UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549




Form
10-QSB/A


(Amendment
Number 1)




Mark
      Onex
                                    Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended March 31, 2008; oro
                                    Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from ________________ to ________
      ___________.Commission
      File No. 002-95626-D
                                      
                                      Sionix
      Corporation(Exact
      name of registrant as specified in charter)Nevada
                                    87-0428526(State or other jurisdiction of
                                      incorporation or organization)
                                    (I.R.S. Employer Identification Number)3880 East Eagle Drive, Anaheim, California 92807(Address of principal executive offices)(714) 678-1000(Registrant’s telephone number, including area code)(Former name, former address and former fiscal year if changed since last report)




Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.x  Yeso  No
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).o Yes
 x
No
  The
number of shares of common stock outstanding at May 4, 2009 was 142,303,907
shares.
  Transitional
Small Business Format (Check one) Yes oNo  x




EXPLANATORY
NOTE




Subsequent
to filing Form 10-QSB for the six months ended March 31, 2008, the Company
determined that certain transactions were not properly accounted for or were
omitted. The primary purpose of the Amendment is to disclose the restatement of
our financial statements for these transactions for the six months ended March
31, 2008.  A complete discussion of the restatement is included in the
section of the Amendment titled “Management’s Discussion and Analysis of
Financial Condition and Plan of Operation” and in note 14 to our financial
statements for the six months ended March 31, 2008.




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




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




Page 2 of
58




Sionix
Corporation – Form 10-QSB


Table
of Contents




Part I
                                                        Financial InformationItem
      1
                                                        Financial
      Statements
                                                        4Balance
      Sheet as of March 31, 2008 (Unaudited) (Restated)
                                                        4Statements
      of Income (Operations) (Unaudited) for the three and six months ended
      March 31, 2008 and March 31, 2007 and from inception (October 3, 1994) to
      March 31, 2008 (Restated)
                                                        5Statements
      of Stockholders Equity (Deficit) for the period from inception (October 3,
      1994) to March 31, 2008 (Restated)
                                                        6Statements
      of Cash Flows (unaudited) for the six months ended March 31, 2008 and
      March 31, 2007 and from inception (October 3, 1994) to March 31, 2008
      (Restated)
                                                        9Notes
      to unaudited financial statements
                                                        10Forward-Looking
      Statements
                                                        40Part II
                                                        Other
      Information
                                                        57Item
      1
                                                        Legal
      Proceedings
                                                        57Item
      2
                                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                        57Item
      3
                                                        Defaults
      upon Senior Securities
                                                        57Item
      4
                                                        Submission
      of Matters to a Vote of Security Holders
                                                        57Item
      5
                                                        Other
      Information
                                                        57Item
      6
                                                        Exhibits
                                                        57Part III
                                                        Signatures
                                                        58Part IV
                                                        Exhibit – 31.1Certifications
      required under Section 302 of the Sarbanes-Oxley Act of 2002Part V
                                                        Exhibit – 32Certifications
      required under Section 906 of the Sarbanes-Oxley Act of 2002




Page 2 of
59




Sionix
Corporation


A
Development Stage Company


Balance
Sheet (Unaudited)


March
31, 2008




RestatedASSETSCURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        102,755Other
      current assets
                        
                        
                        35,000TOTAL
      CURRENT ASSETS
                        
                        
                        137,755PROPERTY
      AND EQUIPMENT, net
                        
                        
                        24,518DEPOSITS
                        
                        
                        4,600$
                        166,873LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        503,124Accrued
      expenses
                        
                        
                        2,423,254Liquidated
      damages liability
                        
                        
                        153,750Notes
      payable to related parties
                        
                        
                        124,000Convertible
      notes, net
                        
                        
                        1,525,97110%
      subordinated notes payable
                        
                        
                        352,389Warrant
      liability
                        
                        
                        2,558,164Beneficial
      conversion features liability
                        
                        
                        874,882TOTAL
      CURRENT LIABILITIES
                        
                        
                        8,515,534STOCKHOLDERS'
      DEFICITCommon
      Stock, $0.001 par value; 150,000,000 shares authorized;107,117,101
      shares issued; 106,635,201 shares outstanding
                        
                        
                        107,012Additional
      paid-in capital
                        
                        
                        10,837,605Shares
      to be issued
                        
                        
                        326,900Deficit
      accumulated during development stage
                        
                        
                        (19,620,178
                        )TOTAL
      STOCKHOLDERS' DEFICIT
                        
                        
                        (8,348,661
                        )TOTAL
      LIABILITIES AND STOCKHODLERS' DEFICIT
                        
                        $
                        166,873





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


Page 3 of
59




Sionix
Corporation


A
Development Stage Company


Statement
of Income (Operations) (Unaudited)





Cummulative
      fromInceptionFor
      the three months ended March 31,
                                          
                                          
                                          For
      the six months ended March 31,
                                          
                                          
                                          (October
      3, 1994)2008
                                          
                                          
                                          2007
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          to
      March 31, 2008(Restated)
                                          
                                          
                                          (Restated)
                                          
                                          
                                          (Restated)
                                          
                                          
                                          (Restated)
                                          
                                          
                                          (Restated)Operating
      expensesGeneral
      and administrative
                                          
                                          $
                                          627,224
                                          
                                          
                                          $
                                          333,644
                                          
                                          
                                          $
                                          5,691,794
                                          
                                          
                                          $
                                          610,368
                                          
                                          
                                          $
                                          19,021,299Research
      and development
                                          
                                          
                                          329,028
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          565,932
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,541,872Depreciation
      and amortization
                                          
                                          
                                          8,157
                                          
                                          
                                          
                                          7,995
                                          
                                          
                                          
                                          16,314
                                          
                                          
                                          
                                          15,788
                                          
                                          
                                          
                                          548,419Total
      operating expenses
                                          
                                          
                                          964,409
                                          
                                          
                                          
                                          341,639
                                          
                                          
                                          
                                          6,274,040
                                          
                                          
                                          
                                          626,156
                                          
                                          
                                          
                                          22,111,590Loss
      from Operations
                                          
                                          
                                          (964,409
                                          )
                                          
                                          
                                          (341,639
                                          )
                                          
                                          
                                          (6,274,040
                                          )
                                          
                                          
                                          (626,156
                                          )
                                          
                                          
                                          (22,111,590
                                          )Other
      income (expense)Interest
      income
                                          
                                          
                                          366
                                          
                                          
                                          
                                          505
                                          
                                          
                                          
                                          1,279
                                          
                                          
                                          
                                          611
                                          
                                          
                                          
                                          59,822Interest
      expense
                                          
                                          
                                          (554,065
                                          )
                                          
                                          
                                          (51,346
                                          )
                                          
                                          
                                          (1,060,790
                                          )
                                          
                                          
                                          (160,274
                                          )
                                          
                                          
                                          (2,237,719
                                          )Decrease
      in warrant liability
                                          
                                          
                                          4,168,133
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4,927,906
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,397,217Decrease
      (increase) in beneficialconversion features
      liability
                                          
                                          
                                          347,780
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          555,929
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          551,885Impairment
      of intangibles
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,267,278
                                          )Inventory
      obsolesence
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (365,078
                                          )Legal
      settlement
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          344,949Loss
      on settlement of debt
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (230,268
                                          )Loss
      on lease termination
                                          
                                          
                                          (129,166
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (129,166
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (129,166
                                          )Write-off
      of beneficial conversion featureand discount
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          380,440
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          380,440Total
      Other Income (Expense)
                                          
                                          
                                          3,833,048
                                          
                                          
                                          
                                          (50,841
                                          )
                                          
                                          
                                          4,675,598
                                          
                                          
                                          
                                          (159,663
                                          )
                                          
                                          
                                          2,504,804Loss
      before income taxes
                                          
                                          
                                          2,868,639
                                          
                                          
                                          
                                          (392,480
                                          )
                                          
                                          
                                          (1,598,442
                                          )
                                          
                                          
                                          (785,819
                                          )
                                          
                                          
                                          (19,606,786
                                          )Income
      Taxes
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          900
                                          
                                          
                                          
                                          900
                                          
                                          
                                          
                                          13,392Net
      Loss
                                          
                                          $
                                          2,868,639
                                          
                                          
                                          $
                                          (392,480
                                          )
                                          
                                          $
                                          (1,599,342
                                          )
                                          
                                          $
                                          (786,719
                                          )
                                          
                                          $
                                          (19,620,178
                                          )Basic
      and dilutive loss per share
                                          
                                          $
                                          0.03
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (0.01
                                          )
                                          
                                          $
                                          -Basic
      and diluted wighted average nubmer ofshares of Common Stock
      outstanding*
                                          
                                          
                                          107,494,374
                                          
                                          
                                          
                                          105,459,175
                                          
                                          
                                          
                                          107,494,374
                                          
                                          
                                          
                                          105,459,175





* -
Weighted averag diluted number of share are the same as basic weighted average
nuimber of shares as the
effect is anti-dilutive.





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




Page 4 of
59




Sionix
Corporation


A
Development Stage Company


Statement
of Stockholders’ Equity (Deficit) (Unaudited)


For
the Period from Inception (October 3, 1994) to March 31, 2008





Deficit
                      
                      
                      TotalCommon
      Stock
                      
                      
                      Additional
                      
                      
                      Stock
                      
                      
                      Deferred
                      
                      
                      Stock
                      
                      
                      Shares
                      
                      
                      Unamortized
                      
                      
                      Accumulated
                      
                      
                      Stockholders'Number
                      
                      
                      
                      
                      
                      Paid-in
                      
                      
                      to
      be
                      
                      
                      Warrant
                      
                      
                      Subscription
                      
                      
                      to
      be
                      
                      
                      Consulting
                      
                      
                      from
                      
                      
                      Equityof
      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Issued
                      
                      
                      Expense
                      
                      
                      Receivable
                      
                      
                      Cancelled
                      
                      
                      Fees
                      
                      
                      Inception
                      
                      
                      (Deficit)Stock
      issued for cash October 3, 1994
                      
                      
                      10,000
                      
                      
                      $
                      10
                      
                      
                      $
                      90
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      100Net
      loss from October 3,1994, to December 31, 1994
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,521
                      )
                      
                      
                      (1,521
                      )Balance
      at December 31, 1994
                      
                      
                      10,000
                      
                      
                      
                      10
                      
                      
                      
                      90
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,521
                      )
                      
                      
                      (1,421
                      )Shares
      issued for assignment rights
                      
                      
                      1,990,000
                      
                      
                      
                      1,990
                      
                      
                      
                      (1,990
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Shares
      issued for services
                      
                      
                      572,473
                      
                      
                      
                      572
                      
                      
                      
                      135,046
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      135,618Shares
      issued for debt
                      
                      
                      1,038,640
                      
                      
                      
                      1,038
                      
                      
                      
                      1,164,915
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,165,953Shares
      issued for cash
                      
                      
                      232,557
                      
                      
                      
                      233
                      
                      
                      
                      1,119,027
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,119,260Shares
      issued for subscription receivable
                      
                      
                      414,200
                      
                      
                      
                      414
                      
                      
                      
                      1,652,658
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,656,800
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (3,728
                      )Shares
      issued for productions costs
                      
                      
                      112,500
                      
                      
                      
                      113
                      
                      
                      
                      674,887
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (675,000
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Net
      loss for the year ended December 31, 1995
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (914,279
                      )
                      
                      
                      (914,279
                      )Balance
      at December 31, 1995
                      
                      
                      4,370,370
                      
                      
                      
                      4,370
                      
                      
                      
                      4,744,633
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,331,800
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (915,800
                      )
                      
                      
                      1,501,403Shares
      issued for reorganization
                      
                      
                      18,632,612
                      
                      
                      
                      18,633
                      
                      
                      
                      (58,033
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (39,400
                      )Shares
      issued for cash
                      
                      
                      572,407
                      
                      
                      
                      573
                      
                      
                      
                      571,834
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      572,407Shares
      issued for services
                      
                      
                      24,307
                      
                      
                      
                      24
                      
                      
                      
                      24,283
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      24,307Net
      loss for the year ended September 30, 1996
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (922,717
                      )
                      
                      
                      (922,717
                      )Balance
      at September 30, 1996
                      
                      
                      23,599,696
                      
                      
                      
                      23,600
                      
                      
                      
                      5,282,717
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,331,800
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,838,517
                      )
                      
                      
                      1,136,000Shares
      issued for cash
                      
                      
                      722,733
                      
                      
                      
                      723
                      
                      
                      
                      365,857
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      366,580Shares
      issued for services
                      
                      
                      274,299
                      
                      
                      
                      274
                      
                      
                      
                      54,586
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      54,860Cancellation
      of shares
                      
                      
                      (542,138
                      )
                      
                      
                      (542
                      )
                      
                      
                      (674,458
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      675,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Net
      loss for the year ended September 30, 1997
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (858,915
                      )
                      
                      
                      (858,915
                      )Balance
      at September 30, 1997
                      
                      
                      24,054,590
                      
                      
                      
                      24,055
                      
                      
                      
                      5,028,702
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,656,800
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,697,432
                      )
                      
                      
                      698,525Shares
      issued for cash
                      
                      
                      2,810,000
                      
                      
                      
                      2,810
                      
                      
                      
                      278,190
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      281,000Shares
      issued for services
                      
                      
                      895,455
                      
                      
                      
                      895
                      
                      
                      
                      88,651
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      89,546Shares
      issued for compensation
                      
                      
                      2,200,000
                      
                      
                      
                      2,200
                      
                      
                      
                      217,800
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      220,000Cancellation
      of shares
                      
                      
                      (2,538,170
                      )
                      
                      
                      (2,538
                      )
                      
                      
                      (1,534,262
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,656,800
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      120,000Net
      loss for the year ended September 30, 1998
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,898,376
                      )
                      
                      
                      (1,898,376
                      )Balance
      at September 30, 1998
                      
                      
                      27,421,875
                      
                      
                      
                      27,422
                      
                      
                      
                      4,079,081
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,595,808
                      )
                      
                      
                      (489,305
                      )Shares
      issued for compensation
                      
                      
                      3,847,742
                      
                      
                      
                      3,847
                      
                      
                      
                      389,078
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      392,925Shares
      issued for services
                      
                      
                      705,746
                      
                      
                      
                      706
                      
                      
                      
                      215,329
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      216,035Shares
      issued for cash
                      
                      
                      9,383,000
                      
                      
                      
                      9,383
                      
                      
                      
                      928,917
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      938,300Net
      loss for the year ended September 30, 1999
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,158,755
                      )
                      
                      
                      (1,158,755
                      )Balance
      at September 30, 1999
                      
                      
                      41,358,363
                      
                      
                      
                      41,358
                      
                      
                      
                      5,612,405
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,754,563
                      )
                      
                      
                      (100,800
                      )Shares
      issued for cash
                      
                      
                      10,303,500
                      
                      
                      
                      10,304
                      
                      
                      
                      1,020,046
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,030,350Shares
      issued for compensation
                      
                      
                      1,517,615
                      
                      
                      
                      1,518
                      
                      
                      
                      1,218,598
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,220,116Shares
      issued for services
                      
                      
                      986,844
                      
                      
                      
                      986
                      
                      
                      
                      253,301
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      254,287Net
      loss for the year ended September 30, 2000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,414,188
                      )
                      
                      
                      (2,414,188
                      )Balance
      at September 30, 2000
                      
                      
                      54,166,322
                      
                      
                      
                      54,166
                      
                      
                      
                      8,104,350
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (8,168,751
                      )
                      
                      
                      (10,235
                      )





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




Page 5 of
59


Sionix
Corporation


A
Development Stage Company


Statement
of Stockholders’ Equity (Deficit) (Unaudited) - Continued


For
the Period from Inception (October 3, 1994) to March 31, 2008




Deficit
                        
                        
                        TotalCommon
      Stock
                        
                        
                        Additional
                        
                        
                        Stock
                        
                        
                        Stock
                        
                        
                        Shares
                        
                        
                        Unamortized
                        
                        
                        Accumulated
                        
                        
                        Stockholders'Number
                        
                        
                        
                        
                        
                        Paid-in
                        
                        
                        to
      be
                        
                        
                        Subscription
                        
                        
                        to
      be
                        
                        
                        Consulting
                        
                        
                        from
                        
                        
                        Equityof
      Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Issued
                        
                        
                        Receivable
                        
                        
                        Cancelled
                        
                        
                        Fees
                        
                        
                        Inception
                        
                        
                        (Deficit)Balance
      at September 30, 2000
                        
                        
                        54,166,322
                        
                        
                        
                        54,166
                        
                        
                        
                        8,104,350
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,168,751
                        )
                        
                        
                        (10,235
                        )Shares
      issued for services and prepaid expenses
                        
                        
                        2,517,376
                        
                        
                        
                        2,517
                        
                        
                        
                        530,368
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (141,318
                        )
                        
                        
                        
                        
                        
                        
                        391,567Shares
      issued for cash
                        
                        
                        6,005,000
                        
                        
                        
                        6,005
                        
                        
                        
                        594,495
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        600,500Shares
      to be issued for cash (100,000 shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        10,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        10,000Shares
      to be issued for debt (639,509 shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        103,295
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        103,295Net
      loss for the year ended September 30, 2001
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,353,429
                        )
                        
                        
                        (1,353,429
                        )Balance
      at September 30, 2001
                        
                        
                        62,688,698
                        
                        
                        
                        62,688
                        
                        
                        
                        9,229,213
                        
                        
                        
                        113,295
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (141,318
                        )
                        
                        
                        (9,522,180
                        )
                        
                        
                        (258,302
                        )Shares
      issued for services and prepaid expenses
                        
                        
                        1,111,710
                        
                        
                        
                        1,112
                        
                        
                        
                        361,603
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        54,400
                        
                        
                        
                        
                        
                        
                        
                        417,115Shares
      issued as a contribution
                        
                        
                        100,000
                        
                        
                        
                        100
                        
                        
                        
                        11,200
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11,300Shares
      issued for compensation
                        
                        
                        18,838
                        
                        
                        
                        19
                        
                        
                        
                        2,897
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,916Shares
      issued for cash
                        
                        
                        16,815,357
                        
                        
                        
                        16,815
                        
                        
                        
                        1,560,782
                        
                        
                        
                        (10,000
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,567,597Shares
      issued for debt
                        
                        
                        1,339,509
                        
                        
                        
                        1,340
                        
                        
                        
                        208,639
                        
                        
                        
                        (103,295
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        106,684Shares
      to be issued for services related to raising equity (967,742
      shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (300,000
                        )
                        
                        
                        300,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Cancellation
      of shares
                        
                        
                        (7,533,701
                        )
                        
                        
                        (7,534
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (7,534
                        )Net
      loss for the year ended September 30, 2002
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,243,309
                        )
                        
                        
                        (1,243,309
                        )Balance
      at September 30, 2002
                        
                        
                        74,540,411
                        
                        
                        
                        74,540
                        
                        
                        
                        11,074,334
                        
                        
                        
                        300,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (86,918
                        )
                        
                        
                        (10,765,489
                        )
                        
                        
                        596,467Shares
      issued for services and prepaid expenses
                        
                        
                        2,467,742
                        
                        
                        
                        2,468
                        
                        
                        
                        651,757
                        
                        
                        
                        (300,000
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        354,225Shares
      issued for capital equity line
                        
                        
                        8,154,317
                        
                        
                        
                        8,154
                        
                        
                        
                        891,846
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        900,000Amortization
      of consulting fees
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        86918
                        
                        
                        
                        
                        
                        
                        
                        86918Cancellation
      of shares
                        
                        
                        (50,000
                        )
                        
