UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended  June 30,
2009





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from


Commission
file number   002-95626-D





SIONIX
      CORPORATION(Exact name of registrant as specified in its
      charter)





Nevada
                      (State or other jurisdiction of incorporation or organization)
                    87-0428526
                      (I.R.S. Employer Identification No.3880 East Eagle Drive, Anaheim,
      California
                      (Address
      of principal executive offices)
                    92807
                      (Zip
      Code)





Issuer’s
telephone number (714)
678-1000





(Former name, former address and former fiscal
      year, if changed since last
report)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes   ̈
No





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





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
      (Do not check if a smaller reporting company)
              Smaller
      reporting company x




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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  As of August 19, 2009 the
number of shares of the registrant’s classes of common stock outstanding was
145,859,105.









Table of
Contents





Part
      I - Financial Information
                
                3Item
      1. Financial Statements
                
                3Balance
      Sheets as of June 30, 2009 (Unaudited) and September 30,
    2008
                
                3Statements
      of Operations (Unaudited) for the three and nine months ended June 30,
      2009 and June 30, 2008 and from inception (October 3, 1994) to June 30,
      2009
                
                4Statement
      of Stockholders Equity (Deficit) (Unaudited) from Inception (October 3,
      1994) to June 30, 2009
                
                5Statements
      of Cash Flows (Unaudited) for the three and nine months ended June 30,
      2009 and June 30, 2008 and from inception (October 3, 1994) to June 30,
      2009
                
                8Notes
      to unaudited financial statements
                
                9Forward-Looking
      Statements
                
                10Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                
                30Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                
                35Item
      4T. Controls and Procedures
                
                36Part
      II – Other Information
                
                36Item
      1. Legal Proceedings
                
                37Item
      1A. Risk Factors
                
                37Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                
                37Item
      3. Defaults Upon Senior Securities
                
                37Item
      4. Submission of Matters to a Vote of Security Holders
                
                37Item
      5. Other Information
                
                37Item
      6. Exhibits
                
                38Signatures
                
                39




These
financials have not been reviewed by our auditors.As soon as they have been
reviewed by our auditor we will file an amended 10Q.




2




Part
I, Item 1.  Financial Statements.





Sionix
Corporation


Balance
Sheets





June 30,2009
                    
                    
                    September 30,(Unaudited)
                    
                    
                    2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    8,582
                    
                    
                    $
                    1,220,588Inventory
                    
                    
                    833,594Other
      current assets
                    
                    
                    28,665
                    
                    
                    
                    46,395TOTAL
      CURRENT ASSETS
                    
                    
                    870,841
                    
                    
                    
                    1,266,983PROPERTY
      AND EQUIPMENT, net
                    
                    
                    152,661
                    
                    
                    
                    87,101DEPOSITS
                    
                    
                    28,495
                    
                    
                    
                    33,095TOTAL
      ASSETS
                    
                    $
                    1,051,997
                    
                    
                    $
                    1,387,179LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    317,158
                    
                    
                    $
                    259,355Accrued
      expenses
                    
                    
                    2,739,329
                    
                    
                    
                    2,629,470Customer
      deposits
                    
                    
                    1,620,000
                    
                    
                    
                    1,260,000Liquidated
      damages liability
                    
                    
                    78,750
                    
                    
                    
                    153,750Notes
      payable to related parties
                    
                    
                    107,000
                    
                    
                    
                    114,000Short-term
      promissory notes payable
                    
                    
                    240,000
                    
                    
                    
                    -Convertible
      notes, net
                    
                    
                    1,761,333
                    
                    
                    
                    2,041,44310%
      subordinated debentures, net
                    
                    
                    482,492
                    
                    
                    
                    400,796Warrant
      and option liability
                    
                    
                    5,875,700
                    
                    
                    
                    3,446,823Beneficial
      conversion feature
                    
                    
                    -
                    
                    
                    
                    26,000TOTAL
      CURRENT LIABILITIES
                    
                    
                    13,221,762
                    
                    
                    
                    10,331,637STOCKHOLDERS'
      DEFICITCommon
      Stock (150,000,000 shares
      authorized; 144,459,105 shares issued and outstanding at June 30, 2009;
      136,684,616 shares issued and outstanding at September 30, 2008; 481,900
      subject to cancellation)
                    
                    
                    143,976
                    
                    
                    
                    134,274Additional
      paid-in capital
                    
                    
                    13,514,364
                    
                    
                    
                    12,688,495Shares
      to be issued
                    
                    
                    400
                    
                    
                    
                    126,429Deficit
      accumulated during development stage
                    
                    
                    (25,828,505
                    )
                    
                    
                    (21,893,656
                    )TOTAL
      STOCKHOLDERS' DEFICIT
                    
                    
                    (12,169,765
                    )
                    
                    
                    (8,944,458
                    )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                    
                    $
                    1,051,997
                    
                    
                    $
                    1,387,179





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




3




Sionix
Corporation


Statements
of Operations (Unaudited)





For the three months
                      
                      
                      For the nine months
                      
                      
                      Cummulative fromended June 30,
                      
                      
                      ended June 30,
                      
                      
                      Inception2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      (October 3, 1994)Revenues
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Operating
      expensesGeneral
      and administrative
                      
                      
                      179,311
                      
                      
                      
                      634,702
                      
                      
                      
                      1,144,202
                      
                      
                      
                      6,755,429
                      
                      
                      
                      21,919,482Research
      and development
                      
                      
                      182,980
                      
                      
                      
                      280,972
                      
                      
                      
                      567,790
                      
                      
                      
                      846,904
                      
                      
                      
                      3,604,663Depreciation
      and amortization
                      
                      
                      12,559
                      
                      
                      
                      8,157
                      
                      
                      
                      37,404
                      
                      
                      
                      24,472
                      
                      
                      
                      594,779Total
      operating expenses
                      
                      
                      374,850
                      
                      
                      
                      923,831
                      
                      
                      
                      1,749,396
                      
                      
                      
                      7,626,805
                      
                      
                      
                      26,118,924Loss
      from Operations
                      
                      
                      (374,850
                      )
                      
                      
                      (923,831
                      )
                      
                      
                      (1,749,396
                      )
                      
                      
                      (7,626,805
                      )
                      
                      
                      (26,118,924
                      )Other
      income (expense)Interest
      income
                      
                      
                      2
                      
                      
                      
                      1,564
                      
                      
                      
                      3,870
                      
                      
                      
                      2,843
                      
                      
                      
                      70,244Interest
      expense
                      
                      
                      (63,423
                      )
                      
                      
                      (313,696
                      )
                      
                      
                      (221,947
                      )
                      
                      
                      (977,912
                      )
                      
                      
                      (2,901,505
                      )Decrease
      (increase) in warrant liability
                      
                      
                      (3,623,669
                      )
                      
                      
                      (2,210,711
                      )
                      
                      
                      (1,992,282
                      )
                      
                      
                      2,702,841
                      
                      
                      
                      3,225,958Decrease
      (increase) in beneficial conversion features liability
                      
                      
                      
                      
                      
                      
                      659,811
                      
                      
                      
                      26,000
                      
                      
                      
                      1,215,740
                      
                      
                      
                      1,426,767Impairment
      of intangibles
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,267,278
                      )Inventory
      obsolesence
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (365,078
                      )Legal
      settlement
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      344,949Gain
      (loss) on settlement of debt
                      
                      
                      19,800
                      
                      
                      
                      
                      
                      
                      
                      3,616
                      
                      
                      
                      
                      
                      
                      
                      (351,795
                      )Loss
      on lease termination
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (125,015
                      )
                      
                      
                      (129,166
                      )Write-off
      of property and equipment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (125,015
                      )Write-off
      of beneficial conversion feature and discount
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      380,440Miscellaneous
                      
                      
                      92
                      
                      
                      
                      4,151
                      
                      
                      
                      90
                      
                      
                      
                      
                      
                      
                      
                      90Total
      Other Income (Expense)
                      
                      
                      (3,667,198
                      )
                      
                      
                      (1,858,881
                      )
                      
                      
                      (2,180,653
                      )
                      
                      
                      2,818,497
                      
                      
                      
                      308,611Loss
      before income taxes
                      
                      
                      (4,042,048
                      )
                      
                      
                      (2,782,712
                      )
                      
                      
                      (3,930,049
                      )
                      
                      
                      (4,808,308
                      )
                      
                      
                      (25,810,313
                      )Income
      Taxes
                      
                      
                      4,800
                      
                      
                      
                      
                      
                      
                      
                      4,800
                      
                      
                      
                      900
                      
                      
                      
                      18,192Net
      Income (Loss)
                      
                      $
                      (4,046,848
                      )
                      
                      $
                      (2,782,712
                      )
                      
                      $
                      (3,934,849
                      )
                      
                      $
                      (4,809,208
                      )
                      
                      $
                      (25,828,505
                      )Basic
      income (loss) per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.04
                      )Dilutive
      income (loss) per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.04
                      )Basic
      wighted average nubmer of shares of Common Stock
    outstanding
                      
                      
                      142,281,820
                      
                      
                      
                      113,816,474
                      
                      
                      
                      138,329,293
                      
                      
                      
                      113,816,474Dilutive
      wighted average nubmer of shares of Common Stock
    outstanding
                      
                      
                      142,281,820
                      
                      
                      
                      113,816,474
                      
                      
                      
                      138,329,293
                      
                      
                      
                      113,816,474





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




4




SIONIX
CORPORATION


(A
DEVELOPMENT STAGE COMPANY)


STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2009


(UNAUDITED)





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


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




5




SIONIX
CORPORATION


(A
DEVELOPMENT STAGE COMPANY)


STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) – Continued


FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2009


(UNAUDITED)





