10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB/A

(Amendment Number 1)

Mark One

þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2008; or

¨   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ________ ___________.

Commission File No. 002-95626-D

Sionix Corporation 

(Exact name of registrant as specified in charter)

Nevada	87-0428526
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)

3880 East Eagle Drive, Anaheim, California 92807

 (Address of principal executive offices)

(847) 235-4566

(Registrant’s telephone number, including area code)

N/A

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

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

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

The number of shares of common stock outstanding at August 12, 2008 was 121,479,647shares

Transitional Small Business Format (Check one) Yes ¨ No þ

EXPLANATORY NOTE

Between October 17, 2006 and February 27, 2007 Sionix Corporation issued 25 secured convertible promissory notes for total proceeds to the Company of $750,000 (“Convertible Notes 1”). Convertible Notes 1 could be converted into shares of the Company’s common stock at a conversion price of $0.05 per share. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price of less than $0.05.

On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on or about December 31, 2008, and are convertible into common stock at $0.01 per share.

As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows:

·

2001 Executive Officers Stock Option Plan

·

Advisory Board Compensation

·

Warrants Related to 2004 Stock Purchase Agreement

·

Convertible Notes 1

·

Convertible Notes 2

·

Subordinated Convertible Notes 3

·

Warrants related to Subordinated Convertible Notes 3

As a result of these transactions, we are filing amendment number 1 (“Amendment 1”) to our Form 10-QSB (the “Original Report”) that was originally filed with the Securities and Exchange Commission (the “SEC”) on August 19, 2008 for the period ended June 30, 2008.

The primary purpose of the Amendment is to disclose the restatement of our financial statements for the three and nine months ended June 30, 2008 and cumulative inception to date operations for June 30, 2008. A complete discussion of the restatement is included in the section of this Amendment 1 titled “Management’s Discussion and Analysis or Plan of Operation” and in note 17 to our financial statements for the period ended June 30, 2008.

This Amendment 1 includes all of the information contained in the Original Report, and we have made no attempt in this Amendment 1 to modify or update the disclosures presented in the Original Report, except as identified.

The disclosures in this Amendment 1 continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment 1 should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Report, including any amendments to those filings. The filing of this Amendment 1 shall not be deemed to be an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

During the period ended June 30, 2008, certain investors converted $105,281 of convertible notes into 2,632,029 common shares at $0.04 per share; however, the conversion rate should have been $0.01. At June 30, 2008, the Company owes an additional 7,896,096 shares to the investors. The Company recorded a liability of $1,658,180, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares will be recorded as a change in fair value of beneficial conversion liability.

2

The following adjustments were made to our financial statements for the periods ended June 30, 2008:

	As Previously Stated			Beneficial Conversion Features			Warrants and Options			As Restated June 30, 2008
Balance Sheet
Accrued expenses	$	2,429,688		$	1,658,180		$	––		$	4,087,868
Warrant and option liability		5,530,616			––			4,370,825			9,901,441
Beneficial conversion feature liability		215,071			15,631,608			––			15,846,679
Additional paid-in capital		12,262,574			––			(2,117,339	)		10,145,235
Deficit accumulated during developmental stage		(23,099,897	)		(17,289,788	)		(2,253,486	)		(42,643,171	)
Statement of Operations (for the three months ended June 30, 2008)
Loss on change in fair value of warrant and option liability	$	(2,210,711	)	$	––			(221,232	)	$	(2,431,943	)
Gain (loss) on change in fair value of beneficial conversion liability		659,811			(5,446,636	)		––			(4,786,825	)
General and administrative expenses		634,702			––			83,855			718,557
Statement of Operations (for the nine months ended June 30, 2008)
Gain (loss) on change in fair value of warrant and option liability	$	2,702,841		$	––			(1,205,295	)	$	1,497,546
Gain on change in fair value of beneficial conversion liability		1,215,740			12,920,313			––			14,136,053
General and administrative expenses		6,755,429			––			83,855			6,839,284
Statement of Operations (since inception)
Gain (loss) on change in fair value of warrant and option liability	$	3,172,152		$	––			(1,346,133	)	$	1,826,019
Gain on change in fair value of beneficial conversion liability		941,845			17,108,241			––			18,050,086
General and administrative expenses		20,084,934			3,787,032			83,855			23,955,821
Interest and financing costs		(2,154,841	)		(30,536,702	)		(897,793	)		(33,589,336	)
Statement of Cash Flows (for the nine months ended June 30, 2008)
Net income (loss)	$	(4,809,208	)	$	12,920,313		$	(1,289,150	)	$	6,821,955
(Gain) loss on change in fair value of warrant and option liability		(2,702,841	)		––			1,205,295			(1,497,546	)
Gain on change in fair value of beneficial conversion liability		(1,215,741	)		(12,920,313	)		––			(14,136,054	)
Non-cash compensation expense		––			––			83,855			83,855
Statement of Cash Flows (since inception)
Net loss	$	(23,099,895	)	$	(17,215,493	)	$	(2,327,781	)	$	(42,643,169	)
(Gain) loss on change in fair value of warrant and option liability		(3,172,152	)		––			1,346,133			(1,826,019	)
Gain on change in fair value of beneficial conversion liability		(1,211,697	)		(17,108,241	)		––			(18,319,938	)
Non-cash compensation expense		––			3,787,032			83,855			3,870,887
Non-cash financing costs		––			30,536,702			897,793			31,434,495