                        
                        (50
                        )
                        
                        
                        50
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Shares
      to be cancelled (7,349,204 shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,349
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (7,349
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Net
      loss for the year ended September 30, 2003
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,721,991
                        )
                        
                        
                        (1,721,991
                        )Balance
      at September 30, 2003
                        
                        
                        85,112,470
                        
                        
                        
                        85,112
                        
                        
                        
                        12,625,336
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,349
                        )
                        
                        
                        -
                        
                        
                        
                        (12,487,480
                        )
                        
                        
                        215,619Shares
      issued for capital equity line
                        
                        
                        19,179,016
                        
                        
                        
                        19,179
                        
                        
                        
                        447,706
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        466,885Shares
      issued for services
                        
                        
                        5,100,004
                        
                        
                        
                        5,100
                        
                        
                        
                        196,997
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (13,075
                        )
                        
                        
                        
                        
                        
                        
                        189,022Share
      to be issued for cash (963,336 shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        28,900
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        28,900Shares
      to be issued for debt (500,000 shares)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,000Cancellation
      of shares
                        
                        
                        (7,349,204
                        )
                        
                        
                        (7,349
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,349
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Issuance
      of warrants related to 2004 stock purchase
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        24,366
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        24,366Net
      loss for the year ended September 30, 2004
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,593,136
                        )
                        
                        
                        (1,593,136
                        )Balance
      at September 30, 2004
                        
                        
                        102,042,286
                        
                        
                        
                        102,042
                        
                        
                        
                        13,294,405
                        
                        
                        
                        43,900
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (13,075
                        )
                        
                        
                        (14,080,616
                        )
                        
                        
                        (653,344
                        )




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




Page 6 of
59





Sionix
Corporation


A
Development Stage Company


Statement
of Stockholders’ Equity (Deficit) (Unaudited) - Continued


For
the Period from Inception (October 3, 1994) to March 31, 2008




Deficit
                                      
                                      
                                      TotalCommon
      Stock
                                      
                                      
                                      Additional
                                      
                                      
                                      Stock
                                      
                                      
                                      Stock
                                      
                                      
                                      Shares
                                      
                                      
                                      Unamortized
                                      
                                      
                                      Accumulated
                                      
                                      
                                      Stockholders'Number
                                      
                                      
                                      
                                      
                                      
                                      Paid-in
                                      
                                      
                                      to
      be
                                      
                                      
                                      Subscription
                                      
                                      
                                      to
      be
                                      
                                      
                                      Consulting
                                      
                                      
                                      from
                                      
                                      
                                      Equityof
      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Issued
                                      
                                      
                                      Receivable
                                      
                                      
                                      Cancelled
                                      
                                      
                                      Fees
                                      
                                      
                                      Inception
                                      
                                      
                                      (Deficit)Balance
      at September 30, 2004, Restated
                                      
                                      
                                      102,042,286
                                      
                                      
                                      
                                      102,042
                                      
                                      
                                      
                                      13,294,405
                                      
                                      
                                      
                                      43,900
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (13,075
                                      )
                                      
                                      
                                      (14,080,615
                                      )
                                      
                                      
                                      (653,343
                                      )Amortization
      of consulting fees
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      13,075
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      13,075Net
      loss for the year endedSeptember 30,
      2005
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (722,676
                                      )
                                      
                                      
                                      (722,676
                                      )Balance
      at September 30, 2005,Restated
                                      
                                      
                                      102,042,286
                                      
                                      
                                      
                                      102,042
                                      
                                      
                                      
                                      13,294,405
                                      
                                      
                                      
                                      43,900
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (14,803,291
                                      )
                                      
                                      
                                      (1,362,944
                                      )Net
      loss for the year endedSeptember 30,
      2006
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,049,319
                                      )
                                      
                                      
                                      (1,049,319
                                      )Balance
      at September 30, 2006,Restated
                                      
                                      
                                      102,042,286
                                      
                                      
                                      
                                      102,042
                                      
                                      
                                      
                                      13,294,405
                                      
                                      
                                      
                                      43,900
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (15,852,610
                                      )
                                      
                                      
                                      (2,412,263
                                      )Shares
      issued for services
                                      
                                      
                                      4,592,915
                                      
                                      
                                      
                                      4,593
                                      
                                      
                                      
                                      80,336
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      84,929Reclassification
      of 2001Executive Option Plan as of July 17,
      2007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (2,271,879
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (2,271,879
                                      )Reclassification
      of beneficial conversion features liability related to advisory board
      compensation as of July 17, 2007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (269,851
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (269,851
                                      )Reclassification
      of warrants related to 2004 stock purchase agreement as of July 17,
      2007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (70,029
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (70,029
                                      )Net
      loss for the year ended September 30, 2007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (2,168,226
                                      )
                                      
                                      
                                      (2,168,226
                                      )Balance
      at September 30, 2007,Restated
                                      
                                      
                                      106,635,201
                                      
                                      
                                      
                                      106,635
                                      
                                      
                                      
                                      10,762,982
                                      
                                      
                                      
                                      43,900
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (18,020,836
                                      )
                                      
                                      
                                      (7,107,319
                                      )Conversion
      of note payable into Common Stock
                                      
                                      
                                      227,273
                                      
                                      
                                      
                                      227
                                      
                                      
                                      
                                      49,773
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      50,000Common
      Stock issued for services
                                      
                                      
                                      150,000
                                      
                                      
                                      
                                      150
                                      
                                      
                                      
                                      24,850
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      25,000Common
      Stock to be issued for cash
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      283,000
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      283,000Net
      loss for the six months ended March 31, 2008
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,599,342
                                      )
                                      
                                      
                                      (1,599,342
                                      )Balance
      at March 31, 2008
                                      
                                      
                                      107,012,474
                                      
                                      
                                      $
                                      107,012
                                      
                                      
                                      $
                                      10,837,605
                                      
                                      
                                      $
                                      326,900
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      (19,620,178
                                      )
                                      
                                      $
                                      (8,348,661
                                      )





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




Page 7 of
59




Sionix
Corporation


A
Development Stage Company


Statement
of Cash Flows (Unaudited)




CummulativefromFor
      the Six Months
                                  
                                  
                                  InceptionEnded
      March 31,
                                  
                                  
                                  (October
      3, 1994) to2008
                                  
                                  
                                  2007
                                  
                                  
                                  March
      31,2008(Restated)
                                  
                                  
                                  (Restated)
                                  
                                  
                                  (Restated)Operating
      activities:Net
      loss
                                  
                                  $
                                  (1,599,342
                                  )
                                  
                                  $
                                  (786,719
                                  )
                                  
                                  $
                                  (19,620,178
                                  )Adjustments
      to reconcile net loss to net cash used in  operating
      activities:Depreciation
                                  
                                  
                                  16,314
                                  
                                  
                                  
                                  15,788
                                  
                                  
                                  
                                  635,337Amortization
      of beneficial conversion features discount and warrant
      discount
                                  
                                  
                                  833,775
                                  
                                  
                                  
                                  117,524
                                  
                                  
                                  
                                  1,716,793Stock
      based compensation expense - employee
                                  
                                  
                                  1,791,360
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,627,317Stock
      based compensation expense - consultant
                                  
                                  
                                  3,171,049
                                  
                                  
                                  
                                  32,929
                                  
                                  
                                  
                                  6,232,732Decrease
      in warrant liabilities
                                  
                                  
                                  (4,927,906
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (5,494,031
                                  )Decrease
      in beneficial conversion features liabilities
                                  
                                  
                                  (555,929
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (551,885
                                  )Write-off
      of beneficial conversion features
                                  
                                  
                                  (380,440
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (380,440
                                  )Impairment
      of assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  514,755Write-down
      of obsolete assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  38,862Impairment
      of intangible assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,117,601Loss
      on settlement of debt
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  130,268Loss
      on termination of lease
                                  
                                  
                                  129,166
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  129,166Accrual
      of liquidating damages
                                  
                                  
                                  138,375
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  153,750Other
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (799,044
                                  )(Increase)
      decrease in assets:Other
      current assets
                                  
                                  
                                  (33,650
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (35,000
                                  )Other
      assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  (10,350
                                  )
                                  
                                  
                                  (104,600
                                  )Increase
      (decrease) in liabilities:Accounts
      payable
                                  
                                  
                                  345,724
                                  
                                  
                                  
                                  (50,366
                                  )
                                  
                                  
                                  503,123Accrued
      expenses
                                  
                                  
                                  174,508
                                  
                                  
                                  
                                  334,853
                                  
                                  
                                  
                                  2,181,320Net
      cash used in operating activities
                                  
                                  
                                  (896,996
                                  )
                                  
                                  
                                  (346,341
                                  )
                                  
                                  
                                  (10,004,154
                                  )Investing
      activities:Acquisition
      of property and equipment
                                  
                                  
                                  (29,164
                                  )
                                  
                                  
                                  (12,972
                                  )
                                  
                                  
                                  (400,619
                                  )Acquisition
      of patents
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (154,061
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (29,164
                                  )
                                  
                                  
                                  (12,972
                                  )
                                  
                                  
                                  (554,680
                                  )Financing
      activities:Payment
      on notes payable to officer
                                  
                                  
                                  (19,260
                                  )
                                  
                                  
                                  (28,800
                                  )
                                  
                                  
                                  (218,502
                                  )Proceeds
      from notes payable, related party
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  457,433Payments
      on notes payable to related party
                                  
                                  
                                  (5,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (5,000
                                  )Receipt
      from (payments to) equity line of credit
                                  
                                  
                                  (27,336
                                  )
                                  
                                  
                                  (150,000
                                  )
                                  
                                  
                                  428,664Proceeds
      from convertible notes payable
                                  
                                  
                                  
                                  
                                  
                                  
                                  750,000
                                  
                                  
                                  
                                  1,861,000Proceeds
      from 10% subordinated notes payable
                                  
                                  
                                  425,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  425,000Issuance
      of common stock
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,386,094Receipt
      of cash for stock to be issued
                                  
                                  
                                  283,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  326,900Net
      cash provided by (used in) financing activities
                                  
                                  
                                  656,404
                                  
                                  
                                  
                                  571,200
                                  
                                  
                                  
                                  10,661,589Net
      increase (decrease) in cash and cash equivalents
                                  
                                  
                                  (269,756
                                  )
                                  
                                  
                                  211,887
                                  
                                  
                                  
                                  102,755Cash
      balances:Beginning
      of period
                                  
                                  
                                  372,511
                                  
                                  
                                  
                                  4,544End
      of month
                                  
                                  $
                                  102,755
                                  
                                  
                                  $
                                  216,431
                                  
                                  
                                  $
                                  102,755Cash
      paid for:Interest
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Income
      taxes
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -





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




Page 8 of
59




Sionix
Corporation


A
Development Stage Company


march
31, 2008




Notes
to Financial Statements (Unaudited)




NOTE
1     ORGANIZATION AND DESCRIPTION OF
BUSINESS




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




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




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




NOTE
2     SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




Basis
of Presentation




The
unaudited financial statements have been prepared by the Company, pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished in these unaudited financial statements reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. The results of the six
month period ended March 31, 2008 are not necessarily indicative of the results
to be expected for the full year ending September 30, 2008 and should be read in
conjunction with the audited financial statements for the year ended September
30, 2007.




Revenue
Recognition




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




Support
Services




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




Page 9 of
59




Warranties




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




Allowance
for Doubtful Accounts




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




Inventory
Valuation




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




Goodwill
and other intangibles




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




Legal
contingencies




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




Stock-Based
Compensation




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




Net
Loss per Share




Net loss
per share is calculated in accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share (“SFAS 128”). Basic net loss per
share is based upon the weighted average number of common shares outstanding.
Diluted net loss per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.




Page 10
of 59




Estimates




The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates




Advertising




The cost
of advertising is expensed as incurred. Total advertising costs were included in
general and administrative expenses and were $2,474 and $1,410 for the
three and six months ended March 31, 2008 and 2007,
respectively.




Reclassification




For
comparative purposes, the prior period’s financial statements have been
reclassified to conform to the current period’s presentation.




Recently
Issued Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. Company management is currently
evaluating the effect of this pronouncement on its financial
statements.




In
February 2007, FASB issued FASB Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements. The new Statement allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. Management is currently evaluating the effect of
this pronouncement on the Company's financial statements.




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations”. The objective of this statement will significantly change the
accounting for business combinations. Under Statement 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions.
Statement 141 applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS No. 141R to have a material impact on the Company's financial
statements.




In
December 2007, FASB issued FASB Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. This Statement
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. Not-for-profit organizations should continue to
apply the guidance in Accounting Research Bulletin No. 51, “Consolidated
Financial Statements”, before the amendments made by this Statement, and any
other applicable standards, until the Board issues interpretative guidance. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008 (that is, January 1, 2009, for
entities with calendar year-ends). Earlier adoption is prohibited. The effective
date of this Statement is the same as that of the related Statement 141(R). This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. This statement has no effect
on the financial statements as the Company does not have any outstanding
non-controlling interest in one or more subsidiaries




Page 11
of 59




NOTE
3     PROPERTY AND EQUIPMENT




Property
and equipment consisted of the following at March 31, 2008:




Equipment
      and machinery
                                        
                                        $
                                        213,166Furniture
      and fixtures
                                        
                                        
                                        24,594237,760Less
      accumulated depreciation
                                        
                                        
                                        (213,242
                                        )Net
      Property and Equipment
                                        
                                        $
                                        24,518




Depreciation
expenses for the three and six months ended March 31, 2008 were $8,157 and
$16,314, respectively. Depreciation expenses for the three and six months ended
March 31, 2007 were $7,995 and $15,788, respectively.




NOTE
4     ACCRUED EXPENSES (Restated)




Accrued
expenses consisted of the following at March 31, 2008:




Accrued
      salaries and amounts withheld therefrom
                            
                            $
                            1,480,048Advisory
      board compensation
                            
                            
                            576,000Interest
      payable
                            
                            
                            250,624Other
      accruals
                            
                            
                            116,582Total
      accrued expenses
                            
                            $
                            2,423,254




NOTE
5     NOTES PAYABLE TO RELATED PARTIES




The
Company has received advances in the form of unsecured promissory notes from
stockholders in order to pay ongoing operating expenses. These notes bear
interest at rates up to 13% and are due on demand. As of March 31, 2008, notes
payable amounted to $124,000. The Company recorded $3,204 and $6,443 of interest
expense on those notes during the three and six months ended March 31, 2008,
respectively.




NOTE
6     CONVERTIBLE NOTES PAYABLE (Restated)




Convertible
Notes 1




Between
October 2006 and February 2007, the Company completed an offering of $750,000 in
principal amount of convertible notes, which bear interest at 10% per annum and
mature at the earlier of (i) 18 months from the date of issuance (ii) an event
of default or (iii) the closing of any equity related financing by the Company
in which the gross proceeds are a minimum of $2,500,000. These notes are
convertible into shares of the Company’s Common Stock at $0.05 per share or
shares of any equity security issued by the Company at a conversion price equal
to the price at which such security is sold to any other party. In the event
that a registration statement covering the underlying shares was not declared
effective within 180 days after the closing, the conversion price was to be
reduced by $0.0025 per share for each 30 day period that the effectiveness of
the registration statement was delayed but in no case could the conversion price
be reduced below $0.04 per share. As of March 31, 2008, the conversion price was
$0.04 per share.




SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives. The terms of the conversion feature only allow the
counterparty to convert the notes into shares of common stock. Therefore, EITF
00-19, paragraphs 12-33 were included in the analysis to determine the
classification of the conversion feature. The Company included SFAS 150 in the
analysis of the convertible notes.SFAS 150 requires three
classes of freestanding financial instruments, as defined in paragraphs 8
through 17, to be classified as liabilities. The first class, as defined in
paragraph 9, is financial instruments that are mandatorily redeemable financial
instruments. There are no terms or conditions that require the Company to
unconditionally redeem the convertible notes by transferring assets at a
specified or determinable date. The second class, as defined in paragraph 11, is
financial instruments that require the repurchase of shares of Common Stock by
transferring assets. There are no terms or conditions that require the Company
to repurchase shares of Common Stock. The third class, as defined in paragraph
12, is financial instruments that require the issuance of a variable number of
shares of Common Stock. There are no terms or conditions that require the
Company to issue a variable number of shares of Common Stock. Therefore, the
Company concluded that the convertible notes were not within the scope of SFAS
150.


Page 12
of 59




The fair
value of the embedded beneficial conversion features was $750,000 at the date of
issuance using the Black Sholes valuation modelwith the following
assumptions: risk free rate of return of 2.02% to 5.09%; volatility of 268% to
275%; dividend yield of 0% and an expected term of 1.5 years.
 