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


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




6




SIONIX
CORPORATION


(A
DEVELOPMENT STAGE COMPANY)


STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) - Continued


FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO MARCH 31, 2009


(UNAUDITED)





Deficit
                    
                    
                    TotalCommon
      Stock
                    
                    
                    Additional
                    
                    
                    Stock
                    
                    
                    Stock
                    
                    
                    Shares
                    
                    
                    Unamortized
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Number
                    
                    
                    
                    
                    
                    Paid-in
                    
                    
                    to
      be
                    
                    
                    Subscription
                    
                    
                    to
      be
                    
                    
                    Consulting
                    
                    
                    from
                    
                    
                    Equityof
      Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Issued
                    
                    
                    Receivable
                    
                    
                    Cancelled
                    
                    
                    Fees
                    
                    
                    Inception
                    
                    
                    (Deficit)Balance
      at September 30, 2004, Restated
                    
                    
                    102,042,286
                    
                    
                    
                    102,042
                    
                    
                    
                    13,294,405
                    
                    
                    
                    43,900
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (13,075
                    )
                    
                    
                    (14,080,615
                    )
                    
                    
                    (653,343
                    )Amortization
      of consulting fees
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13,075
                    
                    
                    
                    
                    
                    
                    
                    13,075Net
      loss for the year ended September 30, 2005
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (722,676
                    )
                    
                    
                    (722,676
                    )Balance
      at September 30, 2005
                    
                    
                    102,042,286
                    
                    
                    
                    102,042
                    
                    
                    
                    13,294,405
                    
                    
                    
                    43,900
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (14,803,291
                    )
                    
                    
                    (1,362,944
                    )Net
      loss for the year ended September 30, 2006
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,049,319
                    )
                    
                    
                    (1,049,319
                    )Balance
      at September 30, 2006
                    
                    
                    102,042,286
                    
                    
                    
                    102,042
                    
                    
                    
                    13,294,405
                    
                    
                    
                    43,900
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (15,852,610
                    )
                    
                    
                    (2,412,263
                    )Shares
      issued for services
                    
                    
                    4,592,915
                    
                    
                    
                    4,593
                    
                    
                    
                    80,336
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    84,929Reclassification
      of 2001 Executive Option Plan as of July 17, 2007
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,271,879
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,271,879
                    )Reclassification
      of beneficial conversion features liability related to advisory board
      compensation as of July 17, 2007
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (269,851
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (269,851
                    )Reclassification
      of warrants related to 2004 stock purchase agreement as of July 17,
      2007
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (70,029
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (70,029
                    )Net
      loss for the year ended September 30, 2007
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,168,226
                    )
                    
                    
                    (2,168,226
                    )Balance
      at September 30, 2007
                    
                    
                    106,635,201
                    
                    
                    
                    106,635
                    
                    
                    
                    10,762,982
                    
                    
                    
                    43,900
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (18,020,836
                    )
                    
                    
                    (7,107,319
                    )Shares
      issued for services
                    
                    
                    1,539,750
                    
                    
                    
                    1,540
                    
                    
                    
                    254,330
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    255,870Shares
      to be issued for services
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    126,029
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    126,029Shares
      converted from debt
                    
                    
                    17,149,359
                    
                    
                    
                    17,149
                    
                    
                    
                    886,633
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    903,782Shares
      issued for cash
                    
                    
                    8,950,003
                    
                    
                    
                    8,950
                    
                    
                    
                    784,550
                    
                    
                    
                    (43,500
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    750,000Net
      loss for the year ended September 30, 2008
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,872,820
                    )
                    
                    
                    (3,872,820
                    )Balance
      at September 30, 2008
                    
                    
                    134,274,313
                    
                    
                    
                    134,274
                    
                    
                    
                    12,688,495
                    
                    
                    
                    126,429
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (21,893,656
                    )
                    
                    
                    (8,944,458
                    )Shares
      issued for services
                    
                    
                    1,200,139
                    
                    
                    
                    1,200
                    
                    
                    
                    225,029
                    
                    
                    
                    (126,029
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    100,200Shares
      converted from debt
                    
                    
                    7,669,419
                    
                    
                    
                    7,669
                    
                    
                    
                    476,673
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    484,342Shares
      issued for property and equipment
                    
                    
                    833,333
                    
                    
                    
                    833
                    
                    
                    
                    124,167
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    125,000Net
      income for the nine months ended June 30, 2009
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,934,849
                    )
                    
                    
                    (3,934,849
                    )Balance
      at June 30, 2009
                    
                    
                    143,977,204
                    
                    
                    $
                    143,976
                    
                    
                    $
                    13,514,364
                    
                    
                    $
                    400
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (25,828,505
                    )
                    
                    $
                    (12,169,765
                    )





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




7




Sionix
Corporation


A
Development Stage Company


Statement
of Cash Flows (Unaudited)





CummulativefromFor the Nine Months
                          
                          
                          InceptionEnded June 30,
                          
                          
                          (October 3, 1994) to2009
                          
                          
                          2008
                          
                          
                          June 30,2009Operating
      activities:Net
      income (loss)
                          
                          $
                          (3,934,849
                          )
                          
                          $
                          (4,809,208
                          )
                          
                          $
                          (25,828,505
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                          
                          
                          37,404
                          
                          
                          
                          24,472
                          
                          
                          
                          681,696Amortization
      of beneficial conversion features discount and warrant
      discount
                          
                          
                          2,890
                          
                          
                          
                          1,073,445
                          
                          
                          
                          2,050,229Stock
      based compensation expense - employee
                          
                          
                          187,844
                          
                          
                          
                          
                          
                          
                          
                          3,866,746Stock
      based compensation expense - consultant
                          
                          
                          238,244
                          
                          
                          
                          5,799,646
                          
                          
                          
                          6,888,835Impairment
      of assets
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          514,755Write-down
      of obsolete assets
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          38,862Impairment
      of intangible assets
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,117,601Loss
      on settlement of debt
                          
                          
                          (19,800
                          )
                          
                          
                          
                          
                          
                          
                          364,777Loss
      on lease termination
                          
                          
                          
                          
                          
                          
                          126,111
                          
                          
                          
                          129,166Write-off
      of beneficial conversion features
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (576,000
                          )Stock
      issued for services and rent
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          114,850Accrual
      of liquidating damages
                          
                          
                          
                          
                          
                          
                          138,375
                          
                          
                          
                          153,750Other
                          
                          
                          27,582
                          
                          
                          
                          
                          
                          
                          
                          (771,462
                          )(Increase)
      decrease in assets:Inventory
                          
                          
                          (833,594
                          )
                          
                          
                          
                          
                          
                          
                          (833,594
                          )Other
      current assets
                          
                          
                          17,730
                          
                          
                          
                          (77,269
                          )
                          
                          
                          (28,665
                          )Other
      assets
                          
                          
                          4,600
                          
                          
                          
                          
                          
                          
                          
                          (128,495
                          )Increase
      (decrease) in liabilities:Accounts
      payable
                          
                          
                          197,604
                          
                          
                          
                          409,406
                          
                          
                          
                          613,123Accrued
      expenses
                          
                          
                          288,074
                          
                          
                          
                          (139,840
                          )
                          
                          
                          2,933,286Customer
      deposits
                          
                          
                          360,000
                          
                          
                          
                          900,000
                          
                          
                          
                          1,620,000Warrant
      liability
                          
                          
                          2,000,811
                          
                          
                          
                          (2,702,841
                          )
                          
                          
                          (3,217,429
                          )Beneficial
      conversion feature liability
                          
                          
                          (26,000
                          )
                          
                          
                          (1,215,741
                          )
                          
                          
                          (1,426,768
                          )Net
      cash used in operating activities
                          
                          
                          (1,451,460
                          )
                          
                          
                          (473,444
                          )
                          
                          
                          (11,723,242
                          )Investing
      activities:Acquisition
      of property and equipment
                          
                          
                          (5,546
                          )
                          
                          
                          (26,111
                          )
                          
                          
                          (473,553
                          )Acquisition
      of patents
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (158,212
                          )Net
      cash used in investing activities
                          
                          
                          (5,546
                          )
                          
                          
                          (26,111
                          )
                          
                          
                          (631,765
                          )Financing
      activities:Payment
      on notes payable to officer
                          
                          
                          
                          
                          
                          
                          (19,260
                          )
                          
                          
                          (218,502
                          )Proceeds
      from notes payable, related party
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          442,433Payments
      on notes payable to related party
                          
                          
                          
                          
                          
                          
                          (5,000
                          )
                          
                          
                          428,664Receipt
      from (payments to) equity line of credit
                          
                          
                          
                          
                          
                          
                          (27,336
                          )Receipt
      of proceeds from short term notes
                          
                          
                          240,000
                          
                          
                          
                          
                          
                          
                          
                          240,000Proceeds
      from convertible notes payable
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,861,000Proceeds
      from 10% subordinted notes payable
                          
                          
                          
                          
                          
                          
                          425,000
                          
                          
                          
                          425,000Issuance
      of common stock
                          
                          
                          5,000
                          
                          
                          
                          330,000
                          
                          
                          
                          8,184,594Receipt
      of cash for stock to be issued
                          
                          
                          
                          
                          
                          
                          420,000
                          
                          
                          
                          400Net
      cash provided by (used in) financing activities
                          
                          
                          245,000
                          
                          
                          
                          1,123,404
                          
                          
                          
                          12,363,589Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          (1,212,006
                          )
                          
                          
                          623,849
                          
                          
                          
                          8,582Cash
      and cash equivalents balances:Beginning
      of period
                          
                          
                          1,220,588
                          
                          
                          
                          372,511End
      of month
                          
                          $
                          8,582
                          
                          
                          $
                          996,360
                          
                          
                          $
                          8,582Cash
      and cash equivalents paid for:Interest
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Income
      taxes
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -





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




8




Sionix
Corporation


June
30, 2009


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




Note
2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




CASH AND
CASH EQUIVALENTS




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




INVENTORY




Inventory
is stated at the lower of cost, using the first in, first out method, or market.
Management compares the cost of inventories with the market value, and an
allowance is made for writing down the inventories to their market value, if
lower.  As of June 30, 2009, the Company believes that no reserve is
required. Inventory at June 30, 2009 was $831,175 and consisted of work in
process.