3

Sionix Corporation - Form 10-QSB/A

Table of Contents

Part I Financial Information
Item 1 Financial Statements
	Balance Sheet as of June 30, 2008 (Unaudited) (Restated)	5
	Statements of Operations (Unaudited) for the three and nine months ended June 30,
	2008 and June 30, 2007 and from inception (October 3, 1994) to June 30, 2008 (Restated)	5
	Statements of Stockholders Equity (Deficit) for the period from inception (October
	3, 1994) to June 30, 2008 (Restated)	7
	Statements of Cash Flows (unaudited) for the three and nine months ended June 30,
	2008 and June 30, 2007 and from inception (October 3, 1994) to June 30, 2008 (Restated)	9
	Notes to unaudited condensed financial statements	10
	Forward-Looking Statements	30
Part II Other Information
Item 1 Legal Proceedings		41
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3 Defaults upon Senior Securities		41
Item 4 Submission of Matters to a Vote of Security Holders		41
Item 5 Other Information		41
Item 6 Exhibits		41
Signatures		42

4

SIONIX CORPORATION

A DEVELOPMENT STAGE COMPANY

BALANCE SHEET

(UNAUDITED)

	June 30, 2008
	(As Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	996,360
Other current assets		78,619
TOTAL CURRENT ASSETS		1,074,979
PROPERTY AND EQUIPMENT, net		16,361
DEPOSITS		4,600
TOTAL ASSETS		1,095,940
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable	$	541,805
Accrued expenses		4,087,868
Customer deposits		900,000
Liquidated damages liability		153,750
Notes payable – related parties		124,000
Convertible notes, net of debt discounts of $1,163,555		1,109,111
10% subordinated convertible notes, net of debt discounts of $80,675		344,325
Warrant and option liability		9,901,441
Beneficial conversion liability		15,846,679
TOTAL CURRENT LIABILITIES		33,008,979
STOCKHOLDERS' DEFICIT
Common stock (150,000,000 shares authorized; 121,479,647 shares issued and 120,997,747 shares outstanding; par value $0.001)		120,997
Additional paid-in capital		10,145,235
Shares to be issued		463,900
Deficit accumulated during development stage		(42,643,171	)
TOTAL STOCKHOLDERS' DEFICIT		(31,913,039	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,095,940

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

5

SIONIX CORPORATION

A DEVELOPMENT STAGE COMPANY

STATEMENTS OF OPERATIONS

(UNAUDITED)

