
                (71,683
                )Payments
      for patents
                
                
                (92,284
                )
                
                
                -
                
                
                
                (92,284
                )Net
      cash used in investing activities
                
                
                (187,787
                )
                
                
                (44,660
                )
                
                
                (263,159
                )Financing
      activities:Proceeds
      from (payments on) line of credit borrowings
                
                
                (112,167
                )
                
                
                9,061
                
                
                
                524,750Proceeds
      from sales of preferred stock
                
                
                -
                
                
                
                225,000
                
                
                
                725,000Proceeds
      from convertible notes payable
                
                
                -
                
                
                
                235,000
                
                
                
                235,000Payments
      on convertible notes payable
                
                
                (20,000
                )
                
                
                (35,000
                )
                
                
                (55,000
                )Proceeds
      from sale of common stock
                
                
                1,231,947
                
                
                
                300,000
                
                
                
                1,531,947Proceeds
      from short-term loans
                
                
                109,000
                
                
                
                -
                
                
                
                109,000Net
      cash provided by financing activities
                
                
                1,208,780
                
                
                
                734,061
                
                
                
                3,070,697Net
      increase (decrease) in cash
                
                
                (4,768
                )
                
                
                (305,891
                )
                
                
                270Cash,
      beginning of period
                
                
                5,038
                
                
                
                310,929
                
                
                
                -Cash,
      end of period
                
                $
                270
                
                
                $
                5,038
                
                
                $
                270Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                
                $
                47,695
                
                
                $
                48,660
                
                
                $
                150,982Cash
      paid for income taxes
                
                $
                1,659
                
                
                $
                1,619
                
                
                $
                5,128Supplemental
      disclosure of non-cash investing and financing activities:Warrants
      issued in connection with preferred stock
                
                $
                -
                
                
                $
                107,835
                
                
                $
                155,714Beneficial
      conversion feature on preferred stock
                
                $
                -
                
                
                $
                11,111
                
                
                $
                11,111Conversion
      of preferred to common shares in reverse merger
                
                $
                -
                
                
                $
                -
                
                
                $
                625,000Proceeds
      from sales of preferred shares used to purchase shares of
    Bio
                
                $
                -
                
                
                $
                400,000
                
                
                $
                400,000Conversion
      of note payable to common stock
                
                $
                278,922
                
                
                $
                -
                
                
                $
                278,922Accrued
      dividends issued to preferred stockholders
                
                $
                6,000
                
                
                $
                1,733
                
                
                $
                6,000Conversion
      of convertible notes payable and accrued interest to common
      stock
                
                $
                190,803
                
                
                $
                -
                
                
                $
                190,803
 
 
 23
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 - Organization
 
 Cavitation
Technologies, Inc. (the “Company”) is a Nevada Corporation incorporated on May
8, 2006, under the name BioEnergy, Inc..  The Company designs and
engineers environmentally friendly NANO technology based systems that have
potential commercial applications in industries such as vegetable oil refining,
renewable fuels, water treatment, water-oil emulsions, alcoholic beverage
enhancement, algae oil extraction, and crude oil yield enhancement.
 
 Research
and development has led to products including the Green D+Plus NANO Neutralization
System– a vegetable oil refining or de-gumming system, and the Bioforce 9000 NANO Reactor
System which performs the transesterification process during the
production of biodiesel. Both the Green D+ PlusSystem and the Bioforce 9000NANO Reactor
Systememploy
our proprietary continuous flow-through, hydrodynamic NANOTechnology in the form of our
multi-stage NANO Series of reactors.  To date, we have sold no
products and have recorded no revenue.  Our investment in research and
development since inception on January 29, 2007 through June 30, 2010 is
$4,623,400.
 
 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 merchandising
the  Green D+ Plus
NANO Neutralization  System which is designed to partially
de-gum or refine vegetable oils such as soybean, canola, and
rapeseed.  Our near term goal is to successfully complete operational
testing of three Green
D+Plus Systems.Given the
conditions in the biodiesel market, we have no plans to actively pursue sales of
our Bioforce 9000
System in the foreseeable future.
  The
accompanying financial statements for the years ended June 30, 2010 and 2009,
and the period from January 29, 2007 (date of inception) through June 30, 2010
have been prepared in conformity with generally accepted accounting principles
which contemplate continuation of the Company as a going concern.  The
Company has no significant operating history and, from January 29, 2007,
(inception), through June 30, 2010, generated a net loss of
$13,374,235.  The Company also has negative cash flow from operations
and negative net equity.  These factors, among others, raise
substantial doubt about the Company’s ability to continue as a going
concern.
 
 Management’s
plan is to generate income from operations by successfully finalizing sales
arrangements with its prospective customers.  We will also attempt 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
 
 The
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles (“GAAP”) as promulgated in the United
States of America (“U.S.”).
 
 On
October 7, 2009, the Company filed an amendment to its Articles of Incorporation
with the Secretary of State of the State of Nevada to authorize and increase the
number of authorized shares of common stock to 1,000,000,000 (par value $0.001)
and to effect a 3 for 1 forward split of all outstanding shares. The effective
date for the forward split was October 29, 2009.  All references to
the number of shares in the consolidated financial statements have been
retroactively adjusted and are presented on a post-split basis.
  24
  In July
2009 the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Codification  (“ASC”) 105-10, formerly Statement of Financial
Accounting Standards ("SFAS") No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles,
which became the single source of authoritative GAAP recognized by the
FASB. ASC 105-10 does not change current U.S. GAAP, but on the effective
date, the FASB ASCsuperseded
all then existing non-SEC accounting and reporting standards. The ASC is
effective for interim and annual reporting periods ending after September 15,
2009. The Company adopted ASC 105-10 during the year ended June 30, 2010
and revised its referencing of GAAP accounting standards in these financial
statements to reflect the new standards.
  Note
3 - Significant Accounting Policies
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of Cavitation
Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc.
All significant inter-company transactions and balances have been eliminated
through consolidation.
 