PROPERTY
AND EQUIPMENT




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




Property
and equipment are being depreciated and amortized on the straight-line basis
over the following estimated useful lives:




YearsMachinery
      and equipment
                    
                    5Furniture
      and fixtures
                    
                    3-5Leasehold
      improvements
                    
                    3





WARRANTS
AND OPTIONS




The
Company applied Statement of Financial Accounting Standards (SFAS) 133, “Accounting for Derivative
Instruments and Hedging Activities”,Statement of Financial Accounting
Standards (SFAS) 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity”, and Emerging Issue Task Force
(EITF) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”, to all warrants and options
issued.




On the
grant date, the Company applied SFAS 133, paragraph 6 to determine if
warrants and options issued were within the scope and definition of a
derivative. All warrants and options had one or more underlings, one or more
notional amounts, required no initial investment, and required or permitted net
settlement. Therefore, they were determined to be derivatives. In order to
determine how to classify the warrants and options, the Company followed the
guidance of paragraphs 7 and 8 of EITF 00-19.In order to determine the
value of the warrants and 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.




9




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 warrants and options as of June 30, 2009 by following the guidance of SFAS
133, paragraph 6 to ascertain if the warrants and options issued remained
derivatives as of June 30, 2009. All of the criteria in the original analysis
were met, and the warrants and 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.




BENEFICIAL
CONVERSION FEATURES




The
Company applied Statement of Financial Accounting Standards (SFAS) 133, “Accounting for Derivative
Instruments and Hedging Activities”,Statement of Financial Accounting
Standards (SFAS) 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity”, and Emerging Issue Task Force
(EITF) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”, to beneficial conversion
features of convertible notes payable.





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
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.




10




The
Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
embedded beneficial conversion features remained derivatives as of June 30,
2009. 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 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.




REVENUE
RECOGNITION




The
Company applies Securities Exchange Commission Staff Accounting
Bulletin No. 104 for the recognition of revenues. The Company does not
recognize revenue unless: (i) there is persuasive evidence of an
arrangement; (ii) title and risk of loss has passed to the customer, delivery
has occurred or the services have been rendered; (iii) the sales price is fixed
or determinable; and (iv) 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 collectability based on a number of factors,
including past transaction and collection history with a customer and the
creditworthiness of the customer. The Company plans to perform ongoing credit
evaluations of its customers' financial condition. If the Company determines
that collectability of the sales price is not reasonably assured, revenue
recognition will be deferred until such time as collection becomes reasonably
assured, which is generally upon receipt of payment from the
customer.




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




ADVERTISING




The cost
of advertising is expensed as incurred, and included in general and
administrative expenses. There were no advertising costs for the three or nine
months ended June 30, 2009. Total advertising costs were $945 and $3,385 for the
three and nine months ended June 30, 2008, respectively.




RESEARCH
AND DEVELOPEMENT




The cost
of research and development is expensed as incurred. Total research and
development costs were $182,980 and $567,790 for the three and nine months ended
June 30, 2009, respectively. Total research and development costs were $280,972
and $846,904 for the three and nine months ended June 30, 2008.




11




STOCK
BASED COMPENSATION




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




EARNINGS
PER SHARE




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




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




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




For
      the Three Months Ended June 30,2009
                              
                              
                              2008Net
                              
                              
                              
                              
                              
                              Per
                              
                              
                              Net
                              
                              
                              
                              
                              
                              PerLoss
                              
                              
                              Shares
                              
                              
                              Share
                              
                              
                              Loss
                              
                              
                              Shares
                              
                              
                              ShareBasic
      Earnings Per ShareNet
      Loss Available to Stockholders
                              
                              $
                              (4,046,011
                              )
                              
                              
                              142,281,820
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              (2,782,712
                              )
                              
                              
                              113,816,474
                              
                              
                              $
                              (0.02
                              )Effect
      of Dilutive Securities
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
      Earnings Per Share
                              
                              $
                              (4,046,011
                              )
                              
                              
                              142,281,820
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              (2,782,712
                              )
                              
                              
                              113,816,474
                              
                              
                              $
                              (0.02
                              )




For
      the Nine Months Ended June 30,2009
                              
                              
                              2008Net
                              
                              
                              
                              
                              
                              Per
                              
                              
                              Net
                              
                              
                              
                              
                              
                              PerLoss
                              
                              
                              Shares
                              
                              
                              Share
                              
                              
                              Loss
                              
                              
                              Shares
                              
                              
                              ShareBasic
      Earnings Per ShareNet
      Loss Available to Stockholders
                              
                              $
                              (4,809,208
                              )
                              
                              
                              138,328,293
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              (4,809,208
                              )
                              
                              
                              113,816,474
                              
                              
                              $
                              (0.04
                              )Effect
      of Dilutive Securities
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
      Earnings Per Share
                              
                              $
                              (4,809,208
                              )
                              
                              
                              138,328,293
                              
                              
                              $
                              (0.03
                              )
                              
                              $
                              (4,809,208
                              )
                              
                              
                              113,816,474
                              
                              
                              $
                              (0.04
                              )




FAIR
VALUE OF FINANCIAL INSTRUMENTS




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




12




CONCENTRATION
OF CREDIT RISK




During
the nine months ended June 30, 2008 the Company had deposits in financial
institutions over the federally insured limits of $100,000. The Company does not
believe there is any credit risk related to these deposits due to the financial
condition of the financial institution.




RELATED
PARTY TRANSACTION




On
October 14, 2008, the Company entered into an agreement to purchase machinery
and equipment with a fair value of $125,000 from RJ Metal, Co. As compensation,
the Company issued 833,333 shares of Common Stock with a fair value of $108,333
to the shareholders of RJ Metal, Co. The purchase qualified as a related party
transaction because the Company’s Chief Executive Officer and director, is also
a director, officer and significant stockholder of RJ Metal, Co.




USE OF
ESTIMATES




The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States (“GAAP”) requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.  Significant estimates include collectibility of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.




RECLASSIFICATIONS




Certain
items in the prior financial statements have been reclassified to conform to the
current period’s presentation. Due from officer of $92,500 from the balance
sheet as of September 30, 2008 has been reclassified in the accrued expenses.
This reclassification has no effect on the previously reported net
loss.




Note
3  PROPERTY AND EQUIPMENT




Property
and equipment consisted of the following at:




June 30,2009
                              
                              
                              September 30,(Unaudited)
                              
                              
                              2008Machinery
      and equipment
                              
                              $
                              369,391
                              
                              
                              $
                              266,425Furniture
      and fixtures
                              
                              
                              41,176
                              
                              
                              
                              41,176Leasehold
      improvement
                              
                              
                              1,695
                              
                              
                              
                              1,695TOTAL
      PROPERTY AND EQUIPMENT
                              
                              
                              412,262
                              
                              
                              
                              309,296Less
      accumulated depreciation
                              
                              
                              (259,601
                              )
                              
                              
                              (222,195
                              )NET
      PROPERTY AND EQUIPMENT
                              
                              $
                              152,661
                              
                              
                              $
                              87,101




Depreciation
expenses for the three and nine months ended June 30, 2009 were $12,559 and
$37,404, respectively. Depreciation expenses for the three and nine months ended
June 30, 2008 were $8,157 and $24,472, respectively




Note
4  ACCRUED EXPENSES




Accrued
expenses consisted of the following at:




13




June 30,2009
                          
                          
                          September 30,(Unaudited)
                          
                          
                          2008Accrued
      salaries
                          
                          $
                          1,486,880
                          
                          
                          $
                          1,400,944Advisory
      board compensation
                          
                          
                          576,000
                          
                          
                          
                          576,000Auto
      allowance accruals
                          
                          
                          104,785
                          
                          
                          
                          94,408Interest
      payable
                          
                          
                          339,618
                          
                          
                          
                          272,016Other
      accruals
                          
                          
                          232,046
                          
                          
                          
                          286,102TOTAL
      ACCRUED EXPENSES
                          
                          $
                          2,739,329
                          
                          
                          $
                          2,629,470





Note
5  CUSTOMER DEPOSITS




In May
2008, the Company received an order for a water filtration system, which
required a deposit. The Company has not recognized the revenue related to the
water filtration system. As of June 30, 2009 and September 30, 2008 customer
deposits were $1,620,000 and $1,260,000, respectively.




Note
6  NOTES PAYABLE – RELATED PARTIES




The
Company has received advances in the form of unsecured promissory notes from
stockholders in order to pay ongoing operating expenses. These notes bear
interest at rates up to 13% and are due on demand. As of June 30, 2009 and
September 30, 2008, notes payable amounted to $107,000 and $114,000.
Accrued interest on the notes amounted to $81,494 and $74,482 at June 30,
2009 and September 30, 2008, respectively, and is included in accrued expenses.
Interest expenses on these notes for the three and nine months ended June 30,
2009 were $2,954 and $8,827, respectively. Interest expenses on these notes
for the three and nine months ended June 30, 2008 were $3,204 and $9,647,
respectively.