													Cumulative from Inception (October 3, 1994) to June 30,
	For the three months ended June 30,						For the nine months ended June 30,
	2008			2007			2008			2007			2008
	(As Restated)						(As Restated)						(As Restated)
Revenues	$	––		$	––		$	––		$	––		$	––
Operating expenses													< /TD>
General and administrative		718,557			4,106,285			6,839,284			4,594,409			23,955,821
Research and development		280,972			––			846,904			––			2,822,844
Depreciation and amortization		8,157			7,936			24,472			23,723			556,577
Total operating expenses		1,007,686			4,114,221			7,710,660			4,618,132			27,335,242
Loss from operations		(1,007,686	)		(4,114,221	)		(7,710,660	)		(4,618,132	)		(27,335,242	)
													< /TD>
Other income (expense)
Interest income		1,564			56			2,843			666			61,386
Interest expense and financing costs		(313,696	)		(30,543,755	)		(977,912	)		(30,614,343	)		(33,589,336	)
Gain (loss) on change in fair value of warrant and option liability		(2,431,943	)		692,799			1,497,546			692,799			1,826,019
Gain (loss) on change in fair value of beneficial conversion liability		(4,786,825	)		7,923,801			14,136,053			7,923,801			18,050,086
Impairment of intangibles		––			––			––			—			(1,267,278	)
Inventory obsolesence		––			––			––			––			(365,078	)
Legal settlement		––			––			––			––			344,949
Loss on settlement of debt		––			––			––			––			(230,268	)
Miscellaneous		4,151			––			(125,015	)		––			(125,017	)
Total other income (expense)		(7,526,749	)		(21,927,099	)		14,533,515			(21,997,077	)		(15,294,537	)
Income (loss) before income taxes		(8,534,435	)		(26,041,320	)		6,822,855			(26,615,209	)		(42,629,779	)
Income taxes		––			900			900			900			13,392
Net income (loss)	$	(8,534,435	)	$	(26,042,220	)	$	6,821,955		$	(26,616,109	)	$	(42,643,171	)
Basic income (loss) per share	$	(0.07	)	$	(0.24	)	$	0.06		$	(0.25	)
Dilutive income (loss) per share	$	(0.07	)	$	(0.24	)	$	0.06		$	(0.25	)
													< /TD>
Basic weighted average number of shares of common stock outstanding		113,816,474			106,431,387			113,816,474			105,901,243
Dilutive weighted average number of shares of common stock outstanding		113,816,474			106,431,387			113,816,474			105,901,243

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

6

SIONIX CORPORATION

A DEVELOPMENT STAGE COMPANY

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROMOCTOBER 3, 1994 (INCEPTION) TO JUNE 30, 2007

																			Deficit			Total
	Common Stock					Additional			Shares		Stock			Shares		Unamortized			Accumulated			Stockholders’
	Number of					Paid-in			to be		Subscription			To be		Consulting			from			Equity
	Shares		Amount			Capital			Issued		Receivable			Cancelled		Fees			Inception			(Deficit)
Stock issued for cash, October 3, 1994	10,000		$	10		$	90		$	––	$	––		$	––	$	––		$	––		$	100
Net loss	––			––			––			––		––			––		––			(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			––		––			––		––			––			135,618
Shares issued for debt	1,038,640			1,038			1,164,915			––		––			––		––			––			1,165,953
Shares issued for cash	232,557			233			1,119,027			––		––			––		––			––			1,119,260
Shares 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	––			––			––			––		––			––		––			(914,279	)		(914,279	)
Balance at December 31, 1995	4,370,370			4,370			4,744,633			––		(2,331,800	)		––		––			(915,800	)		1,501,403
Shares issued for reorganization	18,632,612			18,633			(58,033	)		––		––			––		––			––			(39,400	)
Shares issued for cash	572,407			573			571,834			––		––			––		––			––			572,407
Shares issued for services	24,307			24			24,283			––		––			––		––			––			24,307
Net loss	––			––			––			––		––			––		––			(922,717	)		(922,717	)
Balance at September 30, 1996	23,599,696			23,600			5,282,717			––		(2,331,800	)		––		––			(1,838,517	)		1,136,000
Shares issued for cash	722,733			723			365,857			––		––			––		––			––			366,580
Shares issued for services	274,299			274			54,586			––		––			––		––			––			54,860
Cancellation of shares	(542,138	)		(542	)		(674,458	)		––		675,000			––		––			––			––
Net loss	––			––			––			––		––			––		––			(858,915	)		(858,915	)
Balance at September 30, 1997	24,054,590			24,055			5,028,702			––		(1,656,800	)		––		––			(2,697,432	)		698,525
Shares issued for cash	2,810,000			2,810			278,190			––		––			––		––			––			281,000
Shares issued for services	895,455			895			88,651			––		––			––		––			––			89,546
Shares issued for compensation	2,200,000			2,200			217,800			––		––			––		––			––			220,000
Cancellation of shares	(2,538,170	)		(2,538	)		(1,534,262	)		––		1,656,800			––		––			––			120,000
Net loss	––			––			––			––		––			––		––			(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			––		––			––		––			––			392,925
Shares issued for services	705,746			706			215,329			––		––			––		––			––			216,035
Shares issued for cash	9,383,000			9,383			928,917			––		––			––		––			––			938,300
Net loss	––			––			––			––		––			––		––			(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			––		––			––		––			––			1,030,350
Shares issued for compensation	1,517,615			1,518			1,218,598			––		––			––		––			––			1,220,116
Shares issued for services	986,844			986			253,301			––		––			––		––			––			254,287
Net loss	––			––			––			––		––			––		––			(2,414,188	)		(2,414,188	)
Balance at September 30, 2000	54,166,322			54,166			8,104,350			––		––			––		––			(8,168,751	)		(10,235	)
Shares issued for services	2,517,376			2,517			530,368			––		––			––		(141,318	)		––			391,567
Shares issued for cash	6,005,000			6,005			594,495			––		––			––		––			––			600,500
Shares to be issued for cash (100,000 shares)	––			––			––			10,000		––			––		––			––			10,000
Shares to be issued for debt (639,509 shares)	––			––			––			103,295		––			––		––			––			103,295
Net loss	––			––			––			––		––			––		––			(1,353,429	)		(1,353,429	)