 Based on
the calculation of the fair value of the embedded beneficial conversion feature,
the Company allocated $750,000 to the beneficial conversion feature and the
beneficial conversion feature discount, and none to the convertible note at the
date of issuance. The embedded beneficial conversion feature discount, which is
$41,667 per month, is amortized to interest expense over the term of the
note.
  As of
March 31, 2008, the outstanding principal amount of the convertible notes was
$750,000 and the unamortized embedded beneficial conversion feature discount was
$40,556, for a net convertible debt of $709,444.
  For the
three months ended March 31, 2008, interest expense was $18,958, and
amortization expense for the embedded beneficial conversion feature discount was
$125,000, which was included in interest expense in the other income (expense)
section of the statement of operations.
  For the
six months ended March 31, 2008, interest expense was $38,334, and amortization
expense for the embedded beneficial conversion feature discount was $250,000,
which was included in interest expense in the other income (expense) section of
the statement of operations.
  Calico
Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and
2 for the Company and received a fee of $75,000. Southridge Investment Group
LLC, Ridgefield, Connecticut (“Southridge) acted as an agent for the Company in
arranging the transaction for Convertible Notes 1 and 2. The Company recorded
these fees as an expense during the period.
  Convertible
Notes 2
  On June
6, 2007, the Company completed an offering of $86,000 in principal amount of
convertible notes, which bear interest at 10% per annum and mature on December
31, 2008.These notes are convertible into shares of the Company’s Common Stock
at $0.01 per share or shares of any equity security issued by the Company at a
conversion price equal to the price at which such security is sold to any other
party. There are no registration rights associated with these
notes.
  SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives. The terms of the conversion
feature only allow the counterparty to convert the notes into shares of common
stock. Therefore, EITF 00-19, paragraphs 12-33 were included in the analysis to
determine the classification of the conversion feature. The Company included
SFAS 150 in the analysis of the convertible notes.SFAS 150 requires three
classes of freestanding financial instruments, as defined in paragraphs 8
through 17, to be classified as liabilities. The first class, as defined in
paragraph 9, is financial instruments that are mandatorily redeemable financial
instruments. There are no terms or conditions that require the Company to
unconditionally redeem the convertible notes by transferring assets at a
specified or determinable date. The second class, as defined in paragraph 11, is
financial instruments that require the repurchase of shares of Common Stock by
transferring assets. There are no terms or conditions that require the Company
to repurchase shares of Common Stock. The third class, as defined in paragraph
12, is financial instruments that require the issuance of a variable number of
shares of Common Stock. There are no terms or conditions that require the
Company to issue a variable number of shares of Common Stock. Therefore, the
Company concluded that the convertible notes were not within the scope of SFAS
150.
  Page 13
of 59
  The fair
value of the embedded beneficial conversion features was $86,000 at the date of
issuance using the Black Sholes valuation model with the following assumptions:
risk free rate of return of 4.96%; volatility of 259.58%; dividend yield of 0%
and an expected term of 1.5 years.
  Based on
the calculation of the fair value of the embedded beneficial conversion feature,
the Company allocated $86,000 to the beneficial conversion feature and the
beneficial conversion feature discount, and none to the convertible note. The
embedded beneficial conversion feature discount, which is $4,778 per month,
is amortized to interest expense over the term of the note.
  As of
March 31, 2008, the outstanding principal amount of the convertible notes was
$86,000 and the unamortized embedded beneficial conversion feature discount was
$38,223, for a net convertible debt of $47,777.
  For the
three months ended March 31, 2008, interest expense was $2,144, and amortization
expense for the embedded beneficial conversion feature discount was $14,333,
which was included in interest expense in the other income (expense) section of
the statement of operations.
  For the
six months ended March 31, 2008, interest expense was $4,335, and amortization
expense for the embedded beneficial conversion feature discount was $28,666,
which was included in interest expense in the other income (expense) section of
the statement of operations.
  Calico
Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and
2 for the Company and received a fee of $75,000. Southridge acted as an agent
for the Company in arranging the transaction for Convertible Notes 1 and 2. The
Company recorded these fees as an expense during the period.
  Convertible
Notes 3
  On July
17, 2007, the Company completed an offering of $1,025,000 in principal amount of
Subordinated Convertible Debentures to a group of institutional and accredited
investors, which bear interest at the rate of 8% per annum, and mature 12 months
from the date of issuance. Convertible Notes 3 are convertible into shares of
the Company’s Common Stock at an initial conversion rate of $0.22 per share,
subject to anti-dilution adjustments. As part of the above offering the Company
issued warrants to purchase 2,329,546 shares of Common Stock at an initial
exercise price of $0.50 per share.
  Under the
terms of a Registration Rights Agreement signed in conjunction with this
offering, the Company is required to file a registration statement under the
Securities Act of 1933 in order to register the resale of the shares of Common
Stock issuable upon conversion of the Convertible Notes 3 and the warrant shares
(collectively, the "Registrable Securities"). If the Company did not file a
registration statement with respect to the Registrable Securities within
forty-five days following the closing of the offering, or if the registration
statement was not declared effective by the Securities and Exchange Commission
within 90 days, then the Company was required to pay to each purchaser damages
equal to 1.5% of the purchase price paid by the purchaser for Convertible Notes
3 for each 30 day period that followed these deadlines. The aggregate amount of
damages payable by the Company is limited to 15% of the purchase price. The
Company had until August 31, 2007 to file the registration statement. As of and
for the three months ended March 31, 2008, the Company recorded $61,500 and
$46,125 as liquidated damages, respectively. No derivative liability is recorded
as the amount of liquidated damage is fixed with a maximum ceiling.
  The
Company applied APB 14, paragraph 15 to determine the allocation of the proceeds
of the convertible debt, which states that proceeds from the sale of debt with
stock purchase warrants should be allocated between the debt and warrants, and
paragraph 16 states that the proceeds should be allocated based on the relative
fair values of the two securities at the time of issuance.
  Page 14
of 59


The fair
value of the warrants was $741,371 at the date of issuance calculated using the
Black Sholes valuation modelwith the following
assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89%
to 226.04%; dividend yield of 0% and an expected term of 5 years.As a result, the
relative fair value of the warrants was $430,189.




SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives.The terms of the
conversion feature only allow the counterparty to convert the notes into shares
of Common Stock. Therefore, EITF 00-19, paragraphs 12-33 were included in the
analysis to determine the classification of the conversion
feature.  The Company included SFAS 150 in the analysis of the
convertible notes. SFAS 150 requires three classes of freestanding financial
instruments, as defined in paragraphs 8 through 17, to be classified as
liabilities. The first class, as defined in paragraph 9, is financial
instruments that are mandatorily redeemable financial instruments. There are no
terms or conditions that require the Company to unconditionally redeem the
convertible notes by transferring assets at a specified or determinable date.
The second class, as defined in paragraph 11, is financial instruments that
require the repurchase of shares of Common Stock by transferring assets. There
are no terms or conditions that require the Company to repurchase shares of
Common Stock. The third class, as defined in paragraph 12, is financial
instruments that require the issuance of a variable number of shares of Common
Stock. There are no terms or conditions that require the Company to issue a
variable number of shares of Common Stock. Therefore, the Company concluded that
the convertible notes were not within the scope of SFAS 150.




The fair
value of the embedded beneficial conversion features was $594,811 at the date of
issuance using the Black Sholes valuation modelwith the following
assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89%
to 226.04%; dividend yield of 0% and an expected term of 1 year.




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




As of
March 31, 2008, the outstanding principal amount of the convertible notes was
$975,000, unamortized warrant discount was $86,650 and unamortized embedded
beneficial conversion feature discount was $119,600, for a net convertible debt
of $768,750, and the number of outstanding warrants was 2,329,546.




For the
three months ended March 31, 2008, interest expense was $20,444, amortization
expense for the warrant discount was $111,031, which was included in interest
expense in the other income (expense) section of the statement of operations,
and amortization expense for the beneficial conversion feature discount was
$153,553, which was also included in interest expense in the other income
(expense) section of the statement of operations.




For the
six months ended March 31, 2008, interest expense was $40,663, amortization
expense for the warrant discount was $218,578, which was included in interest
expense in the other income (expense) section of the statement of operations,
and amortization expense for the beneficial conversion feature discount was
$302,255, which was also included in interest expense in the other income
(expense) section of the statement of operations.




NOTE
7            10%
SUBORDINATED NOTES PAYABLE (Restated)




In
January 2008, the Company completed an offering of $425,000 in principal amount
of Subordinated Debentures to a group of institutional and accredited investors.
 The Subordinated Debentures mature on December 31, 2008, and bear interest
at the rate of 10% per annum. As part of the above offering, the Company
issued warrants to purchase 850,000 shares of Common Stock, which expire six
years from the date of grant.


Page 15
of 59




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




The grant
date fair value of the warrants was determined to be $125,462 which was
calculated using the Black-Sholes valuation model, using the following
assumptions: risk free rate of return ranging from 2.64% to 3.26%, volatility
ranging from 97.08% to 98.27%, dividend yield of 0% and expected life of six
years. As a result, the relative fair value of the warrants was
$96,814.




As of
March 31, 2008, the principal outstanding totaled $425,000, unamortized
warrant discount totaled $72,611, and the net amount of the note payable was
$352,389.




For the
three and six months ended March 31, 2008, interest expense was $8,938, and
amortization expense for the warrant discount was $24,204, which was included in
interest expense in the other income (expense) section of the statement of
operations.




NOTE
8            WARRANT
LIABILITY (Restated)




2001
Executive Officers Stock Option Plan




In
October 2000, the Company amended its employment agreements with its executive
officers. In conjunction with the amendments the Company adopted the 2001
Executive Officers Stock Option Plan. The plan reserved 7,576,680 shares of
Common Stock for awards and, as of March 31, 2008, had issued options for the
purchase of 7,034,140 shares of Common Stock. The options expire 5 years from
the date of issuance.




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




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




The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.The Company analyzed
the options as of March 31, 2008 by following the guidance of SFAS 133,
paragraph 6 to ascertain if the options issued remained derivatives as of March
31, 2008. All of the criteria in the original analysis were met, and the options
issued were determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability. The Company next applied EITF 00-19,
paragraph 10, which states that if classification changes as the result of an
event, the contract should be reclassified as of the date of the event at fair
value. The event responsible for the change in classification was the issuance
of the Convertible Debentures on July 17, 2007.




The fair
value of the options was $457,114 as of March 31, 2008, calculated using
the Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 3 years.


Page 16
of 59




The
decrease in the fair value of the options was recorded by decreasing warrant
liability on the balance sheet by $766,474 for the three months ended March 31,
2008.




The
decrease in the fair value of the options was recorded by decreasing warrant
liability on the balance sheet by $1,469,800 for the six months ended March 31,
2008.




Warrants
Related to Convertible Notes 3




On July
17, 2007 the Company completed an offering of $1,025,000 of Convertible Notes 3
to a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common Stock to
holders of the Convertible Notes 3 and 465,908 shares of Common Stock as a
placement fee) at an exercise price of $0.50 per share. An amendment dated March
13, 2008 reduces the exercise price of the warrants to $0.30 per
share.




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




The fair
value of the warrants was $865,431 ($741,371 attributable to the holders of the
Convertible Notes 3 and $124,060 attributable to the placement fee) at the date
of issuance calculated using the Black Sholes valuation modelwith the following
assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89%
to 226.04%; dividend yield of 0% and an expected term of 5 years. Therefore, the
relative fair value of the warrants attributable to the holders of the
Convertible Notes 3 was determined to be $430,189.




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




The
Company analyzed the warrants as of March 31, 2008 by following the guidance of
SFAS 133, paragraph 6 to ascertain if the warrants issued remained derivatives
as of March 31, 2008. All of the criteria in the original analysis were met, and
the warrants issued were determined to be within the scope and definition of a
derivative. The Company next followed the guidance of EITF 00-19, paragraph 19,
which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability.




The fair
value of the warrants was determined to be $149,493 ($124,735 attributable to
the holders of the Convertible Notes 3 and $24,748 attributable to the placement
fee)as of March
31, 2008, which was calculated using the Black Sholes valuation model with the
following assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.17 to 4.25 years. Therefore, the
relative fair value of the warrants attributable to the holders of the
Convertible Notes 3 was determined to be $111,202.




The
decrease in the fair value of the warrants for the three months ended March 31,
2008 was recorded by decreasing warrant liabilities on the balance sheet by
$185,827 ($143,242 attributable to the holders of the Convertible Notes 3
and $42,585 attributable to the placement fee).




The
decrease in the fair value of the warrants for the six months ended March 31,
2008 was recorded by decreasing warrant liabilities on the balance sheet by
$363,982 ($268,469 attributable to the holders of the Convertible Notes 3
and $95,513 attributable to the placement fee).




Warrants
Issued to Advisory Board Members




On
December 13, 2007, the Company’s Board of Directors approved the issuance of
five year warrants to the Company’s three advisory board members to purchase a
total of 8,640,000 shares of the Company’s Common Stock at an exercise price of
$0.25 per share.


Page 17
of 59




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




The fair
value of the warrants was $1,557,704 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0% and
expected term of 5 years.




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




The
Company analyzed the warrants by applying FASB 133,paragraph 6 to ascertain if
the warrants remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the warrants issued were determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by a company,
the contract is required to be classified as a liability. Paragraph 9 also
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the warrants was determined to be $549,672 as of March 31, 2008, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an
expected term of 4.67 years.




The
decrease in the fair value of the warrants was $983,628 for the three months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the warrants was $1,008,033 for the six months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




Option
Issued to Director




On
December 13, 2007, the Company’s Board of Directors approved the issuance of a
five year option to a Company director to purchase a total of 1,000,000 shares
of the Company’s common stock at an exercise price of $0.25 per
share.




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




The fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.22%, expected volatility of 99.86%, dividend yield of 0% and
expected term of 5 years.




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


Page 18
of 59


The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 also
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the option was determined to be $63,620 as of March 31, 2008, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Option
Issued to Chief Financial Officer




On
December 13, 2007, the Company’s Board of Directors approved the issuance of a
five year option to the Chief Financial Officer to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.




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




The fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.22%, expected volatility of 99.86%, dividend yield of 0% and
expected term of 5 years.




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




The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 also
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the option was determined to be $63,620 as of March 31, 2008 using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Page 19
of 59




Option
Issued to Chief Executive Officer


On
December 19, 2007, the Company entered into a one year Employment Agreement with
Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the
Company’s Chief Executive Officer. As compensation for his services, the Company
granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of
the Company’s Common Stock at an exercise price of $0.25 per share. As per the
terms of the stock option agreement, the right to purchase 340,000 shares of
Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible
Notes 2 as discussed in Note 6 above) are eligible for conversion into shares of
Common Stock. These options were not issued from the 2001 Executive Officers
Stock Option Plan.On
the grant date, the Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contractsthat require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company applied EITF 00-19, paragraph 9, which states that contracts that
require the company to deliver shares as part of a physical settlement or
net-share settlement should be initially measured at fair value.




The fair
value of the option was $1,448,321 at the date of issuance, which was calculated
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 3.26%; volatility of 98.01%; dividend yield of 0%; and an
expected term of 5 years.




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




The
Company analyzed the option as of March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the option issued remained a derivative as of March 31, 2008. All of the
criteria in the original analysis were met, and the option issued was determined
to be within the scope and definition of a derivative. EITF 00-19, paragraph 8
was applied which states that if share settlement is not controlled by a
company, the contract is required to be classified as a liability. Paragraph 9
also states that contracts classified as liabilities should be measured at fair
value at each balance sheet date, with changes in fair value reported in
earnings and disclosed in the financial statements as long as the contracts
remain classified as liabilities.




The fair
value of the option was $543,267 as of March 31, 2008, which was calculated
using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Warrant
Issued to Consultant




On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the
Company. As compensation for his services, the Company granted to Mr. Maron a
five year warrant to purchase up to 8,539,312 shares of the Company’s Common
Stock at an exercise price of $0.25 per share. As per the terms of the warrant
agreement, the right to purchase 340,000 shares of Common Stock is not
exercisable until the notes dated June 6, 2007 (Convertible Notes 2 as discussed
in Note 6 above) are eligible for conversion into shares of Common
Stock.  The warrant was not issued from the 2001 Executive
Officers Stock Option Plan.




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


Page 20
of 59




The fair
value of the warrant was $1,448,321 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.26%, expected volatility of 98.01%, dividend yield of 0% and
expected term of 5 years.




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




The
Company analyzed the warrant by applying FASB 133,paragraph 6 to ascertain if
the warrant remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the warrant was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9 also states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the option was $543,267 as of March 31, 2008, which was calculated
using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Warrants
Related to 10% Subordinated Debentures




In
January 2008, the Company completed an offering of $425,000 in principal amount
of Subordinated Debentures to a group of institutional and accredited
investors. As part of the above offering, the Company issued warrants to
purchase 850,000 shares of Common Stock.




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




The fair
value of the warrants was determined to be $125,462 at the date of
issuance, which was calculated using the Black Sholes valuation model, using the
following assumptions: risk free rate of return of ranging from 2.64% to 3.26%,
volatility ranging from 97.08% to 98.27%, dividend yield of 0% and expected life
of six years. Therefore, the relative fair value of the warrants was determined
to be $96,814.




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




The
Company analyzed the warrants by applying FASB 133,paragraph 6 to ascertain if
the warrants remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the warrants issued were determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 also
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the warrants was determined to be $50,811 as of March 31, 2008, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an
expected term of 5.83 years. Therefore, the relative fair value of the
warrants was determined to be $45,385.




Page 21
of 59




The
decrease in the fair value of the options was $51,429 for the three and six
months ended March 31, 2008, and recorded by decreasing the warrant liability on
the balance sheet.




Warrants
Related to $750,000 Stock Issuance




On March
14, 2008 the Company began an offering of units consisting of Common Stock
and warrants to purchase shares of its Common Stock to a group of institutional
and accredited investors.  The Company raised a total of $750,000
through this offering.  The Company issued warrants to
purchase 15,000,000 shares of Common Stock at an exercise price of
$0.10 per share. The warrants expire three years from the date of
issuance.




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




The fair
value of the warrants was determined to be $470,004 at the date of issuance,
which was calculated using the Black Sholes valuation model, using the following
assumptions: risk free rate of return of 1.32% to 1.57%, volatility of 72.53% to
75.80%, dividend yield of 0%, and expected term of 3 years. Therefore, the
relative fair value of the warrants was determined to be $165,022.




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




The
Company analyzed the warrants by applying FASB 133,paragraph 6 to ascertain if
the warrants remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the warrants were determined to be within
the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied
which states that if share settlement is not controlled by the company, the
contract is required to be classified as a liability. Paragraph 9 also states
that contracts classified as liabilities should be measured at fair value at
each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




The fair
value of the warrants was determined to be $403,602 as of March 31, 2008,
which was calculated using the Black Sholes valuation model, using the following
assumptions: risk free rate of return of 1.56%, volatility of
72.53%, dividend yield of 0% and expected term of 2.92
years. Therefore, the relative fair value of the warrants was determined to
be $156,268.




The
decrease in the fair value of the warrants of $8,754 for the three and six
months ended March 31, 2008 was recorded in decrease in warrant liability in the
other income (expense) section of the statement of operations.




NOTE
9            BENEFICIAL
CONVERSION FEATURES LIABILITY (Restated)




The
Company issued convertible notes between October 17, 2006 and July 17, 2007 that
mature between June 17, 2008 and December 31, 2008 and include embedded
beneficial conversion features that allow the holders of the convertible notes
to convert their notes into Common Stock shares at rates between $.01 and $.22.
The convertible notes accrue interest at rates between 8% and 10%, and any
accrued but unpaid interest is also convertible by the holder of the convertible
notes into shares of Common Stock at the same rate.


Page 22
of 59


The
Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
embedded beneficial conversion features were derivatives at the date of issue.
The embedded beneficial conversion features had one or more underlings and one
or more notional amounts, required no initial investment and required or
permitted net settlement. Therefore, the embedded beneficial conversion features
were determined to be derivatives. In order to determine the classification of
the embedded conversion features, the Company applied paragraph 19 of EITF
00-19, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. In order to determine the
value of the embedded conversion features, the Company followed the guidance of
EITF 00-19, paragraph 9, which states that all contracts classified as
liabilities are to be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.




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




The
Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
embedded beneficial conversion features remained derivatives as of March 31,
2008. All of the criteria in the original analysis were met, and the embedded
beneficial conversion features were determined to be within the scope and
definition of a derivative. The Company followed the guidance of SFAS 133,
paragraph 12, to determine if the embedded beneficial conversion features should
be separated from the convertible notes. All of the criteria in the original
analysis were met, and the embedded beneficial conversion features were
separated from the convertible notes. In order to determine the classification
of the embedded beneficial conversion features, the Company applied paragraph 19
of EITF 00-19, which states that if a company is required to obtain shareholder
approval to increase the company’s authorized shares in order to net-share or
physically settle a contract, share settlement is not controlled by the company,
and the contract is required to be classified as a liability. In order to determine the
value of the embedded conversion features, the Company followed the guidance of
EITF 00-19, paragraph 9, which states that all contracts classified as
liabilities are to be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.




The fair
value of the embedded beneficial conversion features was $874,882 as of March
31, 2008, which was calculated using the Black Sholes valuation modelwith the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0% and an expected term of .08 to .75 years.




The
decrease in the fair value of the embedded beneficial conversion features for
the three months ended March 31, 2008 were recorded by decreasing beneficial
conversion features liability on the balance sheet by $347,740.




The
decrease in the fair value of the embedded beneficial conversion features for
the six months ended March 31, 2008 were recorded by decreasing beneficial
conversion features liability on the balance sheet by $555,929.




NOTE
10          STOCKHOLDERS’
EQUITY (Restated)




Common
Stock




The
Company has 150,000,000 authorized shares with $0.001 par value. As of March 31,
2008, the Company had 107,494,374 shares issued and 107,012,474 shares
outstanding.




During
the three and six months ended March 31, 2008 the Company issued a total of
377,273 shares of common stock. 150,000 shares were issued for legal services
and 227,273 shares were issued upon conversion of $50,000 of Convertible Note
3.