 Fair
Value Measurement
  ASC
820-10 (formerly SFAS No. 157, Fair Value Measurements)
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. ASC 820-10 defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of June 30, 2010,
the carrying value of certain financial instruments such as deferred costs,
accounts payable, accrued expenses, accrued payroll and short-term loans
approximates fair value due to the short-term nature of such
instruments.
  The
Company utilizes ASC 820-10 for valuing financial assets and liabilities
measured on a recurring basis. ASC 820-10 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This standard applies in situations where other accounting
pronouncements either permit or require fair value measurements. ASC 820-10 does
not require any new fair value measurements.
  Accounting
guidance also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
  The
standard describes three levels of inputs that may be used to measure fair
value:
  Level  1:
              Quoted
      prices in active markets for identical or similar assets and
      liabilities.Level  2:
              Quoted
      prices for identical or similar assets and liabilities in markets that are
      not active or observable inputs other than quoted prices in active markets
      for identical or similar assets and liabilities.Level  3:
              Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities.
 
 Reclassifications
 
 Certain
prior year data has been reclassified to conform with the current year
presentation.  The reclassifications have not impacted the previously
reported results of operations or total assets, liabilities or stockholders’
deficit.
  25
  Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the 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.
 
 Revenue
Recognition
 
 The
Company recognizes revenue 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 collectability is reasonably assured.
 
 The
Company received total deposits of $50,761 and $26,000 as of June 30, 2010 and
2009, respectively, from prospective customers relating to orders of the
Company’s NANO Neutralization
Systemand Bioforce
9000 Reactor Skid Systems.  Because these transactions have not
yet been fully completed, these amounts have been reflected in deferred revenue
on the accompanying consolidate balance sheet as of June 30, 2010 and
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.  The Company maintains its cash
and cash equivalents in bank deposit accounts which, at times, may exceed
federally insured limits.  The Company has never experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
 
 Property
and Equipment
 
 Property
and equipment is 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.
 
 Patents
 
 Capitalized
patent costs represent legal fees associated with procuring and filing patent
applications.  The Company accounts for patents in accordance with ASC
360 (formerly SFAS No. 142, Goodwill and Other Intangible
Assets).  During the year ended June 30, 2010, the Company
incurred $92,284 in patent costs which are capitalized in the accompanying
consolidated balance sheet.  The Company is awaiting final approval
and issuance of its pending patents. Once the patents are issued, the Company
will begin amortizing the capitalized patent costs over their estimated useful
lives.
 
 Intangible
and Long-Lived Assets
  In
accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), the Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows
associated with the related asset or group of assets over their estimated useful
lives against their respective carrying amount. Impairment, if any, is based on
the excess of the carrying amount over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. The Company’s
management believes there is no impairment of its long-lived assets. There can
be no assurance, however, that market conditions will not change or demand for
the Company’s products under development will continue. Either of these could
result in future impairment of long-lived assets.
  26
  Stock-Based
Compensation
 
 The
Company accounts for its share-based compensation in accordance ASC 718-20
(formerly SFAS No. 123R, Share-Based
Payment).  Stock-based compensation cost is measured at the
grant date, based on the estimated fair value of the award, and is recognized as
expense over the requisite vesting period.
 
 The fair
value of each stock option and warrant is estimated on the date of grant using
the Black-Scholes option pricing model.Assumptions
relative to volatility and anticipated forfeitures are determined at the time of
grant.  There were no stock options granted during the year ended June
30, 2010.  The following were the assumptions used to value the stock
options during the year ended June 30, 2009.
 Year
      EndedJune
      30,2009Expected
      life in years
                  
                  1 -
      10Stock
      price volatility
                  
                  64.0%
      - 148.0%Risk
      free interest rate
                  
                  1.06%
      - 3.23%Expected
      dividends
                  
                  NoneForfeiture
      rate
                  
                  0%
 
 The fair
value of warrants is estimated on the date of grant using the Black-Scholes
option pricing model. Assumptions relative to volatility are determined at the
time of grant, and were based on the following for warrants granted during the
years ended June 30, 2010 and 2009.
 Year
      Ended
                  
                  Year
      EndedJune
      30,
                  
                  June
      30,2010
                  
                  2009Expected
      life in years
                  
                  2 -
      3
                  
                  1.5
      - 5.0Stock
      price volatility
                  
                  132.1%
                  
                  64.0%
      - 148.0%Risk
      free interest rate
                  
                  0.91%
      - 1.60%
                  
                  0.68%
      - 1.86%Expected
      dividends
                  
                  None
                  
                  NoneForfeiture
      rate
                  
                  0%
                  
                  0%
 
 Income
Taxes
  The
Company accounts for income taxes in accordance with ASC 740-10 (formerly SFAS
No. 109, Accounting for Income
Taxes and FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109. The Company
recognizes deferred tax assets and liabilities to reflect the estimated future
tax effects, calculated at currently effective tax rates, of future deductible
or taxable amounts attributable to events that have been recognized on a
cumulative basis in the financial statements. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
of the deferred tax asset will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates of
the date of enactment.
  ASC
740-10 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition issues. The Company classifies
interest and penalties as a component of interest and other expenses. To date,
there have been no interest or penalties assessed or paid.
  27
  The
Company measures and records uncertain tax positions by establishing a threshold
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return.  Only tax positions meeting
the more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized.
 
 Deferred
costs
 
 Deferred
costs represent costs associated with customizing specific units of the
Company’s NANO Neutralization System and Reactor Skid products that it plans on
selling in the short term.  The direct costs incurred by the Company
associated with manufacturing the products have been capitalized and reflected
as deferred costs. When sales of the specific products are made, the amounts
recorded as deferred costs will be expensed.
 