7

SIONIX CORPORATION

A DEVELOPMENT STAGE COMPANY

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROMOCTOBER 3, 1994 (INCEPTION) TO JUNE 30, 2007 (Continued)

< TD style="background-color:#CCFFCC" valign=top width=13.333>

																				Deficit			Total
	Common Stock					Additional			Shares			Stock		Shares			Unamortized			Accumulated			Stockholders’
	Number of					Paid-in			to be			Subscription		To be			Consulting			from			Equity
	Shares		Amount			Capital			Issued			Receivable		Cancelled			Fees			Inception			(Deficit)
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	1,111,710			1,112			361,603			––			––		––			54,400			––			417,115
Shares issued as a contribution	100,000			100			11,200			––			––		––			––			––			11,300
Shares issued for compensation	18,838			19			2,897			––			––		––			––			––			2,916
Shares issued for cash	16,815,357			16,815			1,560,782			(10,000	)		––		––			––			––			1,567,597
Shares issued for debt	1,339,509			1,340			208,639			(103,295	)		––		––			––			––			106,684
Shares to be issued related to equity
financing (967,742 shares)	––			––			(300,000	)		300,000			––		––			––			––			––
Cancellation of shares	(7,533,701	)		(7,534	)		––			––			––		––			––			––			(7,534	)
Net loss	––			––			––			––			––		––			––			(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	)		596,467
Shares issued for services	2,467,742			2,468			651,757			(300,000	)		––		––			––			––			354,225
Shares issued for capital equity line	8,154,317			8,154			891,846			––			––		––			––			––			900,000
Amortization of consulting fees	––			––			––			––			––		––			86,918			––			86,918
Cancellation of shares	(50,000	)		(50	)		50			––			––		––			––			––			––
Shares to be cancelled (7,349,204 shares)	––			––			7,349			––			––		(7,349	)		––			––			––
Net loss	––			––			––			––			––		––			––			(1,721,991	)		(1,721,991	)
Balance at September 30, 2003	85,112,470			85,112			12,625,336			––			––		(7,349	)		––			(12,487,480	)		215,619
Shares issued for capital equity line	19,179,016			19,179			447,706			––			––		––			––			––			466,885
Shares issued for services	5,100,004			5,100			196,997			––			––		––			(13,075	)		––			189,022
Share to be issued for cash (963,336 shares)	––			––			––			28,900			––		––			––			––			28,900
Shares to be issued for debt (500,000 shares)	––			––			––			15,000			––		––			––			––			15,000
Cancellation of shares	(7,349,204	)		(7,349	)		––			––			––		7,349			––			––			––
Issuance of warrants related to 2004 stock purchase	––			––			24,366			––			––		––			––			––			24,366
Net loss	––			––			––			––			––		––			––			(1,593,135	)		(1,593,135	)
Balance at September 30, 2004	102,042,286			102,042			13,294,405			43,900			––		––			(13,075	)		(14,080,615	)		(653,343	)
Amortization of consulting fees	––			––			––			––			––		––			13,075			––			13,075
Net loss	––			––			––			––			––		––			––			(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	––			––			––			––			––		––			––			(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	)
Stock issued for consulting	4,592,915			4,593			80,336			––			––		––			––			––			84,929
Reclassification to warrant and option liability	––			––			(2,277,013	)		––			––		––			––			––			(2,277,013	)
Net loss	––			––			––			––			––		––			––			(33,612,516	)		(33,612,516	)
Balance at September 30, 2007	106,635,201			106,635			11,097,728			43,900			––		––			––			(49,465,126	)		(38,216,863	)
Conversion of note payable into common stock	10,363,796			10,163			789,090			––			––		––			––			––			799,253
Common stock issued for services	698,750			899			––			113,951			––		––			––			––			––
Common stock issued for cash	3,300,000			3,300			326,700			––			––		––			––			––			330,000
Common stock to be issued for cash	––			––			––			––			––		420,000			––			––			––
Issuance of warrants with stock	––			––			(2,182,234	)		––			––		––			––			––			––
Net income	––			––			––			––			––		––			––			6,821,955			6,821,955
Balance at June 30, 2008, restated, unaudited	120,997,747		$	120,997		$	10,145,235		$	463,900		$	––	$	––		$	––		$	(42,643,171	)	$	(31,913,039	)