Page 23
of 59




Stock
Options




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




WeightredAverage
                  
                  
                  Number
      of
                  
                  
                  AggregateExercise
                  
                  
                  Outstanding
                  
                  
                  IntrinsicPrice
                  
                  
                  Options
                  
                  
                  ValueOutstanding
      as of September 30, 2007
                  
                  $
                  0.15
                  
                  
                  
                  7,034,140
                  
                  
                  $
                  -Granted
                  
                  
                  0.25
                  
                  
                  
                  10,539,312
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of March 31, 2008
                  
                  $
                  0.21
                  
                  
                  
                  17,573,452
                  
                  
                  $
                  -




Outstanding
Options:




Weighted
                                        
                                        
                                        Weighted
                                        
                                        
                                        WeightedAverage
                                        
                                        
                                        Average
                                        
                                        
                                        AverageRemaining
                                        
                                        
                                        Exercise
                                        
                                        
                                        ExerciseStock
                                        
                                        
                                        Stock
                                        
                                        
                                        Contractual
                                        
                                        
                                        Price
      of
                                        
                                        
                                        Price
      ofExercise
                                        
                                        Options
                                        
                                        
                                        Options
                                        
                                        
                                        Life
                                        
                                        
                                        Options
                                        
                                        
                                        OptionsPrice
                                        
                                        Outstanding
                                        
                                        
                                        Exercisable
                                        
                                        
                                        in Years
                                        
                                        
                                        Outstanding
                                        
                                        
                                        Exercisable$0.15
      - $0.25
                                        
                                        
                                        17,573,452
                                        
                                        
                                        
                                        11,168,943
                                        
                                        
                                        
                                        400
                                        
                                        
                                        $
                                        0.21
                                        
                                        
                                        $
                                        0.21




Stock
Warrants




A
summary of the Company’s Outstanding Warrants is listed below:




WeightredAverage
                  
                  
                  Number
      of
                  
                  
                  AggregateExercise
                  
                  
                  Outstanding
                  
                  
                  IntrinsicPrice
                  
                  
                  Warrants
                  
                  
                  ValueOutstanding
      as of September 30, 2007
                  
                  $
                  0.30
                  
                  
                  
                  2,795,454
                  
                  
                  $
                  -Granted
                  
                  
                  0.22
                  
                  
                  
                  23,129,312
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of March 31, 2008
                  
                  $
                  0.22
                  
                  
                  
                  25,924,766
                  
                  
                  $
                  -




Warrants
Outstanding




Weighted
                                  
                                  
                                  Weighted
                                  
                                  
                                  WeightedAverage
                                  
                                  
                                  Average
                                  
                                  
                                  AverageRemaining
                                  
                                  
                                  Exercise
                                  
                                  
                                  ExerciseContractual
                                  
                                  
                                  Price
      of
                                  
                                  
                                  Price
      ofExercise
                                  
                                  Warrants
                                  
                                  
                                  Warrants
                                  
                                  
                                  Life
                                  
                                  
                                  Options
                                  
                                  
                                  OptionsPrice
                                  
                                  Outstanding
                                  
                                  
                                  Exercisable
                                  
                                  
                                  in
      Years
                                  
                                  
                                  Outstanding
                                  
                                  
                                  Exercisable$0.10
      -$0.40
                                  
                                  
                                  25,924,766
                                  
                                  
                                  
                                  19,520,282
                                  
                                  
                                  
                                  4.31
                                  
                                  
                                  $
                                  0.23
                                  
                                  
                                  $
                                  0.23




Page 24
of 59




NOTE
11          GOING CONCERN
(Restated)




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. This basis of accounting contemplates the
recovery of the Company’s assets and the satisfaction of its liabilities in the
normal course of business. Through March 31, 2008, the Company has incurred
cumulative losses of $19,620,178 including a loss for the six months ended March
31, 2008 of $1,599,342. As the Company has no cash flow from operations, its
ability to transition from a development stage company to an operating company
is entirely dependent upon obtaining adequate financing to finance its overhead,
research and development activities, and acquisition of production equipment. It
is unknown when, if ever, the Company will achieve a level of revenues adequate
to support its costs and expenses. In order for the Company to meet its basic
financial obligations, including rent, salaries, debt service and other
operating expenses, it plans to seek additional equity or debt financing.
Because of the Company’s history and current debt levels, there is considerable
doubt that the Company will be able to obtain financing. Its ability to meet its
cash requirements for the next twelve months depends on its ability to obtain
such financing. Even if financing is obtained, any such financing will likely
involve additional fees and debt service requirements. Accordingly, there is no
assurance that the Company will be able to implement its plans.




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




Management
expects an order for water treatment systems. Additionally, management will
continue to identify new markets and demonstrate the water treatment unit to
potential customers. Management will closely monitor and evaluate expenses to
identify opportunities to reduce operating expenses.




NOTE
12          COMMITMENT




On
February 19, 2007 the Company entered into a two year lease agreement beginning
March 1, 2007. According to the terms of the agreement, at the beginning of each
lease year, the then most recently published Consumer Price Index (CPI) figure
shall be determined and the monthly rental payable for the succeeding lease year
will be calculated.




As of
August 1, 2008, we entered into a 36 month lease for an industrial site
consisting of approximately 12,000 square feet of administrative offices and a
manufacturing facility.  Monthly lease payments for the period from
August 1, 2008 through July 31, 2009 are $8,650 plus common area maintenance
charges; monthly lease payments for the period from August 1, 2009 through July
31, 2010 are $8,995 plus common area maintenance charges and monthly lease
payments for the period from August 1, 2010 through July 31, 2011 are $9,355
plus common area maintenance charges.  The lease agreement includes an
option to extend the lease for an additional 36 months. If the option is
exercised, monthly payments over the three year term would be $9,730 plus common
area maintenance charges from August 1, 2011 through July 31, 2012, $10,118 plus
common area maintenance charges from August 1, 2012 through July 31, 2012, and
$10,523 plus common area maintenance charges from August 1, 2013 through July
31, 2014. The future aggregate minimum annual lease payments arising from
this lease agreement are as follows.




For
      the Year Ended September 30,2009
                          
                          $
                          104,4902010
                          
                          
                          108,6602011
                          
                          
                          93,550




Total
rent expense under the operating lease was approximately $18,470 for the year
ended September 30, 2008.




Page 25
of 59




NOTE
13          SUBSEQUENT EVENTS
(Restated)




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




Between
March 14 and May 28, 2008, the Company completed an offering of 7,500,000 shares
of Common Stock at $0.10 per share to a group of institutional and accredited
investors, for a total of $750,000. As of March 31, 2008 the Company had
received $283,000 from investors but had not issued the 2,830,000 shares of
Common Stock.  This amount was included in shares to be issued in the
stockholders deficit section of the balance sheet.




As part
of the offering, the Company issued warrants to purchase 15,000,000 shares of
Common Stock at $0.10 per share. The grant date fair value of the warrants was
$483,476 and was calculated using the Black-Sholes valuation model using the
following assumptions: risk free rate of return of 1.32% to 2.17%, volatility
ranging from 72.4% to 77.86%, dividend yield of 0% and expected life of 5
years.




Termination
of Lease




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




Warrant
Issued to Legal Counsel




On June
24, 2008, the Company entered into an agreement with its legal counsel to issue
600,139 shares of Common Stock and a six year warrant to purchase up to 400,000
shares of Common Stock at an exercise price of $0.15 per share for services
previously rendered.




Warrant
Issued to Director (John Pavia)




On July
11, 2008, the Company’s Board of Directors approved the issuance of a five year
warrant to a director to purchase a total of 500,000 shares of the Company’s
Common Stock at an exercise price of $0.25 per share.




Warrant
Issued to Director (Marcus Woods)




On July
11, 2008, the Company’s Board of Directors approved the issuance of a five year
warrant to a director to purchase a total of 500,000 shares of the Company’s
Common Stock at an exercise price of $0.25 per share.




Warrant
Issued to Legal Counsel




On July
22, 2008, the Company entered into an agreement with its legal counsel to issue
641,000 shares of Common Stock and a six year warrant to purchase up to 641,000
shares of Common Stock at an exercise price of $0.15 per share for services
previously rendered.




Warrant
Issued to Advisory Board Member




On
September 23, 2008, the Company issued a five year warrant to a member of the
Company’s advisory board to purchase 1,500,000 shares of the Company’s Common
Stock at an exercise price of $0.25 per share.




Lease
of Administrative Offices and Manufacturing Facility




As of
August 1, 2008, the Company entered into a 36 month lease for an industrial site
consisting of administrative offices and a manufacturing
facility.  Monthly lease payments are $8,650 plus common area
maintenance charges from August 1, 2008 through July 31, 2009, $8,995 plus
common area maintenance charges from August 1, 2009 through July 31, 2010, and
$9,355 plus common area maintenance charges from August 1, 2010 through July 31,
2011.  The lease agreement includes an option to extend the lease for
an additional 36 months. If the option is exercised, monthly payments would be
$9,730 plus common area maintenance charges from August 1, 2011 through July 31,
2012, $10,118 plus common area maintenance charges from August 1, 2012 through
July 31, 2012, and $10,523 plus common area maintenance charges from August 1,
2013 through July 31, 2014.




Purchase
of Machinery and Equipment




On
October 14, 2008, the Company entered into an agreement to purchase machinery
and equipment from RJ Metals Co. for $125,000. The Company issued a total of
833,334 shares of Common Stock to three employees of RJ Metals Co. at $0.15 per
share as consideration for the purchase.


Page 26
of 59




Termination,
Separation and Release Agreement with Chief Executive Officer




On
November 11, 2008, the Company entered into a termination, separation, and
release agreement with Mr. Richard Papalian, who resigned as the Company’s Chief
Executive Officer on August 14, 2008. Under the terms of the separation
agreement Mr. Papalian retained a five year option granted on December 19, 2007
to purchase 2,933,536 shares of Common Stock at an exercise price of $0.25 per
share, and received a five year option to purchase up to 3,500,000 shares of
Common Stock at an exercise price of $0.15 per share.




Termination
of Chief Executive Officer




On
February 26, 2009, the Company’s Board of Directors terminated Mr. James Houtz
as our Chief Executive Officer. Mr. Houtz remains a director but not an officer
of the Company.




NOTE
14          RESTATEMENT




Subsequent
to filing Form 10-QSB for the six months ended March 31, 2008, the Company
determined that the beneficial conversion feature discounts and warrant
discounts related to the issuance of the convertible notes payable were not
properly accounted for, and certain warrants and options were omitted. As a
result, the Company recorded the following adjustments.




2001 Executive Officers
Stock Option Plan




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




Balance
Sheet




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




The
Company began the analysis for the restatement as of and for the fiscal year
ended September 30, 2007 by applying FASB 133,paragraph 6 to ascertain if
the options remained derivatives as of September 30, 2007. All of the criteria
in the original analysis were met, and the options were determined to be within
the scope and definition of a derivative. EITF 00-19, paragraph 19 was applied
next, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. EITF 00-19, paragraph 10
was then applied. Paragraph 10 states that if classification changes as the
result of an event, the contract should be reclassified as of the date of the
event at fair value. The event responsible for the change in classification was
the issuance of the $1,025,000 Convertible Bridge Notes on July 17,
2007.




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




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




The
Company began the analysis for the restatement by applying FASB 133,paragraph 6 to ascertain if
the options remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the options were determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.


Page 27
of 59




The fair
value of the options was determined to be $457,114 as of March 31, 2008 and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 3 years.




The
decrease in the fair value of the options was $766,474 for the three months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the options was $1,469,800 for the six months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




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




The
change in the fair value of the options for the three months ended March 31,
2008 was $766,474 and included in decrease in warrant liability in the other
income (expense) section of the statement of operations.




The
change in the fair value of the options for the six months ended March 31, 2008
was $1,469,800 and included in decrease in warrant liability in the other income
(expense) section of the statement of operations.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the options of
$1,469,800.




Advisory Board
Compensation




On
October 1, 2004, the Company formed an advisory board consisting of four
members. Each member was to receive $5,000 monthly from October 1, 2004 to
February 22, 2007 for a total of $576,000, convertible by the advisory board
members into 11,520,000 shares of Common Stock at a rate of $0.05 per share. On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of Common Stock in exchange for warrants
exercisable at $0.25 per share. The Company determined that the accrued expense,
embedded beneficial conversion feature, embedded beneficial conversion feature
discount, and related amortization expense were not recorded at the date of
issuance, or prior to the restatement of the financial statements as of March
31, 2008, no payments have been made to any advisory board members, there has
been no conversion by any Advisory Board members of the accrued liability into
shares of Common Stock, and no warrant has been exercised.




Balance
Sheet




The
Company began the analysis for the restatement by applying paragraph 6 of
Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities,to ascertain if the
embedded beneficial conversion features were derivatives at the date of
issuance. The embedded beneficial conversion features had one or more underlings
and one or more notional amounts; required no initial investment; and required
or permitted net settlement. Therefore, the embedded beneficial conversion
features were determined to be within the scope and definition of a derivative
at the date of issuance. Next, FASB 133, paragraph 12 was applied to determine
if the embedded beneficial conversion features should be separated from the
accrued expense. The Company determined that the economic characteristics of the
embedded beneficial conversion features are not clearly and closely related to
the accrued expense; the embedded beneficial conversion features and accrued
expense are not remeasured at fair value at each balance sheet date; and a
separate contract with the same terms would be a derivative pursuant to FASB
133, paragraphs 6-11. Therefore, the embedded beneficial conversion features
were separated from the accrued expense to determine the classification and
valuation. EITF 00-19, paragraphs 7 and 8 were applied to determine the
classification. Paragraph 7 states that contracts which require net-cash
settlement are liabilities, and paragraph 8 states that contracts which give the
counterparty (advisory board members) a choice of net-cash settlement or
settlement in shares are liabilities. Therefore, the embedded conversion
features were determined to be liabilities. EITF 00-19, paragraph 9 was applied
to determine the value. Paragraph 9 of EITF 00-19 states all contracts
classified as liabilities should be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.




Page 28
of 59




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




On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of common stock in exchange for warrants.
As a result, the beneficial conversion feature of $576,000 and the unamortized
beneficial conversion feature discount of $195,560 were written off for a net of
$380,440.




The
beneficial conversion features discount amortization was $15,104 for the three
and six months ended March 31, 2008, which increased accrued
expenses.




Statement
of Operations




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




There was
no increase in the fair value of the beneficial conversion features for the
three or six months ended March 31, 2008.




The
beneficial conversion feature discount amortization was determined to be $15,104
and has been included in general and administrative expenses in the operating
expenses section of the statement of operations for the three and six months
ended March 31, 2008.




The
beneficial conversion feature of $576,000 and the beneficial conversion feature
discount of $195,560 were written off for a net of $380,440 and has been
included in the other income (expense) section of the statement of income
(operations) for the three and six months ended March 31, 2008.




Statement
of Cash Flows




Changes
in the statement of cash flows were the result of the amortization of the
beneficial conversion features discount of $15,104, and the net write off
of beneficial conversion feature and beneficial conversion feature discount of
$380,440 on the statement of operations.




Warrants Related to 2004
Stock Purchase Agreement




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




Balance
Sheet




The
Company began the analysis by applying FASB 133, paragraph 6to determine if
the warrants were within the scope and definition of a derivative at the date of
issuance. The warrants: had one or more underlings, and one or more notional
amounts; required no initial investment; and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. EITF 00-19, paragraphs 7 and 8 were then applied to determine
classification. These paragraphs state that contractswhich
require settlement in shares are equity instruments. EITF 00-19, paragraph 9 was
applied to determine the value of the options. Paragraph 9 of EITF 00-19 states
that contracts which require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.




The fair
value of the warrants was determined to be $24,366 at the date of issuance which
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.21% to 2.14%; volatility of 141.91%
to 170.27%; dividend yield of 0% and an expected term of 5 years. The
warrants were considered an expense prior to October 1, 2006. Therefore, $24,366
was recorded to additional paid-in capital and deficit accumulated during
development stage.




Page 29
of 59


EITF
00-19, paragraph 19 was applied next. Paragraph 19 states that if a company is
required to obtain shareholder approval to increase the company’s authorized
shares in order to net-share or physically settle a contract, share settlement
is not controlled by the company and the contract is required to be classified
as a liability. EITF 00-19, paragraph 10 was then applied. This paragraph states
that if classification changes as the result of an event, the contract should be
reclassified as of the date of the event at fair value. The event responsible
for the change in classification was the issuance of the
$1,025,000 Convertible Bridge Notes on July 17, 2007.




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




EITF
00-19, paragraph 9 was also applied in the analysis. Paragraph 9 states that all
contracts classified as liabilities must be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




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




The
decrease in the fair value of the warrants was $70,029 for the year ended
September 30, 2007, which was recorded to warrant liability and accumulated
deficit during development stage as of March 31, 2008.




Statement
of Operations




There was
no change in the fair value of the warrants for the three months ended March 31,
2008, due to their expiration.




Statement
of Cash Flows




There was
no change in the statement of cash flows for the three months ended March 31,
2008.




Beneficial Conversion
Features




As of
March 31, 2008, the Company had Convertible Bridge Notes outstanding totaling
$1,811,000 which were issued between October 17, 2006 and July 17, 2007. The
bridge notes included an embedded beneficial conversion feature that allowed the
holders of the convertible notes to convert their notes into shares of Common
Stock at rates between $0.01 and $0.22. The bridge notes mature between June 17,
2008 and December 31, 2008. The bridge notes accrue interest at rates between 8%
and 10%, and any accrued but unpaid interest is also convertible by the holder
of the bridge notes into shares of Common Stock at the same rate.




Balance
Sheet




The
Company began the analysis for the restatement as of and for the six months
ended March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the embedded beneficial conversion features remained derivatives subsequent to
the date of issuance. All of the criteria in the original analysis were met, and
the embedded beneficial conversion features issued were determined to be within
the scope and definition of a derivative. FASB 133, paragraph 12 was applied to
determine if the embedded beneficial conversion features should be separated
from the convertible bridge notes. All of the criteria in the original analysis
were met, and the embedded beneficial conversion features were separated from
the convertible bridge notes. EITF 00-19, paragraphs 7 and 8 were applied to
determine the classification. Paragraph 7 states that contracts which require
net-cash settlement are liabilities, and paragraph 8 states that contracts which
give the counterparty (holders of the convertible notes) a choice of net-cash
settlement or settlement in shares are liabilities. Therefore the embedded
conversion features were determined to be liabilities. The change in the
determination of the classification from equity to a liability was based on the
rights of the holders of the convertible notes to convert the notes into shares
of Common Stock. Therefore, share settlement is not controlled by the Company.
EITF 00-19, paragraph 9 was applied to determine the value of the embedded
beneficial conversion features. Paragraph 9 states that all contracts classified
as liabilities must be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.




The fair
value of the monthly embedded beneficial conversion features was determined to
be $874,882 as of March 31, 2008, which was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
1.56%; volatility of 72.53%; dividend yield of 0%; and an expected term
of .08 to .33 years.


Page 30
of 59




The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.




The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.




The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, which increased convertible
notes.




The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, which increased convertible notes.




Statement
of Operations




The
beneficial conversion features were analyzed in accordance withEITF 00-19, paragraph 9
which requires all contracts classified as liabilities to be measured at fair
value, with changes in fair value reported in earnings as long as the contracts
remain classified as liabilities.




The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.




The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.




The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.




The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.




Statement
of Cash Flows




Changes
in the statement of cash flows for the three months ended March 31, 2008 were
the result of the decrease in the fair value of the beneficial conversion
features liability of $347,850 and the amortization of the beneficial conversion
features discounts of $285,610 on the statement of operations.




Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the fair value of the beneficial conversion features
liability of $555,929 and the amortization of the beneficial conversion features
discounts of $573,646 on the statement of operations.