Note
7  SHORT-TERM PROMISSORY NOTES




From June
5 to June 26, 2009, the Company borrowed a total of $240,000 in principal amount
from Steel Pier Capital Advisors and Steel Pier Capital Fund, LP.  The
loans are evidenced by four promissory notes (the “Notes”) with principal
amounts ranging from $40,000 to $75,000. As consideration for the loans, the
Company issued a total of 500,000 shares of common stock to Steel Pier Capital
Fund, LP. The Notes accrue interest at the rate of 10% per annum until the
principal amount and all accrued interest is repaid.  There is no
prepayment penalty associated with the Notes.





The Notes
mature upon the earlier of: (i) two business days after the receipt of funds
from Mourant Cayman Corporate Services LTD or any other financing or investment
source to the Company; (ii) two business days after receiving funds from
Innovative Water Equipment, Inc.; or (iii) July 7, 2009.





Upon an
event of default, the holder of a Note may accelerate the Note and declare all
amounts due under the Note to be due and payable.  An event of default
is defined as (i) any failure to pay any amount of principal or interest when
due; (ii) commencement of a voluntary bankruptcy proceeding, consent to relief
in any involuntary bankruptcy proceeding, consent to the appointment of a
receiver or similar official, or making a general assignment for the benefit of
its creditors; or (iii) entrance into an order or decree under bankruptcy law
that (a) is for relief in any involuntary case or proceeding, (b) appoints a
custodian for any substantial assets or property, or (c) orders the winding up
or liquidation of the Company.




14




Note
8  CONVERTIBLE NOTES




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
to be reduced below $0.04 per share. As of March 31, 2009 the conversion price
was $0.04 per share.




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 is
amortized to interest expense over the term of the note, which is $41,667 per
month.




As of
June 30, 2009, the outstanding principal amount of the convertible notes was
$511,333 and there was no unamortized embedded beneficial conversion feature
discount. As of August 27, 2008, the convertible notes had matured and the
outstanding principal amount of $533,333 and accrued interest of $86,981 were
due. Since the convertible notes matured, $47,639 of principal has been
converted into 1,190,972 shares of Common Stock and the Company has not repaid
the remaining outstanding amount of the convertible notes.




As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $533,333 and there was no unamortized embedded beneficial conversion feature
discount.




For the
three and nine months ended June 30, 2009, interest expense was $13,090 and
$39,728, respectively, which was included in the other income (expense) section
of the statement of income (operations).




For the
three and nine months ended June 30, 2008, interest expense was $17,259 and
$55,593, respectively, and amortization expense for the embedded beneficial
conversion feature discount was $35,000 and $285,000, respectively, which
was included in interest expense in the other income (expense) section of the
statement of income (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 are due and payable
upon the earlier of (i) the occurrence of an Event of Default or (ii) the
Maturity Date, which is defined as any business day that is not sooner than
December 31, 2008, as the holder of the notes may specify in written notice
delivered to the Company not less than 30 days prior to such specified date.
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.





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.




15




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




As of
June 30, 2009, there was no outstanding principal of the convertible notes and
there was no unamortized embedded beneficial conversion feature
discount. As of December 31, 2008, the convertible notes had matured and
the outstanding principal amount of $26,000 and accrued interest of $4,153 were
due. Since the convertible notes matured, $26,000 of principal has been
converted into 2,600,000 shares of Common Stock.




As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $26,000 and unamortized embedded beneficial conversion feature discount was
$2,890.




For the
three and nine months ended June 30, 2009, interest expense was $160 and $1,445,
and amortization expense for the embedded beneficial conversion feature discount
was $2,890, which was included in interest expense in the other income (expense)
section of the statement of income (operations).




For the
three and nine months ended June 31, 2008, interest expense was $2,191 and
$6,526, respectively, and amortization expense for the embedded beneficial
conversion feature discount was $16,556 and $43,000, which was included in
interest expense in the other income (expense) section of the statement of
income (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. An amendment dated March 13, 2008 reduces the
conversion rate of the notes to $0.15 per share and the exercise price of the
warrants to $0.30 per share.




Under the
terms of a Registration Rights Agreement signed in conjunction with this
offering, the Company is required to file a registration statement under the
Securities Act of 1933 in order to register the resale of the shares of Common
Stock issuable upon conversion of the  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 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, 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 and
has accrued $153,750 of expenses as liquidated damages. For the three
and six months ended March 31, 2009, $75,000 of the liquidating damages were
converted into 937,500 shares of Common Stock For the three and six months ended
March 31, 2008, the Company recorded $92,250 and $138,375 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.




16




The fair
value of the warrants was $741,341 at the date of issuance calculated using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0%
and an expected term of 5 years.As a result, the
relative fair value of the warrants was $430,189.




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
June 30, 2009, the outstanding principal amount of the convertible notes was
$250,000, there was no unamortized warrant discount or embedded beneficial
conversion feature discount, and the number of outstanding warrants was
2,329,546. As of July 16, 2008, the convertible notes had matured and the
outstanding principal amount of $485,000 and accrued interest of $67,417 were
due. Since the convertible notes matured, $235,000 of principal has been
converted into 1,566,667 shares of Common Stock and the Company has not repaid
the remaining outstanding principal amount or accrued interest of the
convertible notes.




As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $485,000, there was no unamortized warrant discount or embedded beneficial
conversion feature discount, and the number of outstanding warrants was
2,329,546.




For the
three and nine months ended June 30, 2009, interest expense was $4,984 and
$21,582, respectively, which was included in the other income (expense) section
of the statement of income (operations).




For the
three and nine months ended June 30, 2008, interest expense was $16,306 and
$59,972, amortization expense for the warrant discount was $84,909 and $298,262,
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 $117,174 and $412,154, which was also included
in interest expense in the other income (expense) section of the statement of
income (operations).




12%
SUBORDINATED CONVERTIBLE NOTES




On July
29, 2008, the Company completed an offering of $1,000,000 in principal amount of
Subordinated Debentures to a group of institutional and accredited investors.
 The 12% Subordinated Convertible Notes mature on July 29, 2009 orsooner
if declared due and payable by the holder upon the occurrence of an event of
default, and bear interest at the rate of 12% per annum. The Debentures
will be convertible into Common Stock at a conversion price of $0.25 per share
(the “Conversion Price”) from and after such time as the authorized Common Stock
is increased in accordance with applicable federal and state laws. In the event
of an offering of Common Stock, or securities convertible into Common Stock, at
a price, conversion price or exercise price less than the conversion price (a
“dilutive issuance”), then the conversion price of any then outstanding
subordinated convertible notes will be reduced to equal such lower price, except
in connection with certain exempt issuances.  In an event of default,
the conversion price will be reduced to $0.15 per share. As part of the above
offering, the Company issued warrants to purchase 3,333,333 shares of Common
Stock, which expire five years from the date of grant, are exercisable at an
exercise price of $0.30 per share from and after such time as the authorized
Common Stock is increased in accordance with applicable federal and state laws,
and may be exercised on a cashless basis at the election of the
holder.  In the event of a dilutive issuance, the exercise price of
the warrants will be reduced to equal the price of the securities issued in the
dilutive issuance, except in connection with certain exempt
issuances.




17




The
requirement to increase the number of authorized shares of Common Stock is a
condition that has not occurred, is not certain to occur, and is outside the
control of the Company. Therefore, the Company has not recognized the related
beneficial conversion feature or the warrants related to these notes. If and
when this condition does occur, the Company will recognize the beneficial
conversion feature and warrants at fair value on the date the number of
authorized shares is increased. The note will be converted into 4,000,000 shares
of Common Stock at a conversion price of $0.25 per share. These shares were
excluded from the earnings per share calculation as the effect of dilutive
securities is anti-dilutive.




Calico
Capital Management, LLC acted as a financial advisor for the Company and
received a fee of $40,000. LBS Financial Services, LLC acted as an agent for the
Company in arranging the transaction and received a fee of $120,000. The Company
recorded these fees as an expense during the period.




As of
June 30, 2009 and September 30, 2008, the principal outstanding totaled
$1,000,000.




For the
three and nine months ended June 30, 2009, interest expense was $29,918 and
$89,754, respectively.




Note 9
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.
 The Subordinated Debentures matured 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.




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 of 2.64% to 3.26%, volatility of
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 determined to be
$96,814.




On May
22, 2009, the Company entered into an amendment, exchange and waiver agreement
with each holder of the subordinated debentures. The terms of the agreement
included the waiver of any claim for default under Section 3.01(a) under the
original debentures, an exchange of the original debenture for a new debenture
equal to the outstanding principal and accrued interest through May 22, 2009,
and the amendment of the exercise price of all outstanding warrants from $0.40
to $0.175.




As of
June 30, 2009, the principal outstanding totaled $482,493, and there
was no unamortized warrant discount.




As of
September 30, 2008, the principal outstanding totaled $425,000, and
unamortized warrant discount was $24,204.




For the
three and nine months ended March 31, 2009, interest expense was $11,170 and
$24,204, respectively.




For the
three and nine months ended June 30, 2008, interest expense was $5,856 and
$14,795, respectively, and amortization expense for the warrant discount was
$24,204 and $48,408, respectively, which was included in interest expense in the
other income (expense) section of the statement of operations.




Note 10
WARRANT LIABILITY




2001
Executive Officers Stock Option Plan




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




18




The fair
value of the options was $789,912 as of June 30, 2009, calculated using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 1.75 years.




The fair
value of the options was $484,440 as of September 30, 2008, calculated using the
Black Sholes model with the following assumptions: risk free rate of return of
1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term of 2.5
years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
options was recorded by increasing warrant liability on the balance sheet by
$538,876 and $305,472, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the options was recorded by increasing (decreasing) warrant liability
on the balance sheet by $385,316 and $(1,084,484), respectively.




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 fair
value of the warrants was $554,249 ($430,189 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.