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

8

SIONIX CORPORATION

A DEVELOPMENT STAGE COMPANY

STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the nine months ended June 30,						Cumulative from Inception (October 3, 1994) to June 30,
	2008			2007			2008
	(As Restated)			(As Restated)			(As Restated)
OPERATING ACTIVITIES:
Net income (loss)	$	6,821,955		$	(26,665,300	)	$	(42,643,169	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		24,472			23,723			643,495
Amortization of beneficial conversion features discount and warrant discount		1,073,445			75,827			1,907,270
Stock based compensation expense - employee		––			––			1,835,957
Stock based compensation expense - consultant		5,799,646			84,929			8,105,192
Gain on change in fair value of warrant and option liability		(1,497,546	)		(692,799	)		(1,826,019	)
Gain on change in  fair value of beneficial conversion liability		(14,136,054	)		(7,923,801	)		(18,319,939	)
Non-cash financing costs		––			30,469,448			31,434,495
Non-cash compensation costs		83,855			3,614,932			3,870,887
Impairment of assets		––			––			514,755
Write-down of obsolete assets		––			––			38,862
Impairment of intangible assets		––			––			1,117,601
Loss on settlement of debt		––			––			130,268
Loss on termination of lease		126,111			––			126,111
Increase in assets:
Other current assets		(77,269	)		––			(586,346	)
Other assets		––			(4,600	)		(64,230	)
Increase (decrease) in liabilities:
Accounts payable		409,406			(67,806	)		636,807
Accrued expenses		(139,840	)		484,626			2,443,650
Customer deposits		900,000			––			900,000
Net cash used in operating activities		(611,819	)		(600,821	)		(9,734,353	)
INVESTING ACTIVITIES:
Acquisition of property and equipment		(26,111	)		(25,360	)		(397,566	)
Acquisition of patents		––			––			(154,061	)
Net cash used in investing activities		(26,111	)		(25,360	)		(551,627	)
FINANCING ACTIVITIES:
Accrual of liquidating damages		138,375			––			153,750
Payment on notes payable to officer		(19,260	)		(33,800	)		(218,502	)
Proceeds from notes payable, related party		––			––			457,433
Payments on notes payable to related party		(5,000	)		––			(5,000	)
Receipt from (payments to) equity line of credit		(27,336	)		(225,000	)		428,664
Proceeds from convertible notes payable		––			1,336,000			1,861,000
Proceeds from 10% subordinated notes payable		425,000			––			425,000
Issuance of common stock		330,000			––			7,716,094
Receipt of cash for stock to be issued		420,000			––			463,900
Net cash provided by financing activities		1,261,779			1,077,200			11,282,339
NET INCREASE IN CASH AND CASH EQUIVALENTS		623,849			451,019			996,359
CASH AND CASH EQUIVALENTS, BEGINNING		372,511			4,544			––
CASH AND CASH EQUIVALENTS, ENDING	$	996,360		$	455,563		$	996,359
SUPPLEMENTAL INFORMATION:
Cash and cash equivalents paid for interest	$	––		$	––		$	––
Cash and cash equivalents paid for taxes	$	––		$	––		$	––

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

9

Sionix Corporation

A Development Stage Company

June 30, 2008

Notes to Financial Statements (Unaudited)

NOTE 1

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

NOTE 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

REVENUE RECOGNITION

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

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SUPPORT SERVICES

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

WARRANTIES

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

INVENTORY VALUATION

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

GOODWILL AND OTHER INTANGIBLES

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

LEGAL CONTINGENCIES

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

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.

11

NET LOSS PER SHARE

Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, “Earnings PerShare,” (“SFAS 128”). Basic net loss per share is computed by dividing the net loss available to common stock holders by the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. During the three and nine months ended June 30, 2008, the Company had net income; however, the net income was due to the change in the fair value of the warrant an d option liability and in the change in the fair value of the beneficial conversion liability. If these securities had been converted at the beginning of the period, then the Company would have realized a loss for the three and nine month period ended June 30, 2008. As such, these securities are determined to be anti-dilutive and the number of shares used to determine the basic and dilutive earnings per share is the same.