 Advertising
costs
 
 Advertising
costs incurred in the normal course of operations are expensed as incurred.
Advertising expenses amounted to $46,719, $37,390, and $139,303 for the years
ended June 30, 2010 and 2009, and the period from January 29, 2007 (date of
inception) through June 30, 2010, respectively.
  
 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  The Company’s research and development costs amounted to
$2,184,902, $311,793, and $4,623,400 for the years ended June 30, 2010 and 2009,
and the period from January 29, 2007 (date of inception) through June 30, 2010,
respectively.
 
 Recent
Accounting Pronouncements
 
 Accounting
standards promulgated by the 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.
 
 In April
2010, the FASB issued Accounting Standard Update (“ASU”) 2010-17, which provides
guidance on defining a milestone under ACS 605 and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or
development transactions.  Consideration that is contingent on
achievement of a milestone in its entirety may be recognized as revenue in the
period in which the milestone is achieved only if the milestone is judged to
meet certain criteria to be considered substantive.  Milestones should
be considered substantive in their entirety and may not be bifurcated. An
arrangement may contain both substantive and nonsubstantive milestones that
should be evaluated individually.  This ASU is effective for fiscal
years or interim periods beginning after June 15, 2010.  The Company
is evaluating the potential impact of this update on its consolidated financial
statements.
 
 In April
2010, the FASB issued ASU 2010-13, which addresses the classification of a
share-based payment award with an exercise price denominated in the currency of
a market in which the underlying equity security trades. ASC 718 is amended to
clarify that a share-based payment award with an exercise price denominated in
the currency of a market in which a substantial portion of the entity's equity
securities trades shall not be considered to contain a market, performance, or
service condition. Therefore, such an award is not to be classified as a
liability if it otherwise qualifies as equity classification.  This
ASU is effective for fiscal years beginning after December 15,
2010.  The Company is evaluating the potential impact of this update
on its consolidated financial statements.
 
 In March
2010, the FASB issued ASU 2010-11, which clarifies the type of embedded credit
derivative that is exempt from embedded derivative bifurcation requirements.
Only one form of embedded credit derivative qualifies for the exemption—one that
is related only to the subordination of one financial instrument to another. As
a result, entities that have contracts containing an embedded credit derivative
feature in a form other than such subordination may need to separately account
for the embedded credit derivative feature.  This ASU is effective for
the first fiscal quarter beginning after June 15, 2010.  The Company
is evaluating the potential impact of this update on its consolidated financial
statements.
  28
  In
January 2010, the FASB issued ASU 2010-6, which provides amendments to ASC 820
that will provide more robust disclosures about (1) the different classes of
assets and liabilities measured at fair value, (2) the valuation techniques and
inputs used, (3) the activity in Level 3 fair value measurements, and (4) the
transfers between Levels 1, 2, and 3.  The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.  The adoption of these
provisions did not have a material impact on the Company’s financial
statements.
 
 Note
4-Net Loss Per Share
– Basic and Diluted
 
 The
Company computes the loss per common share using ASC 260 (formerly 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. The
weighted average number of shares used to calculate the net loss per share has
been retroactively restated to consider the effect of the forward stock split on
September 24, 2009.
 
 On June
30, 2010, the Company had 1,987,612 stock options and 12,545,618 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 333,333 shares of common
stock.  These items were also not included in the calculation of
diluted net loss per common share because their effect would be
anti-dilutive.
  Note
5 - Property and Equipment
 
 Property
and equipment consisted of the following as of June 30, 2010 and June 30,
2009
 
 June
      30,
                
                
                June
      30,2010
                
                
                2009Leasehold  improvement
                
                $
                2,475
                
                
                $
                2,475Furniture
                
                
                26,837
                
                
                
                26,837Office
      equipment
                
                
                1,500
                
                
                
                1,400Equipment
                
                
                68,380
                
                
                
                44,66099,192
                
                
                
                75,372Less:
      accumulated depreciation and amortization
                
                
                (29,587
                )
                
                
                (12,619
                )$
                69,605
                
                
                $
                62,753
 
 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
  29
  Depreciation
and amortization expense for the years ended June 30, 2010, 2009, and for the
period from January 29, 2007 (inception) through June 30, 2010, amounted to
$16,968, $7,212 and $29,587, respectively.
 
 Note 6 - Bank Loan
 
 On
February 7, 2007, the Company executed a $700,000 revolving line of credit from
National Bank of California. The line of credit bears interest at the Prime rate
plus 1%. The balance outstanding under this line of credit was $636,917 at June
30, 2009.
 
 On August
1, 2009, the revolving line of credit was replaced by a one-year variable rate
loan which matured  August 1, 2010.   This loan bears
interest at the prime rate plus 2.75%, 7% as of June 30, 2010, and will be
repaid with equal monthly installments of $7,396 beginning September 1, 2009
with  unpaid amounts due on August 1, 2010. This line of credit is
secured by personal guarantees of the Company’s principals and
assets.  The amount outstanding under this bank loan was $524,750 as
of June 30, 2010.  Subsequent to the year ended June 30, 2010, the
term of the loan was extended (see Note 12).
 
 Note
7 - Convertible Notes Payable
 
 In
December 2008, the Company entered into Note and Warrant Purchase Agreements
(collectively, the “Agreements”), 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 convertible 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.
 
 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.  In July 2009, the Company repaid an additional $20,000
in principal.  On August 17, 2009, the remaining $180,000 in
convertible notes payable, plus accrued interest of $10,803, were converted into
1,122,375 shares of restricted 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.  This resulted in a beneficial
conversion feature on the convertible notes payable of $63,601, which is
reflected as a component of interest expense during the year ended June 30, 2010
in the accompanying consolidated statements of operations.  As of June
30, 2010, the remaining balance outstanding for convertible notes payable was
$0.
  Note
8 – Short-Term Loans
 
 In
January 2010, the Company borrowed $9,000 from a shareholder as a short-term
loan.  The borrowing bears no interest and is due on
demand.  As of June 30, 2010, the total outstanding amount related to
this short-term loan amounted to $9,000.  On July 6, 2010, the
outstanding short-term loan amount of $9,000 was repaid.
 