The fair
value of the warrants was determined to be $267,636 ($213,924 attributable to
the holders of the Convertible Notes 3 and $53,712 attributable to the placement
fee) as of June 30, 2009, which was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
0.56%; volatility of 130.03%; dividend yield of 0%; and an expected term of 2.92
to 3.00 years.




The fair
value of the warrants was determined to be $153,789 ($125,440 attributable to
the holders of the Convertible Notes 3 and $28,349 attributable to the placement
fee)as of
September 30, 2008, which was calculated using the Black Sholes model with the
following assumptions: risk free rate of return of 1.78%; volatility of 84.94%;
dividend yield of 0%; and an expected term of 3.67 to 3.75 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrants was recorded by increasing warrant liability on the balance sheet by
$171,224 ($134,532 attributable to the holders of the Convertible Notes 3
and $36,692 attributable to the placement fee) and $113,847
$88,484 attributable to the holders of the Convertible Notes 3 and $25,363
attributable to the placement fee), respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the warrants was recorded by decreasing warrant liability on the
balance sheet by $102,540 ($80,436 and attributable to the holders of the
Convertible Notes 3 and $22,104 attributable to the placement fee) and
$(261,242) ($(188,034) and attributable to the holders of the Convertible Notes
3 and $(73,408) attributable to the placement fee), respectively.




Warrant
Issued to Legal Counsel




On
October 25, 2007, the Company entered into an agreement with its legal counsel
to issue 150,000 shares of Common Stock and a five year warrant to purchase up
to 150,000 shares of Common Stock at an exercise price of $0.25 per share for
services.




The fair
value of the warrant was $32,394 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.93%, volatility of 116.99%, dividend yield of 0% and expected
term of 5 years.




19




The fair
value of the warrant was determined to be $18,797 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 3.25 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$12,444 and $8,288, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $7,765 and $(15,312), respectively.




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 four 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.




The fair
value of the warrants was $1,557,705 at the date of issuance and was calculated
using the Black Sholes option 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 fair
value of the warrants was determined to be $1,103,629 as of June 30, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an
expected term of 3.42 years.




The fair
value of the warrants was determined to be $620,453 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrants was recorded by increasing warrant liability on the balance sheet by
$725,493 and $483,176, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $452,395 and $(555,636), respectively.




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 fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes option 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 fair
value of the option was determined to be $127,735 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 3.42 years.




The fair
value of the option was determined to be $71,812 as of September 30, 2008, using
the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
option was recorded by increasing warrant liability on the balance sheet by
$83,969 and $55,923, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $52,361 and $(55,540), respectively.




20




Option
Issued to Former 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.




The fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes option 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 fair
value of the option was determined to be $127,735 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 3.42 years.




The fair
value of the option was determined to be $71,812 as of September 30, 2008, using
the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
option was recorded by increasing warrant liability on the balance sheet by
$83,969 and $55,923, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $52,361 and $(55,540), respectively.




Option
Issued to Former 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 hadbeen
appointed as the Company’s Chief Executive Officer.Ascompensationfor his services, the Company granted 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 Stockis not exercisable until the notes
dated June 6, 2007 (Convertible Notes 2 as discussed in Note 7 above) are
eligible for conversion into shares of Common Stock. These options werenotissuedfromthe 2001 Executive Officers Stock
Option Plan. On
August 14, 2008, Mr. Papalian resigned as the Company’s Chief Executive
Officer




The fair
value of the option was $1,448,321 at the date of issuance, which was calculated
using the Black Sholes 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 fair
value of the option was determined to be $374,713 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 3.42 years.




The fair
value of the option was determined to be $613,223 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.




For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $246,326 and $(238,509), respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $447,123 and $(457,931), respectively.




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 has been 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 7 above) are eligible for conversion into shares of Common
Stock.  The warrant was not issued from the 2001 Executive
Officers Stock Option Plan.




21




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




The fair
value of the warrant was determined to be $1,090,768 as of June 30, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an
expected term of 3.42 years.




The fair
value of the warrant was determined to be $613,223 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrants was recorded by increasing warrant liability on the balance sheet by
$717,038 and $477,545, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $477,123 and $(457,931), respectively.




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 at an exercise price of $0.40 per
share.




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




On May
22, 2009, the Company entered into an amendment, exchange and waiver agreement
with the holders of the warrants. Terms of the agreement included an amendment
of the exercise price to $0.175 per share.




The fair
value of the warrants was determined to be $96,395 as of June 30, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an
expected term of 4.58 years.




The fair
value of the warrants was determined to be $52,609 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 5.33 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrants was recorded by increasing warrant liability on the balance sheet by
$60,335 and $43,786, respectively.




For the
three and nine months ended June 30, 2008, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $31,050 and $(20,379), respectively.




Warrants
Related to $750,000 Stock Issuance




On May
28, 2008 the Company completed 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.




22




The fair
value of the warrants was determined to be $483,476 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 2.17%, volatility of 72.4% to
77.86%, dividend yield of 0%, and expected term of 3 years.




The fair
value of the warrants was determined to be $536,066 as of June 30, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an
expected term of 1.67 to 1.83 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrants was recorded by increasing (decreasing) warrant liability on the
balance sheet by $187,424 and $67,987, respectively.




For the
three and nine months ended June 30, 2008, the increase in the fair value of the
warrants was recorded by increasing warrant liability on the balance sheet by
$397,095 and $69,887, respectively.




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.




The fair
value of the warrant was $60,645 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.36%, expected volatility of 74.90%, dividend yields of 0% and
expected term of 6 years.




The fair
value of the warrant was determined to be $60,461 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 4.92 years.




The fair
value of the warrant was determined to be $38,802 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 5.75 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$36,551 and $21,660, respectively.




For the
three and nine months ended June 30, 2008, the decrease in the fair value of the
warrant was recorded by decreasing warrant liability on the balance sheet by
$316.




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.




The fair
value of the warrant was $51,582 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.30%, expected volatility of 71.69%, dividend yield of 0% and
expected term of 5 years.




The fair
value of the warrant was determined to be $67,589 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 4.00 years.




The fair
value of the warrant was determined to be $38,759 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term
of 4.75 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$43,453 and $28,830, respectively.




23




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.




The fair
value of the warrant was $51,582 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.30%, expected volatility of 71.69%, dividend yield of 0% and
expected term of 5 years.




The fair
value of the warrant was determined to be $67,589 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 4.00 years.




The fair
value of the warrant was determined to be $38,759 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.75 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$43,453 and $28,830, respectively.




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.




The fair
value of the warrant was $82,779 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.27%, expected volatility of 70.18%, dividend yield of 0% and
expected term of 6 years.




The fair
value of the warrant was determined to be $97,241 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 5.00 years.




The fair
value of the warrant was determined to be $62,512 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term
of 5.75 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$58,670 and $34,729, respectively.




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.




The fair
value of the warrant was $144,641 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.01%, expected volatility of 78.92%, dividend yield of 0% and
expected term of 5 years.




The fair
value of the warrant was determined to be $205,571 as of June 30, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an
expected term of 4.17 years.




The fair
value of the warrant was determined to be $118,551 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.83 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
warrant was recorded by increasing warrant liability on the balance sheet by
$131,399 and $87,020, respectively.




24




Option
Issued to Former Chief Executive Officer




On
November 11, 2008 the Company’s Board of Directors approved the issuance to the
Chief Executive Officer of a five year option to purchase a total of 3,500,000
shares of the Company’s common stock at an exercise price of $0.15 per
share.




The fair
value of the option was $238,244 at the date of issuance, which was calculated
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 1.16%; volatility of 89.31%; dividend yield of 0%; and an
expected term of 5 years.




The fair
value of the option was determined to be $485,854 as of June 30, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected
term of 4.33 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
option was recorded by increasing warrant liability on the balance sheet by
$308,836 and $247,610, respectively.




Option
Issued to Director (Rodney Anderson)




On March
30, 2009 the Company issued an option to a director to purchase a total of
1,380,114 shares of the Company’s common stock at an exercise price of $0.15 per
share. The right to purchase 690,057 shares of Common Stock vested on the date
of grant and the right to purchase 172,514 shares of Common Stock vests on June
30, September 30, December 31, 2009 and March 31, 2010,
respectively.




The fair
value of the vested options was $41,847 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.




The fair
value of the vested options was determined to be $128,884 as of June 30, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and
an expected term of 4.67 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
vested options was recorded by increasing warrant liability on the balance sheet
by $62,715 and 64,170, respectively.




Option
Issued to interim Chief Financial Officer (Robert Hasson)




On March
30, 2009 the Company issued an option to the interim Chief Financial Officer to
purchase a total of 958,412 shares of the Company’s common stock at an exercise
price of $0.15 per share. The right to purchase 479,206 shares of Common Stock
vested on the date of grant and the right to purchase 119,802 shares of Common
Stock vests on June 30, September 30, December 31, 2009 and March 31, 2010,
respectively.




The fair
value of the vested options was $29,060 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.




The fair
value of the vested options was determined to be $89,503 as of June 30, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and
an expected term of 4.67 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
vested options was recorded by increasing warrant liability on the balance sheet
by $43,552 and $44,562, respectively.




Option
Issued to Employee




On March
30, 2009 the Company issued an option to an employee to purchase a total of
1,495,124 shares of the Company’s common stock at an exercise price of $0.15 per
share. The right to purchase 747,562 shares of Common Stock vested on the date
of grant and the right to purchase 186,891 shares of Common Stock vests on June
30, September 30, December 31, 2009 and March 31, 2010,
respectively.


25




The fair
value of the vested options was $45,334 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.




The fair
value of the vested options was determined to be $139,624 as of June 30, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and
an expected term of 4.67 years.