ESTIMATES

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

ADVERTISING

The cost of advertising is expensed as incurred. Total advertising costs were included in general and administrative expenses and were $945 and $3,385 for the nine months ended June 30, 2008 and 2007, respectively.

ACCRUED DERIVATIVE LIABILITIES

The Company applies a two-step model to determine whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for equity treatment. However, liability accounting is triggered as there were insufficient shares to fulfill all potential conversions. The Company determines which instruments or embedded features require liability accounting and records the fair values as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statements of operations as “gain on change in fair value of warrant and option liability” and “gain on change in fair value of beneficial conversion liability.”

RECLASSIFICATION

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

12

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

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

NOTE 3

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 2008:

Equipment and machinery	$	209,014
Furniture and fixtures		24,594
		233,608
Less accumulated depreciation		(217,247	)
Net Property and Equipment	$	16,361

Depreciation expense was $24,472 and $23,723 for the nine months ended June 30, 2008 and 2007, respectively.

NOTE 4

ACCRUED EXPENSES (RESTATED)

Accrued expenses consisted of the following at June 30, 2008:

Accrued salaries	$	1,527,676
Advisory board compensation		576,000
Interest payable		223,857
Other accruals		1,760,335
Total accrued expenses	$	4,087,868

NOTE 5

CUSTOMER DEPOSITS

In May 2008, the Company received an order for two water filtration systems, which required a deposit. The Company is in the design phase of the manufacturing process, and has not recognized any revenue related to these water filtration systems. As of June 30, 2008, customer deposits were $900,000.

NOTE 6

NOTES PAYABLE TO RELATED PARTIES

The Company has received advances in the form of unsecured promissory notes from stockholders in order to pay ongoing operating expenses. These notes bear interest at rates up to 13% and are due on demand. As of June 30, 2008, notes payable amounted to $124,000.

13

NOTE 7

CONVERTIBLE NOTES PAYABLE

CONVERTIBLE NOTE 1

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

FASB 133, paragraph 12 was applied to determine if the embedded beneficial conversion features should be bifurcated from the convertible bridge notes. The Company determined that the economic characteristics of the embedded beneficial conversion features are not clearly and closely related to the convertible bridge notes, the embedded beneficial conversion feature and convertible bridge 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 FASB 133, paragraphs 6-11. Therefore, the embedded beneficial conversion features were bifurcated from the convertible bridge notes. FASB 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 o r permitted net settlement. Therefore, the embedded beneficial conversion features were determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to determine the classification of the beneficial conversion feature, which states that contracts which require net-share settlement are equity. Therefore the embedded conversion features were determined to be equity instruments at the date of issuance. The Company applied EITF 00-19, paragraph 9, which states that all contracts be initially measured at fair value. The terms of the conversion feature were analyzed and the Company determined that the convertible notes were a conventional convertible pursuant to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis of the convertible notes. SFAS 150 requires three classes of freestanding financial instruments, as defined in paragraphs 8 through 17, to be classified as liabilities. The first class, as defined in paragraph 9, includes financial instruments that are mandatorily re deemable 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, includes financial instruments that require the issuance of a variable number of shares of Common Stock. There are no terms or conditions that require the Company to issue a variable number of shares of Common Stock. Therefore, the Company concluded that the convertible notes were not within the scope of SFAS 150.

The fair value of the embedded beneficial conversion features was valued at $750,000 at the date of issuance using the Black Sholes model with the following assumptions: risk free rate of return of 2.02% to 5.09%; volatility of 268% to 275%; dividend yield of 0% and an expected term of 1.5 years.

Based on the calculation of the fair value of the embedded beneficial conversion feature, the Company allocated $750,000 to the beneficial conversion feature and the beneficial conversion feature discount, and none to the convertible note at the date of issuance. The embedded beneficial conversion feature discount is amortized to interest expense over the term of the note.

As of June 30, 2008, the outstanding convertible notes totaled $573,333 and the unamortized embedded beneficial conversion feature discount totaled $5,555, for a net convertible debt of $567,778.

For the nine months ended June 30, 2008, interest expense was $55,593 and amortization expense for the embedded beneficial conversion feature discount was $283,472, which was included in interest expense in the other income (expense) section of the statement of operations.