 In May
2010, the Company received a short-term loan from a shareholder in the amount of
$100,000.  The borrowing bears no interest and is due on
demand.  As of June 30, 2010, the total outstanding amount related to
this short-term loan amounted to $100,000.  Management expects the
shareholder to convert this short-term loan into common stock or another
financial instrument during the year ended June 30, 2011.
 
 The total
outstanding balance of the above loans of $109,000 is recorded as short-term
loans on the accompanying consolidated balance sheet as of June 30,
2010.
  30
  Note
9 – Stockholders’ Equity
 
 Common
Stock
  On
September 24, 2009, the Company’s Board of Directors authorized an increase in
authorized common shares from 100,000,000 to 1,000,000,000 as well as a 3 for 1
forward split of the Company’s common shares. The stock split resulted in a
retroactive restatement of all historical shares outstanding.  The
accompanying consolidated statements of changes in stockholder’s deficit and
references to the number of shares throughout the document were restated to give
retroactive recognition of the forward stock split.
 
 During
the year ended June 30, 2009, the Company completed the following common stock
transactions.
 
 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 Energy, Inc. (“Bio”), a non-operating shell company,
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 (the “Transaction”).  Bio issued 56,250,000 shares of its
common stock to the stockholders of the Company, in exchange for all the
outstanding shares of the Company, and 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 Transaction, all shares of Series A-1
Preferred Stock were converted to common shares of Bio, resulting in 2,149,560
shares of common stock.  The accompanying financial statements have
retroactively shown the recapitalization for all periods
presented.  In connection with the Bio transaction, 410,000 warrants
to purchase 410,000 shares of common stock of the Company converted into 839,376
warrants to purchase 839,376 shares of common stock of Bio.
  During
the year ended June 30, 2009, the Company issued an aggregate of 1,983,909
shares of common stock as payment for services provided, valued at an aggregate
total of $640,027.  These amounts are reflected in general and
administrative expenses during the year ended June 30, 2009.
 
 During
the year ended June 30, 2009, the Company sold an aggregate of 1,599,996 shares
of common stock for aggregate total proceeds of $300,000.
 
 During
the year ended June 30, 2010, the Company completed the following common stock
transactions.
 
 On June
1, 2010, the Company issued a note payable to Igor Gorodnitsky, the Company’s
President, in the amount of $278,922 as payment for deferred salary amounts owed
to him.  Concurrent with the issuance of the note payable, Mr.
Gorodnitsky sold the note payable to Snapshot, Ltd., a third party company, for
the face value of the note of $278,922.  On June 1, 2010, Snapshot,
Ltd., a note holder, agreed to convert the outstanding note payable into shares
of the Company’s common stock at a conversion rate of $0.10 per
share.  As a result, the Company issued 2,789,217 shares of common
stock as payment of the note payable of $278,922.  A resulting charge
on the conversion of the note payable of $223,137 was recorded, representing the
difference between the market value of the stock issued and the book value of
the note payable.  This amount is reflected in interest expenses
during the year ended June 30, 2010.
 
 During
the year ended June 30, 2010, the Company issued an aggregate of 29,637,462
shares of common stock as payment for services provided, which resulted in an
aggregate total expense of $6,475,727.  This amount is reflected in
general and administrative and research and development expenses in the
accompanying consolidated statements of operations during the year ended June
30, 2010.  This total includes 2,825,000 shares of restricted common
stock issued to members of senior management as compensation on July 24, 2009,
which had a total value of $2,260,000.  These shares vest over a
period from June 25, 2009 through January 2, 2011.  As of June 30,
2010, the total vested value of these restricted shares amounted to $1,473,725,
which was included in the amount recorded in general and administrative expense
above.  The remainder of the shares will vest during the year ended
June 30, 2011, resulting in an additional $786,275 in general and administrative
expenses during the year ended June 30, 2011.
 
 During
the year ended June 30, 2010, the Company sold an aggregate of 8,047,915 shares
of restricted common stock for aggregate total proceeds of
$1,231,947.  Along with the purchase of the shares, the investors were
also issued an aggregate of 6,922,915 warrants to purchase additional shares of
the Company’s common stock.  These warrants have an exercise price of
$0.42 per share, a contractual life of 3 years, and were vested immediately upon
the date of grant.
  31
  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
Company has 5,000,000 shares of Series A Preferred Stock authorized and 111,111
shares outstanding.  Series A Preferred Stock is convertible into
common stock at a rate of 3 shares of common stock per share of each Series A
Preferred Stock held at any time at the option of the preferred
shareholders.  In the event of any liquidation, dissolution or winding
up of the Company, the holders of Series A Preferred will have liquidation
preferences prior to distributions made to any other class of
stockholder.  The Series A Preferred Stock is not
redeemable.  On the third anniversary date of the issuance of the
preferred shares, any Series A Preferred shares outstanding are automatically
converted into common stock, at the conversion rate described
above.
  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. During
the years ended June 30, 2010 and 2009, cumulative dividends amounted to $6,000
and $1,733 respectively. As of June 30, 2010, none of the cumulative dividends
have been paid.
 
 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 Preferred Stock at a
purchase price of $0.90 per 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.  In connection with the sale Series
A Preferred Stock, the Company also issued 333,333 warrants to the investor to
purchase common stock at an exercise price of $0.42 per share.
 
 Stock
Options
 
 The
Company has not adopted a formal stock option plan, however, it has assumed
outstanding stock options resulting from the acquisition of its wholly-owned
subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made
periodic non-plan grants.
  32
  A summary
of the stock option activity from January 29, 2007 (date of inception) through
June 30, 2010 is as follows.
 