For the
three and nine months ended June 30, 2009, the increase in the fair value of the
vested options was recorded by increasing warrant liability on the balance sheet
by $67,941 and $69,517, respectively.




Note 10
BENEFICIAL CONVERSION FEATURES LIABILITY




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




The 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 fair
value of the embedded beneficial conversion features was $26,000 as of September
30, 2008, which was calculated using the Black Sholes model with the following
assumptions: risk free rate of return of 1.78%; volatility of 84.94%; dividend
yield of 0% and an expected term of .25.




For the
nine months ended June 30, 2009, the decrease in the fair value of the embedded
beneficial conversion feature was recorded by decreasing beneficial conversion
features liability on the balance sheet by $26,000.




For the
three and nine months ended June 30, 2008, the decrease in the fair value of the
embedded beneficial conversion feature was recorded by decreasing beneficial
conversion features liability on the balance sheet by $659,811 and $1,215,740,
respectively.




Note 11
STOCKHOLDERS’ EQUITY




COMMON
STOCK




The
Company has 150,000,000 authorized shares of Common Stock, par value $0.001 per
share.  As of June 30, 2009 and September 30, 2008, the Company had
144,459,105 and 134,756,213 shares of Common Stock issued and outstanding,
respectively. As of June 30, 2009, there are 481,900 shares of Common Stock
subject to cancellation. Subsequent to cancellation, the total issued and
outstanding shares of Common Stock would be 143,977,205.




During
the nine months ended June 30, 2009 the Company issued 9,702,892 shares of
Common Stock for the payment of $290,000 of debt, $20,179 of accrued interest,
$77,979 of late fees and penalties and $75,000 of liquidated damages at
conversion prices between $0.04 and $0.15. Additionally, the Company issued
833,333 shares of common stock for $125,000 for machinery and equipment from RJ
Metal Co. Lastly, the Company issued 1,200,139 shares of Common Stock to legal
counsel for services having a value of $1800,014.  The fair value of
the Common Stock on the date of issuance was $226,229.




The
Company has not issued 13,333 shares of Common Stock representing $400 to
certain investors pursuant to the terms of an offering undertaken by the Company
in 2004. The investment was made and funds deposited into the Company’s bank
accounts between February 9, 2004, and August 25, 2004.  The
investment has been recorded on the Company’s balance sheet in the Stockholders’
Deficit section as “Shares to be Issued”.




STOCK
OPTIONS




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




26




WeightedAverage
                      
                      
                      
                      
                      
                      AggregateExercise
                      
                      
                      Number
                      
                      
                      IntrinsicPrice
                      
                      
                      of
      Options
                      
                      
                      ValueOutstanding
      at October 1, 2008
                      
                      $
                      0.19
                      
                      
                      
                      11,967,666
                      
                      
                      $
                      175,854Granted
                      
                      
                      0.20
                      
                      
                      
                      7,333,650
                      
                      
                      
                      95,841Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at June 30, 2009
                      
                      $
                      0.19
                      
                      
                      
                      19,301,316
                      
                      
                      $
                      271,695




Options
outstanding as of June 30, 2009:




WeightedAverageRemaining
                                            
                                            Weighted
      AverageExercise
                                            
                                            Options
                                            
                                            Options
                                            
                                            Contractual
                                            
                                            Exercise PricePrice
                                            
                                            Outstanding
                                            
                                            Exercisable
                                            
                                            Life
                                            
                                            Outstanding Exercisable$0.15
      - $0.25
                                            
                                            19,301,316
                                            
                                            17,863,696
                                            
                                            3.22
                                            
                                            $
                                            0.19
                                            
                                            $
                                            0.20




WeightedAverageOutstanding
                  
                  
                  Exercisable
                  
                  
                  RemainingOption
                  
                  
                  
                  
                  Exercise
                  
                  
                  
                  
                  
                  Exercise
                  
                  
                  ContractualHolder
                  
                  Amount
                  
                  
                  Price
                  
                  
                  Amount
                  
                  
                  Price
                  
                  
                  Life2001
      Executive Officers Stock Option Plan
                  
                  
                  7,034,140
                  
                  
                  $
                  0.15
                  
                  
                  
                  7,034,140
                  
                  
                  $
                  0.15
                  
                  
                  
                  1.75Director
                  
                  
                  1,000,000
                  
                  
                  
                  0.25
                  
                  
                  
                  1,000,000
                  
                  
                  
                  0.25
                  
                  
                  
                  3.42Former
      Chief Financial Officer
                  
                  
                  1,000,000
                  
                  
                  
                  0.25
                  
                  
                  
                  1,000,000
                  
                  
                  
                  0.25
                  
                  
                  
                  3.42Former
      Chief Executive Officer
                  
                  
                  2,933,526
                  
                  
                  
                  0.25
                  
                  
                  
                  2,933,526
                  
                  
                  
                  0.25
                  
                  
                  
                  3.42Former
      Chief Executive Officer
                  
                  
                  3,500,000
                  
                  
                  
                  0.25
                  
                  
                  
                  3,500,000
                  
                  
                  
                  0.25
                  
                  
                  
                  4.33Director
                  
                  
                  1,380,114
                  
                  
                  
                  0.15
                  
                  
                  
                  690,057
                  
                  
                  
                  0.15
                  
                  
                  
                  4.67Director
                  
                  
                  958,412
                  
                  
                  
                  0.15
                  
                  
                  
                  479,206
                  
                  
                  
                  0.15
                  
                  
                  
                  4.67Employee
                  
                  
                  1,495,124
                  
                  
                  
                  0.15
                  
                  
                  
                  747,562
                  
                  
                  
                  0.15
                  
                  
                  
                  4.67




STOCK
WARRANTS




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


27




WeightedAverage
                    
                    
                    
                    
                    
                    AggregateExercise
                    
                    
                    Number
                    
                    
                    IntrinsicPrice
                    
                    
                    of Options
                    
                    
                    ValueOutstanding
      at October 1, 2008
                    
                    $
                    0.20
                    
                    
                    
                    39,515,766
                    
                    
                    $
                    1,151,025Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at March 31, 2009
                    
                    $
                    0.20
                    
                    
                    
                    39,515,766
                    
                    
                    $
                    1,151,025




Warrants
outstanding as of March 31, 2009:




WeightedAverageRemaining
                              
                              Weighted
      AverageExercise
                              
                              Warrants
                              
                              Options
                              
                              Contractual
                              
                              Exercise PricePrice
                              
                              Outstanding
                              
                              Exercisable
                              
                              Life
                              
                              Outstanding Exercisable$0.10
      - $0.25
                              
                              39,515,766
                              
                              39,515,7662
                              
                              89
                              
                              $
                              0.19
                              
                              $
                              0.19




WeightedAverageOutstanding
                
                
                Exercisable
                
                
                RemainingWarrant
                
                
                
                
                Exercise
                
                
                
                
                
                Exercise
                
                
                ContractualHolder
                
                Amount
                
                
                Price
                
                
                Amount
                
                
                Price
                
                
                LifeConvertible
      Notes 3
                
                
                2,795,454
                
                
                $
                0.30
                
                
                
                2,795,454
                
                
                $
                0.30
                
                
                
                3.00Richarson
      & Patel LLP
                
                
                150,000
                
                
                
                0.25
                
                
                
                150,000
                
                
                
                0.25
                
                
                
                3.25Advisory
      Board Members
                
                
                8,640,000
                
                
                
                0.25
                
                
                
                8,640,000
                
                
                
                0.25
                
                
                
                3.42Consultant
                
                
                8,539,312
                
                
                
                0.25
                
                
                
                8,539,312
                
                
                
                0.25
                
                
                
                3.4210%
      Subordinated Notes Payable
                
                
                850,000
                
                
                
                0.18
                
                
                
                850,000
                
                
                
                0.18
                
                
                
                4.58Stockholders
                
                
                15,000,000
                
                
                
                0.10
                
                
                
                15,000,000
                
                
                
                0.10
                
                
                
                1.83Richarson
      & Patel LLP
                
                
                400,000
                
                
                
                0.15
                
                
                
                400,000
                
                
                
                0.15
                
                
                
                4.92Director
                
                
                500,000
                
                
                
                0.25
                
                
                
                500,000
                
                
                
                0.25
                
                
                
                4.00Director
                
                
                500,000
                
                
                
                0.25
                
                
                
                500,000
                
                
                
                0.25
                
                
                
                4.00Richarson
      & Patel LLP
                
                
                641,000
                
                
                
                0.15
                
                
                
                641,000
                
                
                
                0.15
                
                
                
                5.00Advisory
      Board Member
                
                
                1,500,000
                
                
                
                0.25
                
                
                
                1,500,000
                
                
                
                0.25
                
                
                
                4.17


28


Note 12
GOING CONCERN




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 June 30, 2009, the Company has incurred
cumulative losses of $25,828,505 including net loss for the nine months ended
June 30, 2009 of $3,934,849. As the Company has no cash flow from
operations,  its  ability to transition from a development
stage company to an operating company is entirely dependent upon obtaining
adequate cash to finance its overhead, research and development activities, and
acquisition of production equipment. It is unknown when, if ever, the Company
will achieve a level of revenues adequate to support its costs and expenses. In
order for the Company to meet its basic financial obligations, including rent,
salaries, debt service and operations, it plans to seek additional equity or
debt financing. Because of the Company’s history and current debt levels, there
is considerable doubt that the Company will be able to obtain financing. The
Company’s ability to meet its cash requirements for the next twelve months
depends on its ability to obtain such financing. Even if financing is obtained,
any such financing will likely involve additional fees and debt service
requirements which may significantly reduce the amount of cash we will have for
our operations. Accordingly, there is no assurance that the Company will be able
to implement its plans.