Calico Capital Management, LLC acted as an agent for the Company in arranging the transaction for Bridge Notes 1 and 2 and was paid a placement fee of $75,000. The Company recorded these fees as an expense in 2007.

14

 CONVERTIBLE NOTE 2

On June 6, 2007, the Company completed an offering of $86,000 in principal amount of convertible notes, which bear interest at 10% per annum and mature on December 31, 2008.These notes are convertible into shares of the Company’s Common Stock at $0.01 per share or shares of any equity security issued by the Company at a conversion price equal to the price at which such security is sold to any other party. There are no registration rights associated with these notes.

FASB 133, paragraph 12 was applied to determine if the embedded beneficial conversion features should be bifurcated from the convertible bridge notes. The Company determined that the economic characteristics of the embedded beneficial conversion features are not clearly and closely related to the convertible bridge notes, the embedded beneficial conversion feature and convertible bridge 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 FASB 133, paragraphs 6-11. Therefore, the embedded beneficial conversion features were bifurcated from the convertible bridge notes. FASB 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 o r permitted net settlement. Therefore, the embedded beneficial conversion features were determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to determine the classification of the beneficial conversion feature, which states that contracts which require net-share settlement are equity. Therefore the embedded conversion features were determined to be equity instruments at the date of issuance. The Company applied EITF 00-19, paragraph 9, which states that all contracts be initially measured at fair value. The terms of the conversion feature were analyzed and the Company determined that the convertible notes were a conventional convertible pursuant to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis of the convertible notes. SFAS 150 requires three classes of freestanding financial instruments, as defined in paragraphs 8 through 17, to be classified as liabilities. The first class, as defined in paragraph 9, includes financial instruments that are mandatorily re deemable 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, includes 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, includes financial instruments that require the issuance of a variable number of shares of Common Stock. There are no terms or conditions that require the Company to issue a variable number of shares of Common Stock. Therefore, the Company concluded that the convertible notes were not within the scope of SFAS 150.

The fair value of the embedded beneficial conversion features was determined to be $86,000 at the date of issuance using the Black Sholes model with the following assumptions: risk free rate of return of 4.96%; volatility of 259.58%; dividend yield of 0% and an expected term of 1.5 years.

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.

As of June 30, 2008, the outstanding convertible notes totaled $78,000 and the unamortized embedded beneficial conversion feature discount was $21,667, for a net convertible debt of $56,333.

For the nine months ended June 30, 2008, interest expense was $6,526, and amortization expense for the embedded beneficial conversion feature discount was $43,000, which was included in interest expense in the other income (expense) section of the statement of operations.

Calico Capital Management, LLC acted as an agent for the Company in arranging the transaction for Bridge Notes 1 and 2 and was paid a placement fee of $75,000. The Company recorded these fees as an expense in 2007.

CONVERTIBLE NOTE 3

On July 18, 2007, the Company completed an offering of $1,025,000 in principal amount of Subordinated Convertible Debentures to a group of institutional and accredited investors, which bear interest at the rate of 8% per annum, and mature 12 months from the date of issuance. The Subordinated Convertible Debentures are convertible

15

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, which expire five years from the date of grant.

Under the terms of a Registration Rights Agreement signed in conjunction with this offering, the Company is required to file a registration statement under the Securities Act of 1933 in order to register the resale of the shares of Common Stock issuable upon conversion of the Subordinated Convertible Debentures and the warrant shares (collectively, the "Registerable Securities"). If the Company does not file a registration statement with respect to the Registerable Securities within forty-five days following the closing of the Offering, or if the Registration Statement is not declared effective by the Securities and Exchange Commission within 90 days, then the Company must pay to each purchaser damages equal to 1.5% of the purchase price paid by the purchaser for its Subordinated Convertible Debentures, for each 30 day period that follows after these deadlines. The aggregate amount of damages payable by the Company is limited to 15% of the purchase price. The Company had until August 31, 2007 to file the registration statement. The Company recorded $153,750 as liquidated damages as of June 30, 2008. No derivative liability is recorded as the amount of liquidated damage is fixed with a maximum ceiling.

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

The fair value of the warrants was determined to be $741,371 at the date of issuance calculated using the Black Sholes model with the following assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0% and an expected term of 5 years. As a result, the relative fair value of the warrants was determined to be $594,811.