 Weighted-AverageWeighted-
                
                
                RemainingAverage
                
                
                ContractualExercise
                
                
                LifeOptions
                
                
                Price
                
                
                (Years)Outstanding
      at January 29, 2007 (date of inception)
                
                
                -
                
                
                $
                -
                
                
                
                -Granted
                
                
                2,137,612
                
                
                
                0.57Exercised
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2009
                
                
                2,137,612
                
                
                
                0.57
                
                
                
                6.68Granted
                
                
                -
                
                
                
                -Forfeited
                
                
                (150,000
                )
                
                
                0.67Exercised
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2010
                
                
                1,987,612
                
                
                
                0.56
                
                
                
                6.16Vested
      and expected to vest at June 30, 2010
                
                
                1,987,612
                
                
                
                0.56
                
                
                
                6.16Exercisable
      at June 30, 2010
                
                
                1,987,612
                
                
                
                0.56
                
                
                
                6.16
 
 The fair
value of the options granted during the year ended June 30, 2009 amounted to
$307,512.  These stock options were fully vested upon being granted
and, as a result, the fair value of these stock options was recorded as an
expense on the grant date.  There were no stock options granted during
the year ended June 30, 2010.  In addition, there were no unvested
options as of June 30, 2010 or 2009.
 
 The
weighted average grant date fair value of options granted during the year ended
June 30, 2009 was $0.14.  The intrinsic value of options outstanding
and exercisable at June 30, 2010 was $0.
 
 The
following table summarizes additional information concerning options outstanding
and exercisable at June 30, 2010.
 
 Options
      Outstanding
                
                
                Options
      ExercisableWeighted
                
                
                Weighted
                
                
                
                
                
                WeightedAverage
                
                
                Average
                
                
                
                
                
                AverageExercise
                
                
                Number
                
                
                Remaining
                
                
                Exercise
                
                
                Number
                
                
                ExercisePrice
                
                
                of
      Shares
                
                
                Life
      (Years)
                
                
                Price
                
                
                of
      Shares
                
                
                Price$
                0.33
                
                
                
                637,297
                
                
                
                6.31
                
                
                $
                0.33
                
                
                
                637,297
                
                
                $
                0.330.67
                
                
                
                1,350,315
                
                
                
                6.09
                
                
                
                0.67
                
                
                
                1,350,315
                
                
                
                0.671,987,612
                
                
                
                
                
                
                
                
                
                
                
                1,987,612
  33
  Warrants
 
 A summary
of the Company’s warrant activity and related information from January 29, 2007
(date of inception) through June 30, 2010 is as follows.
  Weighted-AverageWeighted-
                
                
                RemainingAverage
                
                
                ContractualExercise
                
                
                LifeWarrants
                
                
                Price
                
                
                (Years)Outstanding
      at January 29, 2007 (date of inception)
                
                
                -
                
                
                $
                -
                
                
                
                -Granted
                
                
                409,440
                
                
                
                0.37Exercised
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2008
                
                
                409,440
                
                
                
                0.37
                
                
                
                2.75Granted
                
                
                4,123,263
                
                
                
                0.46Exercised
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2009
                
                
                4,532,703
                
                
                
                0.45
                
                
                
                3.18Granted
                
                
                8,012,915
                
                
                
                0.40Exercised
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2010
                
                
                12,545,618
                
                
                
                0.42
                
                
                
                2.66Vested
      and expected to vest at June 30, 2010
                
                
                12,545,618
                
                
                
                0.42
                
                
                
                2.66Exercisable
      at June 30, 2010
                
                
                12,545,618
                
                
                
                0.42
                
                
                
                2.66
  The
weighted average grant date fair value of warrants granted during the years
ended June 30, 2010 and 2009 amounted to $0.19 and $0.07,
respectively.
 
 The
following table summarizes additional information concerning warrants
outstanding and exercisable at June 30, 2010.
  Warrants
      Outstanding
                
                
                Warrants
      ExercisableWeighted
                
                
                Weighted
                
                
                
                
                
                WeightedAverage
                
                
                Average
                
                
                
                
                
                AverageExercise
                
                
                Number
                
                
                Remaining
                
                
                Exercise
                
                
                Number
                
                
                ExercisePrice
                
                
                of
      Shares
                
                
                Life
      (Years)
                
                
                Price
                
                
                of
      Shares
                
                
                Price$
                0.20
      - 0.37
                
                
                
                2,339,374
                
                
                
                2.61
                
                
                $
                0.30
                
                
                
                2,339,374
                
                
                $
                0.300.42
      - 0.58
                
                
                
                10,206,244
                
                
                
                2.67
                
                
                
                0.45
                
                
                
                10,206,244
                
                
                
                0.4512,545,618
                
                
                
                
                
                
                
                
                
                
                
                12,545,618
  34
  Note
10 - Income Taxes
  The items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes were as follows.
 Year
      EndedJune
      30. 2010Computed
      tax provision at statutory Federal rates
                  
                  
                  34.0
                  %Increase
      (decrease) in taxes resulting from:State
      taxes, net of Federal income tax benefit
                  