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




As
mentioned in Notes 7 and 8, the Company has convertible notes and subordinated
notes payable that have matured. The Company is in the process of renegotiating
the terms of the notes with the note holders to extend the maturity date. If the
Company is unsuccessful in extending the maturity date, the Company may not be
able to continue as a going concern.




Management
expects an order for 14 additional water treatment systems from the customer who
purchased two 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 13
COMMITMENTS




Operating
Lease




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 Fiscal Year Ended September 30,2009
                      
                      $
                      52,5902010
                      
                      
                      108,6602011
                      
                      
                      93,550




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


29





Issuance of Shares of Common
Stock for Services





On June
10, 2009, the Company entered into an agreement to convert $120,000 of
outstanding legal fees into a total of 600,000 shares of Common Stock. However,
if the average closing price of the Common Stock is $0.15 or less for the 10
trading days preceding December 10, 2009, the Company is required to issue an
additional 200,000 shares of Common Stock.





Note 14
SUPPLEMENTAL CASH FLOW INFORMATION




The
Company had the following noncash transactions.




The
Company issued 9,702,892 shares of Common Stock for the payment of $290,000 of
debt, $20,179 of accrued interest, $77,979 of late fees and penalties and
$75,000 of liquidated damages at conversion prices between $0.04 and
$0.15.




The
Company issued 833,333 shares of Common Stock for the purchase of machinery and
equipment from RJ Metal, Co. having a value of $125,000.




The
Company issued 1,200,139 shares of Common Stock for legal services having a
value of $180,014.  The fair value of the Common Stock on the date of
issuance was $226,229.




Note 15
SUBSEQUENT EVENT




The
Company considered all subsequent events through August 14, 2009, and the date
of issuance is August 17, 2009.




On July
15, 2009, the Company entered into a short-term promissory note payable for
$50,000. Interest accrues at 10% per annum and matures on October 15, 2009. A
total of 100,000 shares of Common Stock was issued in accordance with the
note.




On July
22, 2009, the Company received $65,000 for the issuance of a total of 650,000
shares of Common Stock as a result of a warrant that was exercised at $0.10 per
share.




Part
I, Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations.




The
information in this quarterly report on Form 10-Q contains forward-looking
statements.  These forward-looking statements involve risks and
uncertainties, including statements regarding our capital needs, business
strategy and expectations.  Any statements contained in this report
that are not statements of historical facts may be deemed to be forward-looking
statements.  In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue, the negative of
such terms or other comparable terminology.  Actual events or results
may differ materially from those events or results included in the
forward-looking statements.  In evaluating these statements, you
should consider various factors, including the risks outlined from time to time
in the reports we file with the Securities and Exchange
Commission.  Some, but not all, of these risks include, among other
things:





·
            our
      inability to obtain the financing we need to continue our
      operations;





·
            changes
      in regulatory requirements that adversely affect our
    business;





·
            loss
      of our key personnel; and





·
            risks
      over which we have no control, such as the general global downturn in the
      economy which may adversely affect spending by government
      agencies.





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


30




Overview




The
Company is based in Anaheim, California.  Its business is the design,
development and marketing of automatic water filtration systems primarily for
small water districts.  The Company received an order for two water
filtration systems in June, 2008.  The Company anticipates that the
water treatment systems will be manufactured and delivered within the next few
months. Subsequent to the delivery of the water treatment systems, revenue will
be recognized and the Company will no longer meet the definition of a
development stage company.




Until
additional orders and customer deposits are received, we anticipate that most of
our capital needs will need to be funded by debt or equity
financing.  To date we have not earned revenue.




Application
of Critical Accounting Policies and Estimates




The
preparation of our 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 three and six months ended March 31, 2009.
Management believes the following critical accounting policies reflect its more
significant estimates and assumptions.




Revenue
Recognition. Although the Company has yet to complete 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 collectability based on a number of factors,
including past transaction and collection history with a customer and the
creditworthiness of the customer. The Company plans to perform ongoing credit
evaluations of its customers' financial condition. If the Company determines
that collectability of the sales price is not reasonably assured, revenue
recognition will be deferred until such time as collection becomes reasonably
assured, which is generally upon receipt of payment from the customer. The
Company 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 services 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.


31


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 may be a defendant in litigation. As
required by Financial Accounting Standards Board Statement No. 5“Accounting for
Contingencies” (FAS 5), we are required to 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 that may be incurred 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.




Warrant
Liability. The Company calculates the fair value of warrants and options using
the Black Sholes valuation model. Assumptions used in the calculation include
the risk free interest rate, volatility of the stock price, and dividend yield.
Estimates used in the calculation include the expected term of the warrants or
options.




Results
of Operations




Three
Months Ended June 30, 2009 Compared To Three Months Ended June 30,
2008




Revenues
for the three months ended June 30, 2009 and 2008 were zero.  Although
we received an order and deposit for two water treatment systems during the 2009
fiscal year, revenue from this order has not been recognized because the units
have not been completed and delivered. The Company incurred operating expenses
of $374,850 during the three months ended June 30, 2009, a decrease of $548,981
or approximately 59%, as compared to $923,831 for the three months ended June
30, 2008.  General and administrative expenses were $179,311 during
the three months ended June 30, 2009, a decrease of $455,391 or approximately
72%, as compared to $634,702 for the three months ended June 30,
2008.  The decrease in general and administrative expenses contributed
to the significant decrease in operating expenses. Research and development
expenses were $182,980 during the three months ended June 30, 2009, a decrease
of $97,992 or approximately 35%, as compared to $280,972 for the three months
ended June 30, 2008.  The decrease in research and development
expenses resulted primarily from the reallocation of personnel for the design of
the two water treatment systems ordered during the 2009 fiscal
year.


32


Other
income (expense) totaled $4,042,048 during the three months ended June 30, 2009,
a decrease of $1,259,336 or approximately 45%, as compared to $2,782,712 for the
three months ended June 30, 2008. The Company earned interest income of $2
during the three months ended June 30, 2009, a decrease of $1,562 or 100%, as
compared to $1,564 during the three months ended June 30, 2008.  The
Company incurred interest expense of $63,423 during the three months ended June
30, 2009, a decrease of $250,273 or approximately 80%, as compared to $313,696
for the three months ended June 30, 2008. The significant interest expense we
incurred during the three months ended June 30, 2008 was due primarily to the
amortization of the beneficial conversion features discount and warrant discount
of the convertible debt securities, while during the three months ended June 30,
2009 there was a decrease in outstanding debt principal, which resulted in lower
interest expenses. Decrease (increase) in warrant liability was $3,623,669
during the three months ended June 30, 2009, an increase of $1,412,958 or
approximately 64%, as compared to $2,210,711 during the three months ended June
30, 2008. The increase in warrant liability was due to the increase in the
trading price of our Common Stock, resulting in a higher Black Sholes valuation
model valuation calculation of the warrant liability. Decrease in beneficial
conversion features liability was $659,811 during the three months ended June
30, 2008. The decrease in beneficial conversion features liability was due to
the expiration of the expected term of the beneficial conversion features of our
convertible debt.




As a
result of these items, net loss for the three months ended June 30, 2009 was
$4,046,848, a increase of $1,264,136 or approximately 45% over the net
loss of $2,782,712 for the three months ended June 30, 2008.




Nine
Months Ended June 30, 2009 Compared To Nine Months Ended June 30,
2008




Revenues
for the nine months ended June 30, 2009 and 2008 were zero.  Although
we received an order and deposit for two water treatment systems during the 2008
fiscal year, revenue from this order has not been recognized because the units
have not been completed and delivered. The Company incurred operating expenses
of $1,749,396 during the nine months ended June 30, 2009, a decrease of
$5,877,409 or approximately 77%, as compared to $7,626,805 for the nine months
ended June 30, 2008.  General and administrative expenses were
$1,144,202 during the nine months ended June 30, 2009, a decrease of $5,611,227
or approximately 83%, as compared to $6,755,429 for the nine months ended June
30, 2008.  The decrease in general and administrative expenses
contributed to the significant decrease in operating expenses. The significant
general and administrative expenses incurred during the nine months ended June
30, 2008 were primarily due to the issuance of warrants. During the nine months
ended June 30, 2009, the Company issued warrants having a fair value of
$426,088. Research and development expenses were $567,790 during the nine months
ended June 30, 2009, a decrease of $279,114 or approximately 33%, as compared to
$864,904 for the nine months ended June 30, 2008.  The decrease in
research and development expenses resulted primarily from the reallocation of
personnel for the design of the two water treatment systems ordered during the
2009 fiscal year.




Other
income (expense) totaled $(2,180,653) during the nine months ended June 30,
2009, a decrease of $4,999,150 or approximately 177%, as compared to other
income of $2,818,497 for the nine months ended June 30, 2008. The Company earned
interest income of $3,870 during the nine months ended June 30, 2009,
an increase of $1,027 or 36%, as compared to $2,483 during the nine months
ended June 30, 2008.  The Company incurred interest expense of
$221,947 during the nine months ended June 30, 2009, a decrease of $755,965 or
approximately 77%, as compared to $977,912 for the nine months ended June 30,
2008. The significant interest expense we incurred during the nine months ended
June 30, 2008 was due primarily to the amortization of the beneficial conversion
features discount and warrant discount of the convertible debt securities, while
during the nine months ended June 30, 2009 there was a decrease in outstanding
debt principal, which resulted in lower interest. Decrease in warrant liability
was $1,992,282 during the nine months ended June 30, 2009, a decrease of
$4,695,123 or approximately 174%, as compared to $2,702,841 during the nine
months ended June 30, 2008. The reduction of decrease in warrant liability
was due to the increase in the trading price of our Common Stock, resulting in a
higher Black Sholes valuation model valuation calculation of the warrant
liability.
Decrease in beneficial conversion features liability was $26,000 during the nine
months ended June 30, 2009, a decrease of $1,189,740 or approximately 98%, as
compared to $1,215,740 for the nine months ended June 30, 2008. The reduction of
decrease in beneficial conversion features liability was due to the amortization
expiration of the expected term of the beneficial conversion features of our
convertible debt. During the nine months ended June 30, 2009 the Company
recorded a loss on settlement of debt of $3,616 related to the conversion of
notes payable and accrued interest into Common Stock. During the nine months
ended June 30, 2008 the Company recorded a loss on lease termination for
$125,015 related to the termination of lease. During the nine months ended
June 30, 2008 the Company recorded a write-off of beneficial conversion feature
and discount of $380,440 related to the advisory board
compensation.  There were no comparable expenses recorded during the
six months ended March 31, 2009.