Warrants related to
$1,025,000 of ConvertibleBridge
Notes




On July
17, 2007 the Company completed an offering of $1,025,000 of convertible notes to
a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common
Stock to holders of the convertible bridge notes, 465,908 shares of Common Stock
as a placement fee) at an exercise price of $0.50 per share. An amendment to the
convertible notes dated March 13, 2008 reduced the exercise price to $0.30 per
share.




Balance
Sheet




The
Company began the analysis for the restatement of the financial statements as of
and for the six months ended March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the warrants issued remained derivatives as of March 31, 2008. All of the
criteria in the original analysis were met, and the warrants issued were
determined to be within the scope and definition of a derivative. EITF 00-19,
paragraph 19 was applied next to determine classification. Paragraph 19 states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability. EITF 00-19, paragraph 9 was applied to
determine the value of the warrants. Paragraph 9 states that all contracts
classified as liabilities must be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.


Page 31
of 59




The fair
value of the warrants was determined to be $135,950 as of March 31, 2008, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 4.17 to 4.25 years.




The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded by decreasing warrant
liabilities on the balance sheet by $185,827 ($143,242 related to the holders of
the convertible bridge notes, and $42,585 related to the placement
fee).




The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded by decreasing warrant liabilities
on the balance sheet by $363,982 ($268,470 related to the holders of the
convertible bridge notes, and $95,512 related to the placement
fee).




The
amortization of the warrant discount was $213,353 for the six months ended March
31, 2008, which increased convertible notes.




Statement
of Operations




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




The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.




The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.




The
increase in the amortization of the warrant discount of $30,065 is included in
interest expense in the other income (expense) section of the statement of
operations.




Statement
of Cash Flows




Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the amount of $363,982 in thefair value of the
warrants at the date of issuance on the statement of operations, and
the increase in the amortization of the warrant discount of $30,065 on the
balance sheet.




Warrant Issued to
Consultant




On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the
Company. As compensation for his services, the Company granted Mr. Maron a five
year warrant to purchase up to 8,539,312 shares of the Company’s Common Stock at
an exercise price of $0.25 per share. As per the terms of the warrant agreement,
the right to purchase 340,000 shares of Common Stock is not exercisable until
the notes dated June 6, 2007 (Convertible Notes 2 as discussed in Note 6 to our
financial statements) are eligible for conversion into shares of Common
Stock.  The warrant was not issued from the 2001 Executive
Officers Stock Option Plan.




Balance
Sheet




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


Page 32
of 59




The fair
value of the warrant was determined to be $1,448,321 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.26%, expected volatility of 98.01%,
dividend yields of 0% and expected term of 5 years.




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




The
Company analyzed the warrant by applying FASB 133,paragraph 6 to ascertain if
the warrant remained a derivative as of December 31, 2007. All of the criteria
in the original analysis were met, and the warrant issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 was also
applied, which states that contracts classified as liabilities should be
measured at fair value at each balance sheet date, with changes in fair value
reported in earnings and disclosed in the financial statements as long as the
contracts remain classified as liabilities.




The fair
value of the warrant was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.




The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.




The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.




The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the warrant of
$905,054.




Option Issued to Chief
Executive Officer




On
December 19, 2007, the Company entered into a one year Employment Agreement with
Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the
Company’s Chief Executive Officer. As compensation for his services, the Company
granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of
the Company’s Common Stock at an exercise price of $0.25 per share. As per the
terms of the stock option agreement, the right to purchase 340,000 shares of
Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible
Notes 2 as discussed in Note 6 to our financial statements) are eligible for
conversion into shares of Common Stock. These options were not issued from the
2001 Executive Officers Stock Option Plan.On the grant date, the
Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contractsthat require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company applied EITF 00-19, paragraph 9, which states that contracts that
require the company to deliver shares as part of a physical settlement or
net-share settlement should be initially measured at fair value.




Balance
Sheet




The fair
value of the option was determined to be $1,448,321 at the date of issuance, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 3.26%; volatility of 98.01%; dividend
yield of 0%; and an expected term of 5 years.


Page 33
of 59




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




The
Company analyzed the option as of March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by a company, the contract is
required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$905,054.




Option Issued to
Director




On
December 13, 2007, the Company’s Board of Directors approved the issuance to a
director of a five year option to purchase a total of 1,000,000 shares of the
Company’s common stock at an exercise price of $0.25 per share.




Balance
Sheet




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




The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.




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


Page 34
of 59




The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $63,620 as of March 31, 2008, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Operations




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.




Option Issued to Chief
Financial Officer




On
December 13, 2007, the Company’s Board of Directors approved the issuance to the
Chief Financial Officer of a five year option to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.




Balance
Sheet




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




The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.




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




The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9, which
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $63,620 as of March 31, 2008 using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.


Page 35
of 59




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Operations




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.




Page 36
of 59




Table 1 –
2008




Beneficial
                                    
                                    
                                    WarrantConversion
                                    
                                    
                                    Related toFeatures
                                    
                                    
                                    $1,025,000 of2001
                                    
                                    
                                    
                                    
                                    
                                    Warrants
                                    
                                    
                                    and
                                    
                                    
                                    ConvertibleExecutive
                                    
                                    
                                    
                                    
                                    
                                    Related to
                                    
                                    
                                    Beneficial
                                    
                                    
                                    Bridge NotesAs
                                    
                                    
                                    Officers
                                    
                                    
                                    Advisory
                                    
                                    
                                    2004 Stock
                                    
                                    
                                    Conversion
                                    
                                    
                                    and
                                    
                                    
                                    
                                    
                                    
                                    Option Issued
                                    
                                    
                                    
                                    
                                    
                                    Warrant Issued
                                    
                                    
                                    
                                    
                                    
                                    Warrants RelatedPreviously
                                    
                                    
                                    Option
                                    
                                    
                                    Board
                                    
                                    
                                    Purchase
                                    
                                    
                                    Features
                                    
                                    
                                    Warrant
                                    
                                    
                                    Warrant Issued
                                    
                                    
                                    to Chief Executive
                                    
                                    
                                    Warrant Issued
                                    
                                    
                                    to Chief
                                    
                                    
                                    10% Subordinated
                                    
                                    
                                    to $750,000
                                    
                                    
                                    
                                    
                                    
                                    AsStated
                                    
                                    
                                    Plan
                                    
                                    
                                    Compensation
                                    
                                    
                                    Agreement
                                    
                                    
                                    Discount
                                    
                                    
                                    Discount
                                    
                                    
                                    to Consultant
                                    
                                    
                                    Officer
                                    
                                    
                                    to Director
                                    
                                    
                                    Financial Officer
                                    
                                    
                                    Notes Payable
                                    
                                    
                                    Stock Issuance
                                    
                                    
                                    Other
                                    
                                    
                                    RestatedBalance
      SheetCash
      and cash equivalent
                                    
                                    $
                                    102,604
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    151
                                    
                                    
                                    $
                                    102,755Accounts
      payable
                                    
                                    
                                    470,137
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    32,987
                                    
                                    
                                    
                                    503,124Accrued
      expenses
                                    
                                    
                                    1,847,254
                                    
                                    
                                    
                                    
                                    
                                    
                                    576,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,423,254Convertible
      Notes, net
                                    
                                    
                                    1,306,593
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12,913
                                    
                                    
                                    
                                    206,465
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,525,97110%
      subordinated notes payable
                                    
                                    
                                    332,182
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    20,169
                                    
                                    
                                    
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    352,389Warrant
      liability
                                    
                                    
                                    974,632
                                    
                                    
                                    
                                    457,114
                                    
                                    
                                    
                                    549,672
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    36,522
                                    
                                    
                                    
                                    128,358
                                    
                                    
                                    
                                    128,358
                                    
                                    
                                    
                                    63,620
                                    
                                    
                                    
                                    63,620
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    156,268
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,558,164Beneficial
      conversion feature liability
                                    
                                    
                                    857,678
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    17,204
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    874,882Additional
      paid-in capital
                                    
                                    
                                    12,815,792
                                    
                                    
                                    
                                    (2,271,879
                                    )
                                    
                                    
                                    (269,848
                                    )
                                    
                                    
                                    (45,663
                                    )
                                    
                                    
                                    473,797
                                    
                                    
                                    
                                    135,406
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    10,837,605Deficit
      accumulated during development stage
                                    
                                    
                                    (19,149,208
                                    )
                                    
                                    
                                    1,814,765
                                    
                                    
                                    
                                    (855,824
                                    )
                                    
                                    
                                    45,663
                                    
                                    
                                    
                                    (503,914
                                    )
                                    
                                    
                                    (378,393
                                    )
                                    
                                    
                                    (128,358
                                    )
                                    
                                    
                                    (128,358
                                    )
                                    
                                    
                                    (63,620
                                    )
                                    
                                    
                                    (63,620
                                    )
                                    
                                    
                                    (20,169
                                    )
                                    
                                    
                                    (156,268
                                    )
                                    
                                    
                                    (32,874
                                    )
                                    
                                    
                                    (19,620,178
                                    )Statement
      of Operations (for the three months ended March 31,
      2008)General
      and administrative
                                    
                                    $
                                    395,890
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    165,022
                                    
                                    
                                    $
                                    32,540
                                    
                                    
                                    $
                                    593,452Research
      and development
                                    
                                    
                                    328,694
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    334
                                    
                                    
                                    
                                    329,028Interest
      expense
                                    
                                    
                                    (492,546
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    16,677
                                    
                                    
                                    
                                    (78,022
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (20,169
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (574,060
                                    )Decrease
      (increase) in warrant liability
                                    
                                    
                                    273,778
                                    
                                    
                                    
                                    766,474
                                    
                                    
                                    
                                    983,628
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (36,522
                                    )
                                    
                                    
                                    972,165
                                    
                                    
                                    
                                    972,165
                                    
                                    
                                    
                                    113,845
                                    
                                    
                                    
                                    113,845
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    8,754
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    4,168,132Increase
      in beneficial conversion feature liability
                                    
                                    
                                    364,944
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (17,204
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    347,740Basic
      and dilutive loss per share
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -Statement
      of Operations (for the six months ended March 31,
      2008)General
      and administrative
                                    
                                    $
                                    1,526,663
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    1,557,705
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    1,033,412
                                    
                                    
                                    $
                                    1,033,412
                                    
                                    
                                    $
                                    171,520
                                    
                                    
                                    $
                                    171,520
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    165,022
                                    
                                    
                                    $
                                    32,540
                                    
                                    
                                    $
                                    5,691,794Research
      and development
                                    
                                    
                                    565,598
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    334
                                    
                                    
                                    
                                    565,932Interest
      expense
                                    
                                    
                                    (906,150
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    32,816
                                    
                                    
                                    
                                    (167,287
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (20,169
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,060,790
                                    )Decrease
      (increase) in warrant liability
                                    
                                    
                                    427,991
                                    
                                    
                                    
                                    1,469,800
                                    
                                    
                                    
                                    1,008,033
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (12,580
                                    )
                                    
                                    
                                    905,054
                                    
                                    
                                    
                                    905,054
                                    
                                    
                                    
                                    107,900
                                    
                                    
                                    
                                    107,900
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    8,754
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    4,927,906Increase
      in beneficial conversion feature liability
                                    
                                    
                                    637,688
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (81,759
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    555,929Write-off
      of beneficial conversion feature
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380,440
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380,440Basic
      and dilutive loss per share
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -Statement
      of Operations (since  inception)General
      and administrative
                                    
                                    $
                                    14,680,234
                                    
                                    
                                    $
                                    28,361
                                    
                                    
                                    $
                                    2,240,253
                                    
                                    
                                    $
                                    24,366
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    1,033,412
                                    
                                    
                                    $
                                    1,033,412
                                    
                                    
                                    $
                                    171,520
                                    
                                    
                                    $
                                    171,520
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    165,022
                                    
                                    
                                    $
                                    (526,801
                                    )
                                    
                                    $
                                    19,021,299Research
      and development
                                    
                                    
                                    2,015,071
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    526,801
                                    
                                    
                                    
                                    2,541,872Interest
      expense
                                    
                                    
                                    (1,463,002
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (303,313
                                    )
                                    
                                    
                                    (255,021
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (20,169
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (196,214
                                    )
                                    
                                    
                                    (2,237,719
                                    )Decrease
      in warrant liability
                                    
                                    
                                    427,991
                                    
                                    
                                    
                                    1,814,765
                                    
                                    
                                    
                                    1,008,033
                                    
                                    
                                    
                                    70,029
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    41,737
                                    
                                    
                                    
                                    905,054
                                    
                                    
                                    
                                    905,054
                                    
                                    
                                    
                                    107,900
                                    
                                    
                                    
                                    107,900
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    8,754
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    5,397,217Increase
      in beneficial conversion feature liability
                                    
                                    
                                    637,688
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,044
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (81,759
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    551,885Write-off
      of beneficial conversion feature
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380,440
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    380,440Statement
      of Cash Flows (for the six months ended March 31,
      2008)Net
      loss
                                    
                                    $
                                    (2,077,833
                                    )
                                    
                                    $
                                    1,469,800
                                    
                                    
                                    $
                                    (169,232
                                    )
                                    
                                    
                                    
                                    
                                    
                                    $
                                    (48,943
                                    )
                                    
                                    $
                                    (179,867
                                    )
                                    
                                    $
                                    (128,358
                                    )
                                    
                                    $
                                    (128,358
                                    )
                                    
                                    $
                                    (63,620
                                    )
                                    
                                    $
                                    (63,620
                                    )
                                    
                                    $
                                    (20,169
                                    )
                                    
                                    $
                                    (156,268
                                    )
                                    
                                    $
                                    (32,874
                                    )
                                    
                                    $
                                    (1,599,342
                                    )Amortization
      of beneficial conversion features discount and warrant
      discount
                                    
                                    
                                    669,025
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    10,072
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (32,816
                                    )
                                    
                                    
                                    167,287
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    20,169
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    833,775Stock
      based compensation expense- employee
                                    
                                    
                                    414,908
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,033,412
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    171,520
                                    
                                    
                                    
                                    171,520
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,791,360Stock
      based compensation expense- consultant
                                    
                                    
                                    439,909
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,557,705
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,008,413
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    165,022
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3,171,049(Decrease)
      increase in warrant liability
                                    
                                    
                                    (427,991
                                    )
                                    
                                    
                                    (1,469,800
                                    )
                                    
                                    
                                    (1,008,033
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    12,580
                                    
                                    
                                    
                                    (905,054
                                    )
                                    
                                    
                                    (905,054
                                    )
                                    
                                    
                                    (107,900
                                    )
                                    
                                    
                                    (107,900
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (8,754
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,927,906
                                    )Increase
      in beneficial conversion  feature liaiblity
                                    
                                    
                                    (637,688
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    81,759
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (555,929
                                    )Write-off
      of beneficial conversion
                                      featureAccounts
      payable
                                    
                                    
                                    312,738
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    32,987
                                    
                                    
                                    
                                    345,725Accrued
      expenses
                                    
                                    
                                    159,581
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    576,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    735,581Cash
      and cash equivalents
                                    
                                    
                                    102,604
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    151
                                    
                                    
                                    
                                    102,755


Page 37
of 59




Beneficial
                      
                      
                      WarrantConversion
                      
                      
                      Related toFeatures
                      
                      
                      $1,025,000 of2001
                      
                      
                      
                      
                      
                      Warrants
                      
                      
                      and
                      
                      
                      ConvertibleExecutive
                      
                      
                      
                      
                      
                      Related to
                      
                      
                      Beneficial
                      
                      
                      Bridge NotesAs
                      
                      
                      Officers
                      
                      
                      Advisory
                      
                      
                      2004 Stock
                      
                      
                      Conversion
                      
                      
                      and
                      
                      
                      
                      
                      
                      Option Issued
                      
                      
                      
                      
                      
                      Warrant Issued
                      
                      
                      
                      
                      
                      Warrants RelatedPreviously
                      
                      
                      Option
                      
                      
                      Board
                      
                      
                      Purchase
                      
                      
                      Features
                      
                      
                      Warrant
                      
                      
                      Warrant Issued
                      
                      
                      to Chief Executive
                      
                      
                      Warrant Issued
                      
                      
                      to Chief
                      
                      
                      10% Subordinated
                      
                      
                      to $750,000
                      
                      
                      
                      
                      
                      AsStated
                      
                      
                      Plan
                      
                      
                      Compensation
                      
                      
                      Agreement
                      
                      
                      Discount
                      
                      
                      Discount
                      
                      
                      to Consultant
                      
                      
                      Officer
                      
                      
                      to Director
                      
                      
                      Financial Officer
                      
                      
                      Notes Payable
                      
                      
                      Stock Issuance
                      
                      
                      Other
                      
                      
                      RestatedStatement
      of Cash Flows (since inception)Net
      loss
                      
                      $
                      (19,377,983
                      )
                      
                      $
                      1,786,404
                      
                      
                      $
                      (855,824
                      )
                      
                      $
                      45,663
                      
                      
                      $
                      (385,072
                      )
                      
                      $
                      (213,284
                      )
                      
                      $
                      (128,358
                      )
                      
                      $
                      (128,358
                      )
                      
                      $
                      (63,620
                      )
                      
                      $
                      (63,620
                      )
                      
                      $
                      (20,169
                      )
                      
                      $
                      (156,268
                      )
                      
                      $
                      (59,689
                      )
                      
                      $
                      (19,620,178
                      )Amoritzation
      of beneficial conversion feature discount and warrant
    discount
                      
                      
                      984,402
                      
                      
                      
                      
                      
                      
                      
                      153,888
                      
                      
                      
                      
                      
                      
                      
                      303,313
                      
                      
                      
                      255,021
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20,169
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,716,793Stock
      based compensation expense - employee
                      
                      
                      414,908
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,033,412
                      
                      
                      
                      171,520
                      
                      
                      
                      171,520
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,835,957
                      
                      
                      
                      3,627,317Stock
      based compensation expense - non-employee
                      
                      
                      439,909
                      
                      
                      
                      636,661
                      
                      
                      
                      1,557,705
                      
                      
                      
                      24,366
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,033,412
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      156,268
                      
                      
                      
                      2,287,597
                      
                      
                      
                      6,135,918Warrants
      issued for consulting services
                      
                      
                      106,111
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (106,111
                      )
                      
                      
                      -Issuance
      of Common Stock for compensation
                      
                      
                      1,835,957
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,835,957
                      )
                      
                      
                      -Issuance
      of Common Stock for services
                      
                      
                      2,181,486
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,181,486
                      )
                      
                      
                      -Decrease
      in warrant liability
                      
                      
                      (427,991
                      )
                      
                      
                      (1,814,765
                      )
                      
                      
                      (1,008,033
                      )
                      
                      
                      (70,029
                      )
                      
                      
                      
                      
                      
                      
                      (41,737
                      )
                      
                      
                      (905,054
                      )
                      
                      
                      (905,054
                      )
                      
                      
                      (107,900
                      )
                      
                      
                      (107,900
                      )
                      
                      
                      
                      
                      
                      
                      (8,754
                      )
                      
                      
                      
                      
                      
                      
                      (5,397,217
                      )Decrease
      in beneficial conversion feature liability
                      
                      
                      (637,689
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      85,804
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (551,885
                      )Write-off
      of beneficial conversion feature
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (380,440
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (380,440
                      )Loss
      on termniation of lease
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      129,166
                      
                      
                      
                      129,166Accural
      of liquidating damanges
                      
                      
                      138,375
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,375
                      
                      
                      
                      153,750Decrease
      in other receivables
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Increase
      in deposits
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Other
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Other
      current assets
                      
                      
                      (545,727
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      510,727
                      
                      
                      