                  
                  5.8
                  %Valuation
      Allowance
                  
                  
                  -39.8
                  %Effective
      income tax rate
                  
                  
                  0.0
                  %
  Deferred
tax asset is mainly related to the net operating loss carry forwards, and is
subject to a 100% valuation allowance due to the uncertainty of its
realization.
  The
Company files income tax returns in the United States ("Federal") and California
("State") jurisdictions. The Company is subject to Federal and State income tax
examinations by tax authorities for all years since its
inception.
  At June
30, 2010, the Company had Federal and State net operating loss carry forwards
available to offset future taxable income of approximately $5.8 million and $3.3
million, respectively. These carry forwards will begin to expire in the years
ending June 30, 2027 and June 30, 2017, respectively, subject to IRS
limitations, including change in ownership.
  The
Company periodically evaluates the likelihood of the realization of deferred tax
assets, and adjusts the carrying amount of the deferred tax assets by a
valuation allowance to the extent the future realization of the deferred tax
assets is not judged to be more likely than not. The Company considers many
factors when assessing the likelihood of future realization of our deferred tax
assets, including recent cumulative earnings experience by taxing jurisdiction,
expectations of future taxable income or loss, the carry-forward periods
available to us for tax reporting purposes, and other relevant
factors.
  At June
30, 2010, based on the weight of available evidence, including cumulative losses
in recent years and expectations of future taxable income, the Company
determined that it was more likely than not that its deferred tax assets would
not be realized. Accordingly, the Company has recorded a valuation allowance for
100% of its cumulative deferred tax assets.
  35
  As a
result of the implementation of certain provisions of ASC 740-10, the Company
performed an analysis of its previous tax filings and determined that there were
no positions taken that it considered uncertain. Therefore, there were no
unrecognized tax benefits as of June 30, 2010.
  Future
changes in the unrecognized tax benefit are not expected to have an impact on
the effective tax rate due to the existence of the valuation allowance. The
Company estimates that the unrecognized tax benefit will not change within the
next twelve months. The Company will continue to classify income tax penalties
and interest, if any, as part of interest and other expenses in its consolidated
statements of operations. There is no interest or penalties accrued as of June
30, 2010.
  The
following table summarizes the open tax years for each major
jurisdiction:
  Jurisdiction Open Tax
Years
  Federal
2007 - 2010
  California
State 2007 - 2010
  As the
Company has significant net operating loss carryforwards, even if certain of the
Company's tax positions were disallowed, it is not foreseen that the Company
would have to pay any taxes in the near future. Consequently, the Company does
not calculate the impact of interest or penalties on amounts that might be
disallowed.
  Note
11 – Commitments and Contingencies
 
 Lease
Agreements
 
 On
December 30, 2009, the Company extended its existing lease agreement for
approximately 5,000 square feet of office and warehouse space at 10019 Canoga
Ave for a period of two years effective February 1, 2010.  Monthly
rent under the extended lease agreement is $4,250 per month.  As of
June 30, 2010 and 2009, the Company had a security deposit of $9,500 associated
with this lease.
 
 Total
rent expense was $55,735, $64,198, and $199,783 for the year ended June 30,
2010, 2009 and for the period from January 29, 2007 (date of inception) through
June 30, 2010, respectively.
 
 Future
minimum lease payments under non-cancelable operating leases are as
follows.
 Year
      EndedJune
      30,2011
                  
                  
                  51,0002012
                  
                  
                  29,750Total
                  
                  $
                  80,750
 
 Royalty
Agreements
 
 The
Company has entered into Patent Assignment Agreements with each of its President
and CEO, where certain devices and methods involved in the hydrodynamic
cavitation processes invented by the President and CEO have been assigned to the
Company.  In exchange, the Company agreed to pay a royalty of 5% of
future gross revenues to each of the CEO and President for future licensing,
leasing, or rental revenue generated from products using the assigned
technologies.
  36
  In
connection with an employment agreement with a key employee, for any
technologies invented by the employee, the Company shall pay a royalty of 5% of
future revenues received in the first year and 3% in subsequent years from
licensing, leasing, or rental revenues associated with patents assigned from the
employee.
 
 As of
June 30, 2010, the Company has not paid any amounts related to these
royalties.
 
 Note
12 – Subsequent Events
 
 On July
8, 2010, the Company issued an aggregate total of 349,571 shares of common stock
with an aggregate fair value of $52,436 for the payment of services
rendered.
 
 On August
3, 2010, the Company issued an aggregate total of 1,854,009 shares of common
stock with an aggregate fair value of $352,262 for the payment of services
rendered.
 
 On August
3, 2010, the Company sold an aggregate total of 593,211 shares of restricted
common for proceeds of $59,321.
 
 On
September 8, 2010, the Company issued an aggregate total of 237,192 shares of
common stock with an aggregate fair value of $35,579 for the payment of services
rendered.
 
 On August
1, 2010 the Company renewed until November 1, 2010 a Variable Rate
Nondisclosable loan from the National Bank of California for
$520,516.  The purpose of the loan is to finance working
capital.  The terms and conditions remain the same with monthly
payments of $7,396 and an interest rate of  prime  plus
2.75%.
 
 On August
1, 2010, the Company entered into a Change in Terms agreement with the lender of
its bank loan (see Note 6).  Per the agreement, the term of the loan
was extended from August 1, 2010 to November 1, 2010.
 
 On
September 8, 2010, the Company issued an aggregate total of 237,192 shares of
common stock with an aggregate fair value of $35,579 for the payment of services
rendered.
 
 On
September 8, 2010, Varvara Grichko was appointed to our Board of Directors to
fill an existing vacancy.
 
 ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
 None.
 
 ITEM
9A(T).  CONTROLS AND PROCEDURES
 
 Report
of Management on Internal Control over Financial Reporting
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act. 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.
  37
  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 effective at doing so at that reasonable assurance level, 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.
 
 We have
included the entire definition of internal control over financial reporting, as
set forth in Exchange Act Rule 13a-15(f) as follows: The Company’s internal
control over financial reporting is designed under the supervision of our
principal executive and principal financial officer, and effected by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
 
 (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and
 dispositions
of the Company’s assets;
 
 (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that the
Company’s receipts and expenditures are being made only in accordance with
authorizations of the Company’s management and directors; and
 
 (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.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.
 