33




As a
result of these items, net loss for the nine months ended June 30, 2009 was
$2,180,653, a decrease of $4,999,150 or approximately 177% over the net income
of $2,818,497 for the nine months ended June 30, 2008.




Liquidity
and Capital Resources




The
Company had cash and cash equivalents of $8,582 at June 30, 2009. The Company’s
source of liquidity has been the sale of its securities and deposits received
from orders for two water treatment systems. The Company expects to receive
additional orders for water treatment systems but if it does not receive
additional orders or if these orders do not satisfy its capital needs, the
Company expects to sell its securities or obtain loans to meet its capital
requirements. There can be no assurance that sales of the Company’s securities
or the sale of its water treatment systems, if such sales occur, will provide
sufficient capital for its operations or that the Company will not encounter
unforeseen difficulties that may deplete its capital resources more rapidly than
anticipated.




Operating
Activities




During
the nine months ended June 30, 2009, the Company used $1,451,460 of cash in
operating activities.  Non-cash adjustments included $37,404 for
depreciation, $2,890 for amortization of warrant and beneficial conversion
feature, and $19,800 for loss on settlement of debt. Cash provided by
operating activities included $17,730 in other current assets, $4,600 in other
assets, $197,604 in accounts payable, $288,074 in accrued liabilities, $200,000
in customer deposits, and $2000,811 in warrant liability. Cash used in operating
activities included $833,594 for inventory. Stock based compensation to
employees and nonemployees was $187,844 and $238,244, respectively.




During
the nine months ended June 30, 2008, the Company used $473,444 of cash in
operating activities. Non-cash adjustments included $24,472 for depreciation,
$1,073,445 for amortization of warrant and beneficial conversion
feature, $126,111 for loss on termination of lease. Cash provided by
operating activities included $409,406 in accounts payable. Cash used in
operating activities included $77,269 for other current assets, $2,702,841 for
warrant liability, and $1,215,741 for beneficial conversion features liability.
Stock based compensation to nonemployees was $5,799,646.




Investing
Activities




During
the nine months ended June 30, 2009, the Company acquired $5,546 of property and
equipment. During the six months ended March 31, 2008, the Company acquired
$26,111 of property and equipment.




Financing
Activities




During
the nine months ended June 30, 2009, the Company received $5,000 for the
purchase of common stock, and $240,000 from short term notes.




During
the nine months ended June 30, 2008 the Company received $1,123,404 in financing
activities. Cash provided from financing activities for the nine months
ended June30, 2008 consisted proceeds of $425,000 from the issuance of 10%
subordinated notes payable and $330,000 for the purchase of Common Stock. Cash
used in financing activities for the nine months ended June 30, 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.




On June
30, 2009, the Company had cash and cash equivalents of $8,582. The sole source
of liquidity has been borrowings from affiliates and the sales of our
securities. There is no certainty that the Company will be able to generate
revenues from operations during the fiscal year. As of June 30, 2009, the
Company had an accumulated deficit of $25,828,505. We expect that our future
operating results will continue to be subject to many of the problems, expenses,
delays and risks, which we often cannot control, inherent in the establishment
of a developmental business enterprise.


34




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




We are
not certain how the current economic downturn may affect our
business.  Because of the global recession, government agencies and
private industry may not have the funds to purchase our water treatment
systems.  It may also be more difficult for us to raise capital in the
current economic environment. 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.




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 June 30, 2009, the Company has incurred
cumulative losses of $25,828,505 including net loss for the nine months ended
June 30, 2009 of $3,934,849. As the Company has limited cash flow from
operations, its ability to transition from a development stage company to an
operating company is entirely dependent upon obtaining adequate financing to pay
for its overhead, research and development activities, and acquisition of
production equipment. It is unknown when, if ever, the Company will achieve a
level of revenues adequate to support its costs and expenses. In order for the
Company to meet its basic financial obligations, including rent, salaries, debt
service and operations, it plans to undertake additional equity or debt
financing. Because of the Company’s history and current debt levels, there is
considerable doubt that the Company will be able to obtain financing. The
Company’s ability to meet its cash requirements for the next twelve months
depends on its ability to obtain such financing. Even if financing is obtained,
any such financing will likely involve additional fees and debt service
requirements, which may significantly reduce the amount of cash the Company will
have for its operations. Accordingly, there is no assurance that the Company
will be able to implement its plans.




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




As
mentioned in Notes 7 and 8, the Company has convertible notes and subordinated
notes payable that have matured. The Company is in the process of renegotiating
the terms of the notes with the note holders to extend the maturity date. If the
Company is unsuccessful in extending the maturity date, the Company may not be
able to continue as a going concern.




Part
I, Item 3.  Quantitative and Qualitative Disclosures about Market
Risk.





As a
smaller reporting company, we are not required to provide this
disclosure.





35




Part
I, Item 4T.  Controls and Procedures.





(a)
Disclosure 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 of the period covered by this
report.  Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of March 31, 2009, our disclosure
controls and procedures were not effective at the reasonable assurance level due
to the material weaknesses described below.





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 result 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 in our disclosure controls and
procedures:





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.  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
do not have review and supervision procedures for financial reporting functions.
The review and supervision function of internal control relates to the accuracy
of financial information reported. The failure to review and supervise could
allow the reporting of inaccurate or incomplete financial information. Due to
our size and nature, review and supervision may not always be possible or
economically feasible.  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.





(b)
Changes in internal control over financial reporting





During the quarter covered by
this report, there was no change in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Part
II, Item 1.  Legal Proceedings.





Not
applicable.


36





Part
II, Item 1A.  Risk Factors.





As a
smaller reporting company we are not required to provide this
information.





Part
II, Item 2.  Unregistered Sales of Equity Securities and Use of
Proceeds.





On May
11, 2009, the Company issued 290,798 shares of common stock in exchange for
$11,632 in accrued interest owed to holders of our convertible notes. We relied
on section 3(9) of the Securities Act of 1933 to issue the securities inasmuch
as the notes were exchanged by us with our existing security holders
exclusively, and no commission or other remuneration was paid or given directly
or indirectly for soliciting the exchange.





On May
20, 2009, the Company issued 300,000 shares of common stock in exchange for
$12,000 in principal owed to holders of our convertible notes. We relied on
section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as
the notes were exchanged by us with our existing security holders exclusively,
and no commission or other remuneration was paid or given directly or indirectly
for soliciting the exchange.





On June
10, 2009, the Company issued 600,000 shares of common stock in exchange for
$120,000 of services previously rendered.  We relied on section 4(2)
of the Securities Act of 1933 to issue the common
stock in exchange for cash, as the common stock wasissued without any
form of general solicitation or general advertising and the acquirers were
accredited investors.





On June15
20, 2009, the Company issued 964,400 shares of common stock in exchange for
$8,000 in principal and $1,638 in accrued interest owed to holders of our
convertible notes. We relied on section 3(9) of the Securities Act of 1933 to
issue the securities inasmuch as the notes were exchanged by us with our
existing security holders exclusively, and no commission or other remuneration
was paid or given directly or indirectly for soliciting the
exchange.





Part
II, Item 3.  Defaults upon Senior Securities.





Between
October 2006 and February 2007 we issued Secured Convertible Promissory Notes in
the aggregate principal amount of $750,000.  These notes were due to
be paid on the earlier of the first anniversary of the date of issuance, an
Event of Default (as defined in the note) or on the closing of any equity
financing in which we received gross proceeds of at least $2.5
million.  Payment of these notes became due on the first anniversary
of the date of issuance.  We have not paid the notes and, as of August
15, 2009, we owed a total of $511,333 in principal and approximately $101,000 in
accrued interest.





On July
17, 2007 we issued Subordinated Notes Payable in the aggregate principal amount
of $1,025,000.  We were required to pay the principal and accrued
interest monthly in cash or in shares of our common stock.  We have
not paid these notes in accordance with their terms and, as of August 15, 2009,
we owed a total of $250,000 in principal and approximately $39,000 in accrued
interest.





Part
II, Item 4.  Submission of Matters to a Vote of Security
Holders.





During
the quarter ended June 30, 2009, no matters were submitted to a vote of security
holders.





Part
II, Item 5.  Other Information.





None.





37




Part II, Item
6.  Exhibits.





Exhibit
      No.
                
                Description
      of Exhibit3.1
                
                Articles
      of Incorporation(1)3.2
                
                Bylaws(1)10.1
                
                Promissory
      note dated June 5, 2009 for $75,00010.2
                
                Promissory
      note dated June 11, 2009 for $50,00010.3
                
                Promissory
      note dated June 18, 2009 for $75,00010.4
                
                Promissory
      note dated June 26, 2009 for $40,00031.1
                
                Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002*31.2
                
                Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002*32
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002*




* Filed
herewith.


(1)
Incorporated by reference from our Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 15, 2003 as file number
002-95626-D.


38


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.





August
19, 2009


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


39