                      (35,000
                      )Other
      receiveables
                      
                      
                      3,000Deposits
                      
                      
                      (204,600
                      )Other
      assets
                      
                      
                      140,370
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (244,970
                      )
                      
                      
                      (104,600
                      )Accounts
      payable
                      
                      
                      540,139
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (37,015
                      )
                      
                      
                      503,124Accrued
      expenses
                      
                      
                      1,991,622
                      
                      
                      
                      
                      
                      
                      
                      189,698
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,181,320Acquisition
      of machinery and equipment
                      
                      
                      (437,112
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      36,493
                      
                      
                      
                      (400,619
                      )Proceeds
      from issuance of notes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Proceeds
      from convertible notes payable
                      
                      
                      2,544,191
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (683,191
                      )
                      
                      
                      1,861,000Proceeds
      from 10% subordinated notes payable
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      425,000
                      
                      
                      
                      425,000Receipt
      from (payments to) equity line of credit
                      
                      
                      456,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (27,336
                      )
                      
                      
                      428,664Proceeds
      from notes payable to related party
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      457,433
                      
                      
                      
                      457,433Payments
      on notes payable to related party
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,000
                      )
                      
                      
                      (5,000
                      )Payment
      on notes to officers
                      
                      
                      (51,596
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (166,906
                      )
                      
                      
                      (218,502
                      )Issuance
      of common stock for cash
                      
                      
                      7,376,094
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,000
                      
                      
                      
                      7,386,094Receipt
      of cash for stock to be issued
                      
                      
                      336,900
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (10,000
                      )
                      
                      
                      326,900




Table 2 -
2007




Beneficial
                                                    
                                                    WarrantConversion
                                                    
                                                    Related toFeatures
                                                    
                                                    $1,025,000 of2001
                                                    
                                                    
                                                    
                                                    Warrants
                                                    
                                                    and
                                                    
                                                    ConvertibleExecutive
                                                    
                                                    
                                                    
                                                    Related to
                                                    
                                                    Beneficial
                                                    
                                                    Bridge NotesAs
                                                    
                                                    Officers
                                                    
                                                    Advisory
                                                    
                                                    2004 Stock
                                                    
                                                    Conversion
                                                    
                                                    and
                                                    
                                                    
                                                    
                                                    Option Issued
                                                    
                                                    
                                                    
                                                    Warrant Issued
                                                    
                                                    
                                                    
                                                    Warrants RelatedPreviously
                                                    
                                                    Option
                                                    
                                                    Board
                                                    
                                                    Purchase
                                                    
                                                    Features
                                                    
                                                    Warrant
                                                    
                                                    Warrant Issued
                                                    
                                                    to Chief Executive
                                                    
                                                    Warrant Issued
                                                    
                                                    to Chief
                                                    
                                                    10% Subordinated
                                                    
                                                    to $750,000
                                                    
                                                    
                                                    
                                                    AsStated
                                                    
                                                    Plan
                                                    
                                                    Compensation
                                                    
                                                    Agreement
                                                    
                                                    Discount
                                                    
                                                    Discount
                                                    
                                                    toConsultant
                                                    
                                                    Officer
                                                    
                                                    toDirector
                                                    
                                                    FinancialOfficer
                                                    
                                                    NotesPayable
                                                    
                                                    StockIssuance
                                                    
                                                    Other
                                                    
                                                    RestatedStatement
      of Operations (for the  three months ended March 31,
      2007)General
      and administrative
                                                    
                                                    $
                                                    282,804
                                                    
                                                    
                                                    
                                                    $
                                                    50,840
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    333,644Basic
      and dilutive loss per share
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Statement
      of Operations (for the six months ended March 31, 2007)General
      and administrative
                                                    
                                                    $
                                                    487,224
                                                    
                                                    
                                                    
                                                    $
                                                    123,144
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    610,368Interest
      expense
                                                    
                                                    
                                                    (70,588
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (89,686
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (160,274
                                                    )Basic
      and dilutive loss per share
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Statement
      of Cash Flows (for the six months ended March 31, 2007)Net
      loss
                                                    
                                                    $
                                                    (573,889
                                                    )
                                                    
                                                    
                                                    $
                                                    (123,144
                                                    )
                                                    
                                                    
                                                    $
                                                    (89,686
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    (786,719
                                                    )Amortization
      of beneficial conversion features discount and warrant
      discount
                                                    
                                                    
                                                    27,838
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    89,686
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    117,524Accrued
      interest
                                                    
                                                    
                                                    42,750
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (42,750
                                                    )
                                                    
                                                    -Accrued
      expenses
                                                    
                                                    
                                                    168,959
                                                    
                                                    
                                                    
                                                    
                                                    123,144
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    42,750
                                                    
                                                    
                                                    334,853


Page 38
of 59


FORWARD-LOOKING
STATEMENTS




This
Quarterly Report on Form 10-QSB/A filed by Sionix Corporation contains
forward-looking statements. These are statements regarding financial and
operating performance and results and other statements that are not historical
facts. The words “expect,” “project,” “estimate,” “believe,” “anticipate,”
“intend,” “plan,” “forecast,” and similar expressions are intended to identify
forward-looking statements. These statements, and any other statements that are
not historical facts, are forward looking statements. Certain important risks
could cause results to differ materially from those anticipated by some of the
forward-looking statements. Some, but not all, of these risks include, among
other things:




Ø
            whether
      we will be able to find financing to continue our
    operations;




Ø
            whether
      there are changes in regulatory requirements that adversely affect our
      business;




Ø
            the
      ability of management to execute its plans to meet its
    goals;




Ø
            general
      economic conditions, whether nationally or in the regional and local
      markets in which we operate, which may be less favorable than
      expected;




Ø
            the
      ability to retain key members of management and key employees;
      and




Ø
            other
      uncertainties, all of which are difficult to predict and many of which are
      beyond our control.




We do not
intend to update forward-looking statements. You should refer to and carefully
review the information in the documents we file with the Securities and Exchange
Commission.


Page 39
of 59


ITEM
2                MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS




DEVELOPMENT
STAGE COMPANY. Sionix Corporation (referred to as “the Company”, “we”, “us” or
“our”) is a development stage company as defined in Statement of Financial
Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development
Stage Enterprises.” The Company designs and develops turn-key stand-alone water
treatment systems for municipalities (both potable and wastewater), industry
(both make-up water and wastewater), emergency response, military and small
residential communities. To date, the Company’s efforts have been principally
devoted to research and development, organizational activities, and raising
capital. Development of our ELIXIR water treatment system was completed in 2002.
We are currently engaged in testing the product, as discussed below. We have
earned no revenues from sales of our product and we do not expect our product to
be available for sale during the next few months. Because we earn no revenues,
our operations are, and have been in the past, dependent on our ability to
borrow money or to raise capital by selling our equity or debt
securities.




Our lack
of operating capital has slowed the pace of the development and testing of our
product. However, during the 2007 fiscal year we began raising working capital
through sales of debt securities, which has allowed us to complete installation
of the ELIXIR water treatment system at the Villa Park Dam, Villa Park,
California.




Our plan
for the next 12 months is to continue to raise capital, interview and hire an
independent consulting firm to verify equipment production standards and test
data, and continue the introduction of the ELIXIR water treatment system to the
market place which we anticipate will result in initial sales in the near
future. There is no guarantee, however, that we will be able to accomplish these
goals or that the introduction of our water treatment system will produce
revenues for us. If our production standards and test data are confirmed by the
independent consultants and if we are able to raise sufficient capital then the
Company plans to hire competent production support and administrative staff to
effectively run the Company.




If we are
not able to raise funds as and when we need them, we may be required to severely
curtail, or even to cease, our operations.




MANAGEMENT.
On December 19, 2007, the Company entered into a one year Employment Agreement
with Richard H. Papalian and a one year Consulting Agreement with Mark Maron
pursuant to which Mr. Papalian was appointed as the Company’s Chief Executive
Officer and Mr. Maron was appointed as Special Adviser to the Company. As
compensation for these services, the Company granted to each person a five year
option to purchase up to 8,539,312 shares of the Company’s common stock at an
exercise price of $0.25 per share which represented 5% of the outstanding shares
of the Company’s Common Stock on a fully diluted basis on the date the options
were issued.




PLAN OF
OPERATION. As stated above, during the next twelve months we plan to continue to
raise capital, interview and hire an independent consulting firm to verify
equipment production standards and test data and continue the introduction of
the ELIXIR water treatment system to the market place. If our production
standards and test data are confirmed by the independent consultants and if we
are able to raise sufficient capital, then we intend to hire competent
production support and administrative staff. We plan to engage in substantial
promotional activities in connection with the installation and operation of the
unit, including media exposure and access to other public agencies and potential
private customers. If the unit continues to operate successfully, we believe we
will receive orders for additional units.




NEW
CORPORATE FACILITIES. Effective November 1, 2007, the Company leased a 60,000
square foot research and development, production, engineering and administrative
office facility in Garden Grove, California.  As soon as we obtain
additional funding we will be adding a substantial number of additional
employees. We anticipate that all of our capital needs will need to be funded by
equity or debt financing.




ENGAGEMENT
OF THIRD PARTY TECHNICAL CONSULTANTS. The Company is in the process of
interviewing third party consulting firms to assist in verifying operational
efficiencies of the system and to establish testing protocols.




RESTATEMENT
OF FINANCIAL STATEMENTS




Subsequent
to filing Form 10-QSB for the six months ended March 31, 2008, the Company
determined that the beneficial conversion feature discounts and warrant
discounts related to the issuance of the convertible notes payable were not
properly accounted for, and certain warrants and options were omitted. As a
result, the Company recorded the following adjustments.


Page 40
of 59




2001 Executive Officers
Stock Option Plan




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




Balance
Sheet




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




The
Company began the analysis for the restatement as of and for the fiscal year
ended September 30, 2007 by applying FASB 133,paragraph 6 to ascertain if
the options remained derivatives as of September 30, 2007. All of the criteria
in the original analysis were met, and the options were determined to be within
the scope and definition of a derivative. EITF 00-19, paragraph 19 was applied
next, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. EITF 00-19, paragraph 10
was then applied. Paragraph 10 states that if classification changes as the
result of an event, the contract should be reclassified as of the date of the
event at fair value. The event responsible for the change in classification was
the issuance of the $1,025,000 Convertible Bridge Notes on July 17,
2007.




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




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




The
Company began the analysis for the restatement by applying FASB 133,paragraph 6 to ascertain if
the options remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the options were determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the options was determined to be $457,114 as of March 31, 2008 and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 3 years.




The
decrease in the fair value of the options was $766,474 for the three months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the options was $1,469,800 for the six months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




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


Page 41
of 59




The
change in the fair value of the options for the three months ended March 31,
2008 was $766,474 and included in decrease in warrant liability in the other
income (expense) section of the statement of operations.




The
change in the fair value of the options for the six months ended March 31, 2008
was $1,469,800 and included in decrease in warrant liability in the other income
(expense) section of the statement of operations.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the options of
$1,469,800.




Advisory Board
Compensation




On
October 1, 2004, the Company formed an advisory board consisting of four
members. Each member was to receive $5,000 monthly from October 1, 2004 to
February 22, 2007 for a total of $576,000, convertible by the advisory board
members into 11,520,000 shares of Common Stock at a rate of $0.05 per share. On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of Common Stock in exchange for warrants
exercisable at $0.25 per share. The Company determined that the accrued expense,
embedded beneficial conversion feature, embedded beneficial conversion feature
discount, and related amortization expense were not recorded at the date of
issuance, or prior to the restatement of the financial statements as of March
31, 2008, no payments have been made to any advisory board members, there has
been no conversion by any Advisory Board members of the accrued liability into
shares of Common Stock, and no warrant has been exercised.




Balance
Sheet




The
Company began the analysis for the restatement by applying paragraph 6 of
Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities,to ascertain if the
embedded beneficial conversion features were derivatives at the date of
issuance. The embedded beneficial conversion features had one or more underlings
and one or more notional amounts; required no initial investment; and required
or permitted net settlement. Therefore, the embedded beneficial conversion
features were determined to be within the scope and definition of a derivative
at the date of issuance. Next, FASB 133, paragraph 12 was applied to determine
if the embedded beneficial conversion features should be separated from the
accrued expense. The Company determined that the economic characteristics of the
embedded beneficial conversion features are not clearly and closely related to
the accrued expense; the embedded beneficial conversion features and accrued
expense are not remeasured at fair value at each balance sheet date; and a
separate contract with the same terms would be a derivative pursuant to FASB
133, paragraphs 6-11. Therefore, the embedded beneficial conversion features
were separated from the accrued expense to determine the classification and
valuation. EITF 00-19, paragraphs 7 and 8 were applied to determine the
classification. Paragraph 7 states that contracts which require net-cash
settlement are liabilities, and paragraph 8 states that contracts which give the
counterparty (advisory board members) a choice of net-cash settlement or
settlement in shares are liabilities. Therefore, the embedded conversion
features were determined to be liabilities. EITF 00-19, paragraph 9 was applied
to determine the value. Paragraph 9 of EITF 00-19 states all contracts
classified as liabilities should be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.




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




On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of common stock in exchange for warrants.
As a result, the beneficial conversion feature of $576,000 and the unamortized
beneficial conversion feature discount of $195,560 were written off for a net of
$380,440.




The
beneficial conversion features discount amortization was $15,104 for the three
and six months ended March 31, 2008, which increased accrued
expenses.




Statement
of Operations




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


Page 42
of 59




There was
no increase in the fair value of the beneficial conversion features for the
three or six months ended March 31, 2008.




The
beneficial conversion feature discount amortization was determined to be $15,104
and has been included in general and administrative expenses in the operating
expenses section of the statement of operations for the three and six months
ended March 31, 2008.




The
beneficial conversion feature of $576,000 and the beneficial conversion feature
discount of $195,560 were written off for a net of $380,440 and have been
included in the other income (expense) section of the statement of income
(operations) for the three and six months ended March 31, 2008.




Statement
of Cash Flows




Changes
in the statement of cash flows were the result of the amortization of the
beneficial conversion features discount of $15,104, and the net write off
of beneficial conversion feature and beneficial conversion feature discount of
$380,440 on the statement of operations.




Warrants Related to 2004
Stock Purchase Agreement




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




Balance
Sheet




The
Company began the analysis by applying FASB 133, paragraph 6to determine if
the warrants were within the scope and definition of a derivative at the date of
issuance. The warrants: had one or more underlings, and one or more notional
amounts; required no initial investment; and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. EITF 00-19, paragraphs 7 and 8 were then applied to determine
classification. These paragraphs state that contractswhich
require settlement in shares are equity instruments. EITF 00-19, paragraph 9 was
applied to determine the value of the options. Paragraph 9 of EITF 00-19 states
that contracts which require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.




The fair
value of the warrants was determined to be $24,366 at the date of issuance which
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.21% to 2.14%; volatility of 141.91%
to 170.27%; dividend yield of 0% and an expected term of 5 years. The
warrants were considered an expense prior to October 1, 2006. Therefore, $24,366
was recorded to additional paid-in capital and deficit accumulated during
development stage.




EITF
00-19, paragraph 19 was applied next. Paragraph 19 states that if a company is
required to obtain shareholder approval to increase the company’s authorized
shares in order to net-share or physically settle a contract, share settlement
is not controlled by the company and the contract is required to be classified
as a liability. EITF 00-19, paragraph 10 was then applied. This paragraph states
that if classification changes as the result of an event, the contract should be
reclassified as of the date of the event at fair value. The event responsible
for the change in classification was the issuance of the
$1,025,000 Convertible Bridge Notes on July 17, 2007.




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




EITF
00-19, paragraph 9 was also applied in the analysis. Paragraph 9 states that all
contracts classified as liabilities must be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.




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




The
decrease in the fair value of the warrants was $70,029 for the year ended
September 30, 2007, which was recorded to warrant liability and accumulated
deficit during development stage as of March 31, 2008.


Page 43
of 59




Statement
of Operations
  There was
no change in the fair value of the warrants for the three months ended March 31,
2008, due to their expiration.
  Statement
of Cash Flows
  There was
no change in the statement of cash flows for the three months ended March 31,
2008.
  Beneficial Conversion
Features
  As of
March 31, 2008, the Company had Convertible Bridge Notes outstanding totaling
$1,811,000 which were issued between October 17, 2006 and July 17, 2007. The
bridge notes included an embedded beneficial conversion feature that allowed the
holders of the convertible notes to convert their notes into shares of Common
Stock at rates between $0.01 and $0.22. The bridge notes mature between June 17,
2008 and December 31, 2008. The bridge notes accrue interest at rates between 8%
and 10%, and any accrued but unpaid interest is also convertible by the holder
of the bridge notes into shares of Common Stock at the same rate.
  Balance
Sheet
  The
Company began the analysis for the restatement as of and for the six months
ended March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the embedded beneficial conversion features remained derivatives subsequent to
the date of issuance. All of the criteria in the original analysis were met, and
the embedded beneficial conversion features issued were determined to be within
the scope and definition of a derivative. FASB 133, paragraph 12 was applied to
determine if the embedded beneficial conversion features should be separated
from the convertible bridge notes. All of the criteria in the original analysis
were met, and the embedded beneficial conversion features were separated from
the convertible bridge notes. EITF 00-19, paragraphs 7 and 8 were applied to
determine the classification. Paragraph 7 states that contracts which require
net-cash settlement are liabilities, and paragraph 8 states that contracts which
give the counterparty (holders of the convertible notes) a choice of net-cash
settlement or settlement in shares are liabilities. Therefore the embedded
conversion features were determined to be liabilities. The change in the
determination of the classification from equity to a liability was based on the
rights of the holders of the convertible notes to convert the notes into shares
of Common Stock. Therefore, share settlement is not controlled by the Company.
EITF 00-19, paragraph 9 was applied to determine the value of the embedded
beneficial conversion features. Paragraph 9 states that all contracts classified
as liabilities must be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
  The fair
value of the monthly embedded beneficial conversion features was determined to
be $874,882 as of March 31, 2008, which was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
1.56%; volatility of 72.53%; dividend yield of 0%; and an expected term
of .08 to .33 years.
  The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
  The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
  The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, which increased convertible
notes.
  The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, which increased convertible notes.
  Statement
of Operations
  The
beneficial conversion features were analyzed in accordance withEITF 00-19, paragraph 9
which requires all contracts classified as liabilities to be measured at fair
value, with changes in fair value reported in earnings as long as the contracts
remain classified as liabilities.
 Page 44
of 59




The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.




The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.




The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.




The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.




Statement
of Cash Flows




Changes
in the statement of cash flows for the three months ended March 31, 2008 were
the result of the decrease in the fair value of the beneficial conversion
features liability of $347,850 and the amortization of the beneficial conversion
features discounts of $285,610 on the statement of operations.




Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the fair value of the beneficial conversion features
liability of $555,929 and the amortization of the beneficial conversion features
discounts of $573,646 on the statement of operations.




Warrants related to
$1,025,000 of ConvertibleBridge
Notes




On July
17, 2007 the Company completed an offering of $1,025,000 of convertible notes to
a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common
Stock to holders of the convertible bridge notes, 465,908 shares of Common Stock
as a placement fee) at an exercise price of $0.50 per share. An amendment to the
convertible notes dated March 13, 2008 reduced the exercise price to $0.30 per
share.




Balance
Sheet




The
Company began the analysis for the restatement of the financial statements as of
and for the six months ended March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the warrants issued remained derivatives as of March 31, 2008. All of the
criteria in the original analysis were met, and the warrants issued were
determined to be within the scope and definition of a derivative. EITF 00-19,
paragraph 19 was applied next to determine classification. Paragraph 19 states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability. EITF 00-19, paragraph 9 was applied to
determine the value of the warrants. Paragraph 9 states that all contracts
classified as liabilities must be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.