 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, 2010, our internal controls over financial
reporting are effective.
 This
report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to the new Financial Reform bill enacted in July
2010 which permanently exempts non-accelerated filers such as our company to
provide only management’s report in this annual report.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in the Company’s internal control over financial reporting
during the fourth quarter of fiscal 2010, which were identified in connection
with management’s evaluation required by paragraph (d) of rules 13a-15 and
15d-15 under the Exchange Act, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 ITEM
9B.  Other Information
 
 Not
applicable
  38
  Part III
 
 ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
  Person
                
                Age
                
                PositionMr.
      Roman Gordon
                
                60
                
                CEO,
      Secretary & DirectorMr.
      Igor Gorodnitsky
                
                50
                
                President
      & DirectorMr.
      R.L. Hartshorn
                
                62
                
                CFO
      and DirectorJames
      Fuller
                
                69
                
                DirectorVarvara
      Grichko
                
                53
                
                Director
 
 We  have
an audit committee, but do not have a compensation committee.  We
anticipate forming compensation, governance, and other  committees at
a future Board of Directors’ meeting.
 
 Roman Gordon.Mr. Gordon
has been our Chief Executive Officer and Chairman of the Board since September
26, 2008. With more than 15 years 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.
 
 Igor
Gorodnitsky.Mr. Gorodnitsky has been our President and member
of the Board of Directors since  September 26, 2008. Mr. Gorodnitsky
has developed expertise in handling and processing hazardous waste
material.   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
a variety of commercial clients  and municipalities. . He is a chemist
by training and holds numerous certifications and licenses including 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, l, Health & Safety Supervisor Certification, Hazardous
Certification, and Tosco Refinery Safety. Mr. Gordodnitsky was president of
Express Environmental Corp. since its inception in 1980 until he sold his
interest in January 2009.
 
 R.L.
Hartshorn.  Mr. Hartshorn has
been our Chief Financial Officer and member of the Board of Directors of
Cavitation Technologies, Inc. since September 26, 2008.  He previously
served as a consultant to the company beginning in December 2007.  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.  He speaks German, Portuguese, and Spanish. As a
vice president at Chase and other banks, he was largely responsible for
cultivating credit and marketing relationships with corporate clients across a
variety of industries. He also held sales and sales management positions for 10
years with two public companies in the IT domain including seven years as
Marketing & International Sales for a software and advertising
company.  Overall, Mr. Hartshorn’s operational experience includes 13
years with a sales quota and seven years with  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 in 1971and an MBA from The
Thunderbird School of Global Managementin 1977 and is also a
MCSE.
 
 James
Fuller.Mr. Fuller has been Chairman of our Audit Committee and Independent
Financial Expert since February, 2010.  He was formerly a Vice
President of the New York Stock Exchange and director of the Securities Investor
Protection Corporation. In addition to his over 30 years experience in the
securities markets, Mr. Fuller sat on the Board of Trustees of the University of
California, Santa Cruz and previously served as Chairman of their Audit
Committee and Independent Financial Expert.  Jim is a partner at Baytree
Capital Associates, LLC.Mr. Fuller received his BS in Political Science
from San Jose State University and his MBA from California State University-
Fresno.
  Igor Gorodnitsky, our President,
and Roman Gordon, our CEO, are brothers.
  39
  Varvara
Grichko.Ms. Grichko has been a member of our board of
directors since September, 2010.  Ms. Grichko began her career at the
Institute of Organic Chemistry.  Ms. Grichko received her B.S. and M.S
degrees from the in chemistry and catalysis at Novosibirsk University in
Russia.  Among her other professional exploits, Ms. Grichko has worked
at Marqette University and Novozymes, Inc., where she was involved in the
development of a new process for Bioethanol production. Ms. Grichko holds a
Ph.D. in Chemistry from the Russian Academy of Science and a Ph.D. in biology
from the University of Waterloo in Canada.
 
 ITEM
11.  EXECUTIVE COMPENSATION
 
 The
following table summarizes the compensation earned by each named executive
officer of the Company for the past two fiscal years, determined on the basis of
rules adopted by the SEC relating to smaller reporting companies.
 
 Non-Equity
                
                
                Non-Qualified
                
                
                AllStock
                
                
                Option
                
                
                Incentive
      Plan
                
                
                Deferred
                
                
                OtherYear
                
                
                Salary
                
                
                Awards
      (2)
                
                
                Awards
                
                
                Compensation
                
                
                Compensation
                
                
                Compensation
                
                
                TotalsRoman
      Gordon
                
                
                2010
                
                
                $
                195,000
                
                
                $
                521,673
                (3)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                716,673Chief
      Executive Officer
                
                2009
                
                
                $
                172,857
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                172,857Igor
      Gorodnitsky
                
                2010
                
                
                $
                195,000
                (1)
                
                $
                521,673
                (4)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                716,673President
                
                2009
                
                
                $
                172,857
                (1)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                172,857R.L.
      Hartshorn
                
                2010
                
                
                $
                -
                
                
                $
                194,168
                (5)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                194,168Chief
      Financial Officer
                