The fair
value of the warrants was determined to be $135,950 as of March 31, 2008, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 4.17 to 4.25 years.




The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded by decreasing warrant
liabilities on the balance sheet by $185,827 ($143,242 related to the holders of
the convertible bridge notes, and $42,585 related to the placement
fee).




The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded by decreasing warrant liabilities
on the balance sheet by $363,982 ($268,470 related to the holders of the
convertible bridge notes, and $95,512 related to the placement
fee).




The
amortization of the warrant discount was $213,353 for the six months ended March
31, 2008, which increased convertible notes.


Page 45
of 59


Statement
of Operations




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




The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.




The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.




The
increase in the amortization of the warrant discount of $30,065 is included in
interest expense in the other income (expense) section of the statement of
operations.




Statement
of Cash Flows




Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the amount of $363,982 in thefair value of the
warrants at the date of issuance on the statement of operations, and
the increase in the amortization of the warrant discount of $30,065 on the
balance sheet.




Warrant Issued to
Consultant




On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the
Company. As compensation for his services, the Company granted to Mr. Maron a
five year warrant to purchase up to 8,539,312 shares of the Company’s Common
Stock at an exercise price of $0.25 per share. As per the terms of the warrant
agreement, the right to purchase 340,000 shares of Common Stock is not
exercisable until the notes dated June 6, 2007 (Convertible Notes 2 as discussed
in Note 6 to our financial statements) are eligible for conversion into shares
of Common Stock.  The warrant was not issued from the 2001
Executive Officers Stock Option Plan.




Balance
Sheet




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




The fair
value of the warrant was determined to be $1,448,321 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.26%, expected volatility of
98.01%, dividend yield of 0% and expected term of 5 years.




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




The
Company analyzed the warrant by applying FASB 133,paragraph 6 to ascertain if
the warrant remained a derivative as of December 31, 2007. All of the criteria
in the original analysis were met, and the warrant issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 was also
applied, which states that contracts classified as liabilities should be
measured at fair value at each balance sheet date, with changes in fair value
reported in earnings and disclosed in the financial statements as long as the
contracts remain classified as liabilities.




The fair
value of the warrant was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.


Page 46
of 59


The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.




The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.




The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the warrant of
$905,054.




Option Issued to Chief
Executive Officer




On
December 19, 2007, the Company entered into a one year Employment Agreement with
Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the
Company’s Chief Executive Officer. As compensation for his services, the Company
granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of
the Company’s Common Stock at an exercise price of $0.25 per share. As per the
terms of the stock option agreement, the right to purchase 340,000 shares of
Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible
Notes 2 as discussed in Note 6 to our financial statements) are eligible for
conversion into shares of Common Stock. These options were not issued from the
2001 Executive Officers Stock Option Plan.On the grant date, the
Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contractsthat require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company applied EITF 00-19, paragraph 9, which states that contracts that
require the company to deliver shares as part of a physical settlement or
net-share settlement should be initially measured at fair value.




Balance
Sheet




The fair
value of the option was determined to be $1,448,321 at the date of issuance, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 3.26%; volatility of 98.01%; dividend
yield of 0%; and an expected term of 5 years.




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




The
Company analyzed the option as of March 31, 2008 by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by a company, the contract is
required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.


Page 47
of 59


The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Operations




The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$905,054.




Option Issued to
Director




On
December 13, 2007, the Company’s Board of Directors approved the issuance to a
director of a five year option to purchase a total of 1,000,000 shares of the
Company’s common stock at an exercise price of $0.25 per share.




Balance
Sheet




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




The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.




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




The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $63,620 as of March 31, 2008, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Operations




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.


Page 48
of 59


The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.




Option Issued to Chief
Financial Officer




On
December 13, 2007, the Company’s Board of Directors approved the issuance to the
Chief Financial Officer of a five year option to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.




Balance
Sheet




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




The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.




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




The
Company analyzed the option by applying FASB 133,paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9, which
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.




The fair
value of the option was determined to be $63,620 as of March 31, 2008 using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Operations




The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.




Statement
of Cash Flows




The
change in the statement of cash flows for the six month ended March 31, 2008 was
the result of the change in the fair value of the option of
$107,900.


Page 49
of 59




Table 1 –
2008




Beneficial
                                                        
                                                        
                                                        WarrantConversion
                                                        
                                                        
                                                        Related
      toFeatures
                                                        
                                                        
                                                        $1,025,000
      of2001
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Warrants
                                                        
                                                        
                                                        and
                                                        
                                                        
                                                        ConvertibleExecutive
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Related
      to
                                                        
                                                        
                                                        Beneficial
                                                        
                                                        
                                                        Bridge
      NotesAs
                                                        
                                                        
                                                        Officers
                                                        
                                                        
                                                        Advisory
                                                        
                                                        
                                                        2004
      Stock
                                                        
                                                        
                                                        Conversion
                                                        
                                                        
                                                        and
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Option
      Issued
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Warrant
      Issued
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Warrants
      RelatedPreviously
                                                        
                                                        
                                                        Option
                                                        
                                                        
                                                        Board
                                                        
                                                        
                                                        Purchase
                                                        
                                                        
                                                        Features
                                                        
                                                        
                                                        Warrant
                                                        
                                                        
                                                        Warrant
      Issued
                                                        
                                                        
                                                        to
      Chief Executive
                                                        
                                                        
                                                        Warrant
      Issued
                                                        
                                                        
                                                        to
      Chief
                                                        
                                                        
                                                        10%
      Subordinated
                                                        
                                                        
                                                        to
      $750,000
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        AsStated
                                                        
                                                        
                                                        Plan
                                                        
                                                        
                                                        Compensation
                                                        
                                                        
                                                        Agreement
                                                        
                                                        
                                                        Discount
                                                        
                                                        
                                                        Discount
                                                        
                                                        
                                                        to
      Consultant
                                                        
                                                        
                                                        Officer
                                                        
                                                        
                                                        to
      Director
                                                        
                                                        
                                                        Financial
      Officer
                                                        
                                                        
                                                        Notes
      Payable
                                                        
                                                        
                                                        Stock
      Issuance
                                                        
                                                        
                                                        Other
                                                        
                                                        
                                                        RestatedBalance
      SheetCash
      and cash equivalent
                                                        
                                                        $
                                                        102,604
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        151
                                                        
                                                        
                                                        $
                                                        102,755Accounts
      payable
                                                        
                                                        
                                                        470,137
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        32,987
                                                        
                                                        
                                                        
                                                        503,124Accrued
      expenses
                                                        
                                                        
                                                        1,847,254
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        576,000
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2,423,254Convertible
      Notes, net
                                                        
                                                        
                                                        1,306,593
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        12,913
                                                        
                                                        
                                                        
                                                        206,465
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,525,97110%
      subordinated notes payable
                                                        
                                                        
                                                        332,182
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        20,169
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        38
                                                        
                                                        
                                                        
                                                        352,389Warrant
      liability
                                                        
                                                        
                                                        974,632
                                                        
                                                        
                                                        
                                                        457,114
                                                        
                                                        
                                                        
                                                        549,672
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        36,522
                                                        
                                                        
                                                        
                                                        128,358
                                                        
                                                        
                                                        
                                                        128,358
                                                        
                                                        
                                                        
                                                        63,620
                                                        
                                                        
                                                        
                                                        63,620
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        156,268
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2,558,164Beneficial
      conversion feature liability
                                                        
                                                        
                                                        857,678
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        17,204
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        874,882Additional
      paid-in capital
                                                        
                                                        
                                                        12,815,792
                                                        
                                                        
                                                        
                                                        (2,271,879
                                                        )
                                                        
                                                        
                                                        (269,848
                                                        )
                                                        
                                                        
                                                        (45,663
                                                        )
                                                        
                                                        
                                                        473,797
                                                        
                                                        
                                                        
                                                        135,406
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        10,837,605Deficit
      accumulated during development stage
                                                        
                                                        
                                                        (19,149,208
                                                        )
                                                        
                                                        
                                                        1,814,765
                                                        
                                                        
                                                        
                                                        (855,824
                                                        )
                                                        
                                                        
                                                        45,663
                                                        
                                                        
                                                        
                                                        (503,914
                                                        )
                                                        
                                                        
                                                        (378,393
                                                        )
                                                        
                                                        
                                                        (128,358
                                                        )
                                                        
                                                        
                                                        (128,358
                                                        )
                                                        
                                                        
                                                        (63,620
                                                        )
                                                        
                                                        
                                                        (63,620
                                                        )
                                                        
                                                        
                                                        (20,169
                                                        )
                                                        
                                                        
                                                        (156,268
                                                        )
                                                        
                                                        
                                                        (32,874
                                                        )
                                                        
                                                        
                                                        (19,620,178
                                                        )Statement of
      Operations (for thethree
      months ended March 31,
      2008)General
      and administrative
                                                        
                                                        $
                                                        395,890
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        165,022
                                                        
                                                        
                                                        $
                                                        32,540
                                                        
                                                        
                                                        $
                                                        593,452Research
      and development
                                                        
                                                        
                                                        328,694
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        334
                                                        
                                                        
                                                        
                                                        329,028Interest
      expense
                                                        
                                                        
                                                        (492,546
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        16,677
                                                        
                                                        
                                                        
                                                        (78,022
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (20,169
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (574,060
                                                        )Decrease
      (increase) in warrant liability
                                                        
                                                        
                                                        273,778
                                                        
                                                        
                                                        
                                                        766,474
                                                        
                                                        
                                                        
                                                        983,628
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (36,522
                                                        )
                                                        
                                                        
                                                        972,165
                                                        
                                                        
                                                        
                                                        972,165
                                                        
                                                        
                                                        
                                                        113,845
                                                        
                                                        
                                                        
                                                        113,845
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        8,754
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        4,168,132Increase
      in beneficial conversion feature liability
                                                        
                                                        
                                                        364,944
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (17,204
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        347,740Basic
      and dilutive loss per share
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -Statement of
      Operations (for thesix
      months ended March 31, 2008)General
      and administrative
                                                        
                                                        $
                                                        1,526,663
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        1,557,705
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        1,033,412
                                                        
                                                        
                                                        $
                                                        1,033,412
                                                        
                                                        
                                                        $
                                                        171,520
                                                        
                                                        
                                                        $
                                                        171,520
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        165,022
                                                        
                                                        
                                                        $
                                                        32,540
                                                        
                                                        
                                                        $
                                                        5,691,794Research
      and development
                                                        
                                                        
                                                        565,598
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        334
                                                        
                                                        
                                                        
                                                        565,932Interest
      expense
                                                        
                                                        
                                                        (906,150
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        32,816
                                                        
                                                        
                                                        
                                                        (167,287
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (20,169
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (1,060,790
                                                        )Decrease
      (increase) in warrant liability
                                                        
                                                        
                                                        427,991
                                                        
                                                        
                                                        
                                                        1,469,800
                                                        
                                                        
                                                        
                                                        1,008,033
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (12,580
                                                        )
                                                        
                                                        
                                                        905,054
                                                        
                                                        
                                                        
                                                        905,054
                                                        
                                                        
                                                        
                                                        107,900
                                                        
                                                        
                                                        
                                                        107,900
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        8,754
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        4,927,906Increase
      in beneficial conversion feature liability
                                                        
                                                        
                                                        637,688
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (81,759
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        555,929Write-off
      of beneficial conversion feature
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        380,440
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        380,440Basic
      and dilutive loss per share
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -Statement
      of Operations (sinceinception)General
      and administrative
                                                        
                                                        $
                                                        14,680,234
                                                        
                                                        
                                                        $
                                                        28,361
                                                        
                                                        
                                                        $
                                                        2,240,253
                                                        
                                                        
                                                        $
                                                        24,366
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        1,033,412
                                                        
                                                        
                                                        $
                                                        1,033,412
                                                        
                                                        
                                                        $
                                                        171,520
                                                        
                                                        
                                                        $
                                                        171,520
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        165,022
                                                        
                                                        
                                                        $
                                                        (526,801
                                                        )
                                                        
                                                        $
                                                        19,021,299Research
      and development
                                                        
                                                        
                                                        2,015,071
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        526,801
                                                        
                                                        
                                                        
                                                        2,541,872Interest
      expense
                                                        
                                                        
                                                        (1,463,002
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (303,313
                                                        )
                                                        
                                                        
                                                        (255,021
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (20,169
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (196,214
                                                        )
                                                        
                                                        
                                                        (2,237,719
                                                        )Decrease
      in warrant liability
                                                        
                                                        
                                                        427,991
                                                        
                                                        
                                                        
                                                        1,814,765
                                                        
                                                        
                                                        
                                                        1,008,033
                                                        
                                                        
                                                        
                                                        70,029
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        41,737
                                                        
                                                        
                                                        
                                                        905,054
                                                        
                                                        
                                                        
                                                        905,054
                                                        
                                                        
                                                        
                                                        107,900
                                                        
                                                        
                                                        
                                                        107,900
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        8,754
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        5,397,217Increase
      in beneficial conversion feature liability
                                                        
                                                        
                                                        637,688
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (4,044
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (81,759
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        551,885Write-off
      of beneficial conversion feature
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        380,440
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        380,440Statement of Cash
      Flows (for thesix
      months ended March 31, 2008)Net
      loss
                                                        
                                                        $
                                                        (2,077,833
                                                        )
                                                        
                                                        $
                                                        1,469,800
                                                        
                                                        
                                                        $
                                                        (169,232
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        (48,943
                                                        )
                                                        
                                                        $
                                                        (179,867
                                                        )
                                                        
                                                        $
                                                        (128,358
                                                        )
                                                        
                                                        $
                                                        (128,358
                                                        )
                                                        
                                                        $
                                                        (63,620
                                                        )
                                                        
                                                        $
                                                        (63,620
                                                        )
                                                        
                                                        $
                                                        (20,169
                                                        )
                                                        
                                                        $
                                                        (156,268
                                                        )
                                                        
                                                        $
                                                        (32,874
                                                        )
                                                        
                                                        $
                                                        (1,599,342
                                                        )Amortization
      of beneficial conversionfeatures discount and warrant
      discount
                                                        
                                                        
                                                        669,025
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        10,072
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (32,816
                                                        )
                                                        
                                                        
                                                        167,287
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        20,169
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        38
                                                        
                                                        
                                                        
                                                        833,775Stock
      based compensation expense- employee
                                                        
                                                        
                                                        414,908
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,033,412
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        171,520
                                                        
                                                        
                                                        
                                                        171,520
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,791,360Stock
      based compensation expense- consultant
                                                        
                                                        
                                                        439,909
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,557,705
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,008,413
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        165,022
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        3,171,049(Decrease)
      increase in warrant liability
                                                        
                                                        
                                                        (427,991
                                                        )
                                                        
                                                        
                                                        (1,469,800
                                                        )
                                                        
                                                        
                                                        (1,008,033
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        12,580
                                                        
                                                        
                                                        
                                                        (905,054
                                                        )
                                                        
                                                        
                                                        (905,054
                                                        )
                                                        
                                                        
                                                        (107,900
                                                        )
                                                        
                                                        
                                                        (107,900
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (8,754
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (4,927,906
                                                        )Increase
      in beneficial conversion feature liaiblity
                                                        
                                                        
                                                        (637,688
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        81,759
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (555,929
                                                        )Write-off
      of beneficial
                                                          conversion
      feature
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (380,440
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (380,440
                                                        )Accounts
      payable
                                                        
                                                        
                                                        312,738
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        32,987
                                                        
                                                        
                                                        
                                                        345,725Accrued
      expenses
                                                        
                                                        
                                                        159,581
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        576,000
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        735,581Cash
      and cash equivalents
                                                        
                                                        
                                                        102,604
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        151
                                                        
                                                        
                                                        
                                                        102,755


Page 50
of 59





Beneficial
                        
                        
                        WarrantConversion
                        
                        
                        Related
      toFeatures
                        
                        
                        $1,025,000
      of2001
                        
                        
                        
                        
                        
                        Warrants
                        
                        
                        and
                        
                        
                        ConvertibleExecutive
                        
                        
                        
                        
                        
                        Related
      to
                        
                        
                        Beneficial
                        
                        
                        Bridge
      NotesAs
                        
                        
                        Officers
                        
                        
                        Advisory
                        
                        
                        2004
      Stock
                        
                        
                        Conversion
                        
                        
                        and
                        
                        
                        
                        
                        
                        Option
      Issued
                        
                        
                        
                        
                        
                        Warrant
      Issued
                        
                        
                        
                        
                        
                        Warrants
      RelatedPreviously
                        
                        
                        Option
                        
                        
                        Board
                        
                        
                        Purchase
                        
                        
                        Features
                        
                        
                        Warrant
                        
                        
                        Warrant
      Issued
                        
                        
                        to
      Chief Executive
                        
                        
                        Warrant
      Issued
                        
                        
                        to
      Chief
                        
                        
                        10%
      Subordinated
                        
                        
                        to
      $750,000
                        
                        
                        
                        
                        
                        AsStated
                        
                        
                        Plan
                        
                        
                        Compensation
                        
                        
                        Agreement
                        
                        
                        Discount
                        
                        
                        Discount
                        
                        
                        to
      Consultant
                        
                        
                        Officer
                        
                        
                        to
      Director
                        
                        
                        Financial
      Officer
                        
                        
                        Notes
      Payable
                        
                        
                        Stock
      Issuance
                        
                        
                        Other
                        
                        
                        RestatedStatement
      of Cash Flows (sinceinception)Net
      loss
                        
                        $
                        (19,377,983
                        )
                        
                        $
                        1,786,404
                        
                        
                        $
                        (855,824
                        )
                        
                        $
                        45,663
                        
                        
                        $
                        (385,072
                        )
                        
                        $
                        (213,284
                        )
                        
                        $
                        (128,358
                        )
                        
                        $
                        (128,358
                        )
                        
                        $
                        (63,620
                        )
                        
                        $
                        (63,620
                        )
                        
                        $
                        (20,169
                        )
                        
                        $
                        (156,268
                        )
                        
                        $
                        (59,689
                        )
                        
                        $
                        (19,620,178
                        )Amoritzation
      of beneficial conversionfeature discount and warrant
      discount
                        
                        
                        984,402
                        
                        
                        
                        
                        
                        
                        
                        153,888
                        
                        
                        
                        
                        
                        
                        
                        303,313
                        
                        
                        
                        255,021
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        20,169
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,716,793Stock
      based compensation expense - employee
                        
                        
                        414,908
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,033,412
                        
                        
                        
                        171,520
                        
                        
                        
                        171,520
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,835,957
                        
                        
                        
                        3,627,317Stock
      based compensation expense - non-employee
                        
                        
                        439,909
                        
                        
                        
                        636,661
                        
                        
                        
                        1,557,705
                        
                        
                        
                        24,366
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,033,412
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        156,268
                        
                        
                        
                        2,287,597
                        
                        
                        
                        6,135,918Warrants
      issued for consulting services
                        
                        
                        106,111
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (106,111
                        )
                        
                        
                        -Issuance
      of Common Stock for compensation
                        
                        
                        1,835,957
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,835,957
                        )
                        
                        
                        -Issuance
      of Common Stock for services
                        
                        
                        2,181,486
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,181,486
                        )
                        
                        
                        -Decrease
      in warrant liability
                        
                        
                        (427,991
                        )
                        
                        
                        (1,814,765
                        )
                        
                        
                        (1,008,033
                        )
                        
                        
                        (70,029
                        )
                        
                        
                        
                        
                        
                        
                        (41,737
                        )
                        
                        
                        (905,054
                        )
                        
                        
                        (905,054
                        )
                        
                        
                        (107,900
                        )
                        
                        
                        (107,900
                        )
                        
                        
                        
                        
                        
                        
                        (8,754
                        )
                        
                        
                        
                        
                        
                        
                        (5,397,217
                        )Decrease
      in beneficial conversion feature liability
                        
                        
                        (637,689
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        85,804
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (551,885
                        )Write-off
      of beneficial conversion
                          feature
                        
                        
                        
                        
                        
                        
                        
                        (380,440
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (380,440
                        )Loss
      on termniation of lease
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        129,166
                        
                        
                        
                        129,166Accural
      of liquidating damanges
                        
                        
                        138,375
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,375
                        
                        
                        
                        153,750Decrease
      in other receivables
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Increase
      in deposits
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Other
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Other
      current assets
                        
                        
                        (545,727
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        510,727
                        
                        
                        
                        (35,000
                        )Other
      receiveables
                        
                        
                        3,000Deposits
                        
                        
                        (204,600
                        )Other
      assets
                        
                        
                        140,370
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (244,970
                        )
                        
                        
                        (104,600
                        )Accounts
      payable
                        
                        
                        540,139
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (37,015
                        )
                        
                        
                        503,124Accrued
      expenses
                        
                        
                        1,991,622
                        
                        
                        
                        
                        
                        
                        
                        189,698
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,181,320Acquisition
      of machinery and equipment
                        
                        
                        (437,112
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        36,493
                        
                        
                        
                        (400,619
                        )Proceeds
      from issuance of notes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Proceeds
      from convertible notes payable
                        
                        
                        2,544,191
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (683,191
                        )
                        
                        
                        1,861,000Proceeds
      from 10% subordinated
                          notes
      payable
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        425,000
                        
                        
                        
                        425,000Receipt
      from (payments to) equity line of credit
                        
                        
                        456,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (27,336
                        )
                        
                        
                        428,664Proceeds
      from notes payable to
                          related
      party
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        457,433
                        
                        
                        
                        457,433Payments
      on notes payable to
                          related
      party
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (5,000
                        )
                        
                        
                        (5,000
                        )Payment
      on notes to officers
                        
                        
                        (51,596
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (166,906
                        )
                        
                        
                        (218,502
                        )Issuance
      of common stock for cash
                        
                        
                        7,376,094
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        10,000
                        
                        
                        
                        7,386,094Receipt
      of cash for stock to be issued
                        
                        
                        336,900
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (10,000
                        )
                        
                        
                        326,900




SIGNIFICANT
ACCOUNTING POLICIES AND ESTIMATES.




The
preparation of our consolidated financial statements in accordance with U.S.
GAAP requires management to make judgments, assumptions and estimates that
affect the amounts reported. A critical accounting estimate is an assumption
about highly uncertain matters and could have a material effect on the
consolidated financial statements if another, also reasonable, amount were used
or a change in the estimate is reasonably likely from period to period. We base
our assumptions on historical experience and on other estimates that we believe
are reasonable under the circumstances. Actual results could differ
significantly from these estimates. There were no changes in accounting policies
or significant changes in accounting estimates during the second quarter of the
2008 fiscal year which ended on March 31, 2008. Management believes the
following critical accounting policies reflect its more significant estimates
and assumptions.




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


Page 51
of 59


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




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




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




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




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




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




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




OFF-BALANCE
SHEET ARRANGEMENTS. We have no off-balance sheet arrangements, special purpose
entities or financing partnerships.




CAPITAL
EXPENDITURES. The Company currently has no commitments for capital
expenditures.




MATERIAL
TRENDS, EVENTS OR UNCERTAINTIES. Other than as discussed herein, the Company
does not know of any material trends, events or uncertainties that may impact
its operations in the future.


Page 52
of 59




CONTRACTUAL
OBLIGATIONS. The Company is committed under the following contractual
obligations




Contractual
                  Obligations
                
                Payments Due by PeriodTotal
                
                
                Less
      than 1
                  Year
                
                
                1
      to 3
                  Years
                
                
                3 to 5 Years
                
                
                Over
      5
                  YearsLong-Term
      Debt ObligationsCapital
      lease obligationsOperating
      lease obligations
                
                
                2,218,527
                
                
                
                432,525
                
                
                
                910,920
                
                
                
                875,412
                
                
                
                0Purchase
      obligationsOther
      long-term liabilities




RESULTS
OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2007).




Revenues
for the three months ended March 31, 2008 and 2007 were zero, as the Company has
not yet commenced the sale of its product.




The
Company incurred operating expenses of $964,409 for the three months ended March
31, 2008, an increase of $622,770 or approximately 182%, as compared to $341,639
for the three months ended March 31, 2007. General and administrative expenses
were $627,224 for the three months ended March 31, 2008, an increase of $293,580
or approximately 88%, as compared to $333,644 for the three months ended March
31, 2007. The increase in general and administrative expenses was primarily due
to the issuance of warrants having a fair value of $96,814 to the 10%
subordinated notes payable holders and $165,022 to purchasers of
stock. Research and development expenses incurred during the three months
ended March 31, 2008 were $329,028, and there were no research and development
expenses for the three months ended March 31, 2007.




Other
income and (expense) was $3,833,048 for the three months ended March 31, 2008,
an increase of $3,883,889 or approximately 7,639%, as compared to $(50,841) for
the three months ended March 31, 2007. Decrease in warrant liability was
$4,168,133 for the three months ended March 31, 2008 and represents the decrease
in the fair value of the option and warrant liability. The options and warrants
were required to be classified as liabilities as of July 17, 2007, and valued at
fair value on each balance sheet date, with the change in value reported in
earnings. Therefore there was no increase or decrease in the option and warrant
liability for the three months ended March 31, 2007. The decrease in beneficial
conversion feature liability of $347,740 for the three months ended March 31,
2008 represents the decrease in the fair value of the beneficial conversion
features liability. The beneficial conversion features were required to be
classified as liabilities as of July 17, 2007, and valued at fair value on each
balance sheet date, with the change reported in earnings. Therefore there was no
increase or decrease in the beneficial conversion features liability for the
three months ended March 31, 2007.  Interest expense increased to
$554,065 during the three months ended March 31, 2008, an increase of $502,719
or approximately 979%, as compared to $51,346 for the three months ended March
31, 2007. The increase in interest expense is primarily due to the amortization
of the beneficial conversion features discount of $309,814 and warrant discount
of $105,806. Loss on lease termination was $129,166 for the three months ended
March 31, 2008. There was no loss on termination of lease for the three months
ended March 31, 2007.




Net
income was $2,868,639 for the three months ended March 31, 2008, an
increase of $3,261,119 or approximately 831%, as compared to a net loss of
$392,480 for the three months ended March 31, 2007.




RESULTS
OF OPERATIONS (SIX MONTHS ENDED MARCH 31, 2008 COMPARED TO SIX MONTHS ENDED
MARCH 31, 2007).




Revenues
for the six months ended March 31, 2008 and 2007 were zero, as the Company has
not yet commenced the sale of its product.


Page 53
of 59


The
Company incurred operating expenses of $6,274,040 for the six months ended March
31, 2008, an increase of $5,647,884 or approximately 902%, as compared to
$626,156 for the six months ended March 31, 2007. General and administrative
expenses were $5,691,794 for the six months ended March 31, 2008, an increase of
$5,081,426 or approximately 833%, as compared to $610,368 for the six months
ended March 31, 2007. The increase in general and administrative expenses was
primarily due to the issuance of warrants having a fair value of
$5,010,748. Research and development expenses incurred during the six
months ended March 31, 2008 were $565,932, and there were no research and
development expenses for the six months ended March 31, 2007.




Other
income and (expense) was $4,675,598 for the six months ended March 31, 2008, an
increase of $4,835,261 or approximately 3,028%, as compared to $(159,663) for
the six months ended March 31, 2007. Decrease in warrant liability was
$4,927,906 for the six months ended March 31, 2008 and represents the decrease
in the fair value of the option and warrant liability. The options and warrants
were required to be classified as liabilities as of July 17, 2007, and valued at
fair value on each balance sheet date, with the change in value reported in
earnings. Therefore there was no increase or decrease in the option and warrant
liability for the six months ended March 31, 2007. The decrease in beneficial
conversion feature liability of $555,929 for the six months ended March 31, 2008
represents the decrease in the fair value of the beneficial conversion features
liability. The beneficial conversion features were required to be classified as
liabilities as of July 17, 2007, and valued at fair value on each balance sheet
date, with the change reported in earnings. Therefore there was no increase or
decrease in the beneficial conversion features liability for the six months
ended March 31, 2007.  Interest expense increased to $1,060,790 during
the six months ended March 31, 2008, an increase of $900,516 or approximately
562%, as compared to $160,274 for the six months ended March 31, 2007. The
increase in interest expense is primarily due to the amortization of the
beneficial conversion features discount of $597,850 and warrant discount of
$213,353. Loss on lease termination was $129,166 for the six months ended March
31, 2008. There was no loss on termination of lease for the six months ended
March 31, 2007.




Net loss
was $1,599,342 for the six months ended March 31, 2008, an increase of
$812,623 or approximately 103%, as compared to a net loss of $786,719 for the
six months ended March 31, 2007.




LIQUIDITY
AND CAPITAL RESOURCES. Net cash flows used in our operating activities was
$896,996 for the six months ended March 31, 2008, an increase of $550,655 or
approximately 159%, as compared to $346,341 for the six months ended March
31, 2007. Cash flows used in operating activities, not including the increase in
net loss, is primarily attributable to a decrease in warrant liabilities of
$4,927,906, a decrease in beneficial conversion features of $555,929, and a
write-off of beneficial conversion features of $380,440. The options and
warrants were required to be classified as liabilities as of July 17, 2007, and
valued at fair value on each balance sheet date, with the change in value
reported in earnings. Therefore there was no increase or decrease in the warrant
liabilities or beneficial conversion features for the six months ended March 31,
2007. Cash flows provided from operating activities is primarily attributable to
stock based compensation of $4,962,409, amortization of $833,775, an increase in
accounts payable of $345,724, and an increase in accrued expenses of
$174,508.




Net cash
flows used in our investing activities was $29,164 for the purchase of equipment
for the six months ended March 31, 2008, an increase of $16,192 or approximately
125%, as compared to $12,972 for the six months ended March 31,
2007.




Net cash
flows used in financing activities was $656,404 for the six months ended March
31, 2008, an increase of cash flows used of $85,204 or approximately 15%, as
compared to net cash flows provided by financing activities of $571,200 for the
six months ended March 31, 2007. Cash used in financing activities for the
six months ended March 31, 2008 included a payment of $5,000 toward a note
payable, payments of $27,336 toward notes payable under an equity line of
credit, and payments totaling $19,260 to officers for loans made to us. Cash
provided from financing activities for the six months ended March31, 2008
consisted proceeds of $425,000 from the issuance of 10% subordinated notes
payable and $283,000 for the purchase of common stock. Cash provided from
financing activities for the six months ended March 31, 2007 consisted of
$750,000 from the issuance of convertible notes.




On March
31, 2008, the Company had cash and cash equivalents of $102,755. The sole source
of liquidity has been borrowings from affiliates and the sale of our securities.
Management anticipates that additional capital will be required to finance the
Company's operations. The Company believes that anticipated proceeds from sales
of securities and other financing activities, plus anticipated cash flow from
operations during the 2008 fiscal year, will be sufficient to finance the
Company's operations.  However, the Company has no commitments for
financing or sales, and there can be no assurance that such financing will be
available or that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated. Also, the
Company may not be able to generate revenues from operations during the fiscal
year and, while there are anticipated sources of revenue, none of these sources
have progressed to the stage where we can rely on any of these anticipated
revenue sources.


Page 54
of 59


As of
March 31, 2008, the Company had an accumulated deficit of $19,620,178. It can be
expected that the future operating results will continue to be subject to many
of the problems, expenses, delays and risks inherent in the establishment of a
developmental business enterprise, many of which the Company cannot
control.




GOING
CONCERN OPINION. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. Through March
31, 2008, the Company has incurred cumulative losses of $19,620,178 including a
loss for the six months ended March 31, 2008 of $1,599,342. As the Company has
no cash flow from operations, its ability to transition from a development stage
company to an operating company is entirely dependent upon obtaining adequate
financing to finance its overhead, research and development activities, and
acquisition of production equipment. It is unknown when, if ever, the Company
will achieve a level of revenues adequate to support its cost structure. In
order for the Company to meet its basic financial obligations, including rent,
salaries, debt service and operations, it plans to seek additional equity or
debt financing. Because of the Company’s history and current debt levels, there
is considerable doubt that the Company will be able to obtain financing. Its
ability to meet its cash requirements for the next twelve months depends on its
ability to obtain such financing. Even if obtained, any such financing will
likely involve additional fees and debt service requirements. Accordingly, there
is no assurance that the Company will be able to implement its
plans.




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




ITEM
3             CONTROLS
AND PROCEDURES




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




We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended,  (the
“Exchange Act”), as of March 31, 2008, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission’s rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.  Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of March 31, 2008, our disclosure controls and procedures were not effective at
the reasonable assurance level due to the material weaknesses described
below.


Page 55
of 59


In light
of the material weaknesses described below, we performed additional analysis and
other post-closing procedures to ensure our financial statements were prepared
in accordance with generally accepted accounting principles.  We have
determined that our financial statements for the quarter ended March 31, 2008
could no longer be relied upon and, as described in Note 14 to the restated
financial statements, have restated our financial position as of March 31, 2008
and results of operations, changes in stockholders’ equity and cash flows for
the quarter ended March 31, 2008 and the cumulative period from October 3, 1994
(inception) to March 31, 2008.  Accordingly, we believe that the
restated financial statements included in this report fairly present, in all
material respects, our financial condition, results of operations and cash flows
for the periods presented.




A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.  Management has
identified the following three material weaknesses which have caused management
to conclude that, as of March 31, 2008, our disclosure controls and procedures
were not effective at the reasonable assurance level:




1.           We
do not have written documentation of our internal control policies and
procedures.  Written documentation of key internal controls over
financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act
and is applicable to us for the year ending September 30,
2008.  Management evaluated the impact of our failure to have written
documentation of our internal controls and procedures on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency
that resulted represented a material weakness.




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




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




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




Remediation
of Material Weaknesses




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




Changes
in Internal Control over Financial Reporting




During
the fiscal quarter ended March 31, 2008, the Company has not made any change to
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


Page 56
of 59


PART
II – OTHER INFORMATION




Item
1  Legal Proceedings




None




Item
2  Unregistered Sales of Equity Securities and Use of
Proceeds




From
January 3, 2008 through January 25, 2008, we sold and issued in a private
placement (the “Private Placement”) $425,000 in aggregate principal amount of
our Subordinated 10% Debentures (each, a “Debenture”, collectively, the
“Debentures”) along with warrants to purchase an aggregate of 850,000 shares of
our common stock at an exercise price of $0.40 per share (the
“Warrants”).




Each
Debenture has a maturity date one year from its date of issuance and all
outstanding principal and accrued interest of each Debenture will be due and
payable on such date unless sooner declared due and payable by the holder upon
the occurrence of an event of default. The Debentures accrue interest at the
rate of 10% per year and are subject to pre-payment penalties ranging from 10%
to 25% of the outstanding principal amount, depending on the date of
pre-payment.




The
Warrants have a term of six years and may be exercised on a cashless basis at
the election of the holder. The warrant exercise price and number of warrant
shares are subject to adjustment in the event of stock dividends, distributions
or subdivisions, stock combinations or consolidations, reclassifications,
exchanges or substitutions of our common stock, and the merger, consolidation or
sale of substantially all of our assets.




Out of
the $425,000 of Debentures and Warrants placed in the Private Placement, our
placement agent, Southridge Investment Group LLC (“Southridge”), placed $300,000
of such amount, for which we are obligated to pay Southridge a 10% commission in
the amount of $30,000 and issue Southridge a five-year warrant to purchase
85,000 shares of our common stock at an exercise price of $0.40 per share, in
substantially the same form as the Warrants.




The
Private Placement was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder, inasmuch as the securities were issued to accredited investors only
without any form of general solicitation or general advertising.




On
February 20, 2008 we issued 227,273 shares of our common stock to holders of
$50,000 in face value of our Bridge Notes. We relied on section 3(9) of the
Securities Act of 1933 in issuing these securities.




Item
3  Defaults upon Senior Securities




Under the
terms of a Registration Rights Agreement executed in connection with an offering
that closed on July 18, 2007, we were required to file a registration statement
under the Securities Act of 1933 in order to register the resale of the shares
of common stock issuable upon conversion of certain units it sold consisting of
Subordinated Convertible Debentures and Warrants. The units had a value of
$1,025,000. If we did not file a registration statement with respect to the
these securities within 45 days following the closing of the offering, or if the
registration statement was not declared effective by the Securities and Exchange
Commission within 90 days of the closing, then we are required to pay to each
purchaser damages equal to 1.5% of the purchase price paid by the purchaser for
the Subordinated Convertible Debentures for each 30 days that transpires after
these deadlines. The amount of the aggregate damages payable by us is limited to
15% of the purchase price. We had until August 31, 2007 to file the registration
statement. We filed the registration statement on November 14, 2007, incurring a
penalty for 78 days which amounted to $38,437. The registration statement has
not been declared effective as of the date of this report, therefore we have
incurred an additional penalty for 85 days totaling $115,313




Item
4  Submission of Matters to a vote of Security Holders




None




Item
5  Other Information




None


Page 57
of 59


Item
6  Exhibits




3.1
              Articles
      of Incorporation, as amended and restated
(1)
  3.2
              Bylaws,
      as amended and restated (1)
  10.1
              Amended
      and Restated Convertible Promissory Notes in favor of Calico Capital
      Management, LLC, BRAX Capital, LLC and Gene Salkind,
    M.D.(2)
 
 10.2
              Consulting
      Agreement dated February 21, 2008 with John H. Foster,
      Ph.D.(3)
 
 10.3
              Form
      of Securities Purchase Agreement(4)
 
 10.4
              Form
      of Subordinated 10% Debenture(4)
 
 10.5
              Form
      of Common Stock Purchase Warrant(4)
 
 10.6
              Termination
      Agreement dated March 14, 2008 between Rodney L. Anderson, Joey M.
      Anderson and Robert A Hasson(5)
 
 10.7
              Second
      Amended Convertible Promissory Notes in favor of Calico Capital
      Management, LLC, BRAX Capital, LLC and Gene Salkind,
    M.D.(6)
  31.1
              Certification
      Pursuant to Rule 13a - 14(a) and 15d -
14(a)(4)*
 
 31.2
              Certification
      Pursuant to Rule 13a - 14(a) and 15d -
14(a)(4)*
 
 32
              Certification
      Pursuant to Section 1350 of Title 18 of the United States
      Code*
  (1)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on July 15,
2003.
 
 (2)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on January 28,
2008.
 
 (3)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on February 25,
2008.
 
 (4)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on March 3,
2008.
 
 (5)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on March 17,
2008.
 
 (6)
              Incorporated
      by reference from the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on March 24,
2008.


Page 58
of 59


SIGNATURES




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: May
11, 2009




SIONIX
      CORPORATIONBy:
              /s/ Rodney AndersonRodney
      Anderson, Chief Executive Officer/s/ Robert A. HassonRobert
      A. Hasson, Chief Financial
Officer


Page 59
of 59