                2009
                
                
                $
                -
                
                
                $
                184,349
                (5)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                184,349
  (1)
              In
      2009, Mr. Gorodnitsky earned a salary of $172,857.  On June 1,
      2010, the Company issued a note payable to Mr. Gorodnitsky in the amount
      of $278,922 as payment for all deferred salary amounts owed to him for
      services provided through November 30, 2009.  During 2010, Mr.
      Gorodnitsky earned a salary of $195,000, of which a total of $49,152 was
      unpaid and recorded as accrued payroll as of June 30,
  2010.
  (2)
              Stock
      awards are disclosed at the expense recorded based on their aggregate
      grant date fair values as calculated under ASC 718, Share-Based
      Payment.  All share amounts disclosed include the impact
      of a 3 for 1 forward stock split which was effective as of October 29,
      2009.
  (3)
              In
      July 2009, the Company issued Mr. Gordon 1,000,000 shares of restricted
      common stock as payment for services.  On the date of grant, the
      shares had an aggregate fair value of $800,000.  The shares vest
      through January 2, 2011 and are being expensed in the financial statements
      over that time.  During the year ended June 30, 2010, the
      Company recorded a total of $521,673 of expense associated with this
      grant.  The remaining $278,327 will be recorded over the vesting
      term during the year ended June 30,
2011.
  (4)
              In
      July 2009, the Company issued Mr. Gorodnitsky 1,000,000 shares of
      restricted common stock as payment for services.  On the date of
      grant, the shares had an aggregate fair value of $800,000.  The
      shares vest through January 2, 2011 and are being expensed in the
      financial statements over that time.  During the year ended June
      30, 2010, the Company recorded a total of $521,673 of expense associated
      with this grant.  The remaining $278,327 will be recorded over
      the vesting term during the year ended June 30,
  2011.
  (5)
              In
      July 2009, the Company issued Mr.  Hartshorn 250,000 shares of
      restricted common stock as payment for services.  On the date of
      grant, the shares had an aggregate fair value of $200,000.  The
      shares vest through January 2, 2011 and are being expensed in the
      financial statements over that time.  During the year ended June
      30, 2010, the Company recorded a total of $130,418 of expense associated
      with this grant.  The remaining $69,582 will be recorded over
      the vesting term during the year ended June 30, 2011.  In
      addition, as compensation during the year ended June 30, 2010, Mr.
      Hartshorn was also issued an aggregate total of 350,000 shares of common
      stock with an aggregate grant date fair value of
      $63,750.  During the year ended June 30, 2009, Mr. Hartshorn was
      issued an aggregate total of 402,000 shares of common stock with an
      aggregate grant date fair value of
$184,349.
  40
 
 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, 2010 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.
  Amount
      andNature
      ofTitle
      of
                
                Beneficial
                
                
                Percent
      ofName
      of Beneficial Owner
                
                Class
                
                Owner
                
                
                Class
      (1)Roman
      Gordon
                
                Common
      Stock
                
                
                21,323,475
                
                
                
                16.3
                %Chief
      Executive Officer and Director/Chairman of the BoardIgor
      Gorodnitsky
                
                Common
      Stock
                
                
                21,323,475
                
                
                
                16.3
                %PresidentR.L.
      Hartshorn
                
                Common
      Stock
                
                
                1,502,366
                
                
                
                1.2
                %Chief
      Financial OfficerJames
      Fuller
                
                Common
      Stock
                
                
                75,000
                
                
                
                *Director  and
      Chairman of Audit CommitteeVarvara
      Grichko
                
                Common
      Stock
                
                
                275,183
                
                
                
                *DirectorBioWorld
      Management LTD
                
                Common
      Stock
                
                
                8,594,631
                
                
                
                6.6
                %Directors
      and Officers
                
                Common
      Stock
                
                
                44,499,499
                
                
                
                34.1
                %(as
      a group, five individuals)
 
 (1)
                Based
      upon 130,581,562 issued and outstanding shares of common stock as of June
      30, 2010, which includes the impact of 3 for 1 forward stock split which
      was effective as of October 29,
2009.
 
 *
              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 during the fiscal years ended June 30, 2010 or
2009.
 
 Director
Independence
 
 As our
common stock is currently traded on the OTC Bulletin Board, we are not subject
to the rules of any national securities exchange which require that a majority
of a listed company’s directors and specified committees of the board of
directors meet independence standards prescribed by such rules. For the purpose
of preparing the disclosures in this Report on Form 10-K regarding director
independence, we have used the definition of “independent director” set forth in
the Marketplace Rules of The NASDAQ, which defines an “independent director”
generally as a person other than an executive officer or employee of the Company
or any other individual having a relationship which, in the opinion of the
Company’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. Consistent with
these standards, we believe that James Fuller is an independent
director.
 
 41
 
 ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Audit
 
 Our
principal auditing firm is Rose, Snyder, and Jacobs.  During fiscal
2010 and 2009, we incurred expenses of $97,113 and $85,755, respectively, for
professional services rendered for the audit of our annual financial statements
and review of financial statements included on Form 10-Q.
 
 Tax
Fees
 
 The
aggregate fees billed in fiscal 2010 and fiscal 2009 for professional services
rendered by the principal accountant for tax compliance amounted to $10,300 and
$13,250, respectively.
 
 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.
  Part IV
 
 ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 The
following documents are filed as part of this report:
 
 3.1   Certificate
of Amendment of Articles of Incorporation – filed as an exhibit to the Company’s
Quarterly Report filed on November 16, 2009 and incorporated by
reference
  10.1  Marketing
Agreement between the Company and Desmet Bellestra Group, S.A. – filed as an
exhibit to the Company’s Quarterly Report filed on February 4, 2010, and
incorporated by reference
 14.1.  Code
of Business Conduct and Ethics.  In accordance with Regulation S-K 406
of the Securities Act of 1934, we undertake to provide to any person without
charge, upon request, a copy of our “Code of Business Conduct and
Ethics”.  A copy may be requested by sending an email to
info@cavitationtechnologies.com .
 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 pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of  the Sarbanes-Oxley Act of
2002.
 
 32.2  Certification
of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of  the Sarbanes-Oxley Act of
2002.
  42
  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, 2010Roman
      Gordon
              
              (Principal
      Executive Officer)
                Chairman
      of the Board/s/  Igor
      Gorodnitsky
              
              President
              
              September
      28, 2010Igor
      Gorodnitsky/s/  R.L.
      Hartshorn
              
              Chief
      Financial Officer
              
              September
      28, 2010R.L.
      Hartshorn
              
              (Principal
      Financial Officer and Accounting Officer)
 
 
 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, 2010
              Date: September
      28, 2010By:
      /s/ Roman Gordon
              By:
      /s/ R.L. Hartshorn, Chief Financial OfficerRoman
      Gordon, Chief Executive Officer
              R.L.
      Hartshorn, Chief Financial Officer
 
 43