FASB 133, paragraph 12 was applied to determine if the embedded beneficial conversion features should be bifurcated from the convertible bridge notes. The Company determined that the economic characteristics of the embedded beneficial conversion features are not clearly and closely related to the convertible bridge notes, the embedded beneficial conversion feature and convertible bridge 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 FASB 133, paragraphs 6-11. Therefore, the embedded beneficial conversion features were bifurcated from the convertible bridge notes. FASB 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 o r permitted net settlement. Therefore, the embedded beneficial conversion features were determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to determine the classification of the beneficial conversion feature, which states that contracts which require net-share settlement are equity. Therefore the embedded conversion features were determined to be equity instruments at the date of issuance. The Company applied EITF 00-19, paragraph 9, which states that all contracts be initially measured at fair value. The terms of the conversion feature were analyzed and the Company determined that the convertible notes were a conventional convertible pursuant to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis of the convertible notes. SFAS 150 requires three classes of freestanding financial instruments, as defined in paragraphs 8 through 17, to be classified as liabilities. The first class, as defined in paragraph 9, includes financial instruments that are mandatorily re deemable 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, includes 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, includes financial instruments that require the issuance of a variable number of shares of Common Stock. There are no terms or conditions that require the Company to issue a variable number of shares of Common Stock. Therefore, the Company concluded that the convertible notes were not within the scope of SFAS 150.

The fair value of the embedded beneficial conversion features was determined to be $430,189 at the date of issuance using the Black Sholes model with the following assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0% and an expected term of 1 year.

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

As of June 30, 2008, the outstanding convertible notes totaled $485,000, the unamortized warrant discount was $0, and the embedded beneficial conversion feature discount was $0, for a net convertible debt of $485,000.

For the nine months ended June 30, 2008, interest expense was $59,972, amortization expense for the warrant discount was $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 $412,154, which was also included in interest expense in the other income (expense) section of the statement of operations.

As of June 30, 2008, the Company entered into various debenture agreements (the “Bridge Notes”) with several investors. Under the terms of the agreements, the Bridge Notes bear interest at the rate of 10% per annum. The Bridge Notes will automatically mature and the entire outstanding principal amount, together with all unpaid and accrued interest, shall become due and payable after the earlier of (i) the eighteen (18) month anniversary of 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 to the Company are at least $2,500,000, unless, prior to such time, the notes have been converted into shares of the Company’s Common Stock.

NOTE 8

10% SUBORDINATED NOTES PAYABLE

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

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 option pricing model, using the following assumptions: risk free rate of return of ranging from 2.64% to 3.26%, volatility ranging from 97.08% to 98.27%, dividend yield of 0% and expected life of six years. As a result, the relative fair value of the warrants was $96,814.

FASB 133, paragraph 12 was applied to determine if the embedded beneficial conversion features should be bifurcated from the convertible bridge notes. The Company determined that the economic characteristics of the embedded beneficial conversion features are not clearly and closely related to the convertible bridge notes, the embedded beneficial conversion feature and convertible bridge 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 FASB 133, paragraphs 6-11. Therefore, the embedded beneficial conversion features were bifurcated from the convertible bridge notes. FASB 133, paragraph 6 was applied to determine if the embedded beneficial conversion features were within the scope and definition of a derivative. The embedded beneficial conversion features had one or more underlings and one or more notional amounts, required no initial investment and required or permitted net settlement. Therefore, the embedded beneficial conversion features were determined to be derivatives. The Company applied EITF 00-19, paragraph 8 to determine the classification of the beneficial conversion feature, which states that contracts which require net-share settlement are equity. Therefore the embedded conversion features were determined to be equity instruments at the date of issuance. The Company applied EITF 00-19, paragraph 9, which states that all contracts be initially measured at fair value. The terms of the conversion feature were analyzed and the Company determined that the convertible notes were a conventional convertible pursuant to paragraph 4 of EITF 00-19. The Company included SFAS 150 in the analysis of the convertible notes. SFAS 150 requires three classes of freestanding financial instruments, as defined in paragraphs 8 through 17, to be classified as liabilities. The first class, as defined in paragraph 9, includes financial instruments that are mandatorily red eemable

17

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, includes 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, includes 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.

As of June 30, 2008, the principal outstanding totaled $425,000, unamortized warrant discount totaled $80,675, and the net amount of the note payable was $344,325.

For the nine months ended June 30, 2008, interest expense was $14,795, and amortization expense for the warrant discount was $16,140, which was included in interest expense in the other income (expense) section of the statement of operations.

NOTE 9

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 shares of Common Stock. The options expire 5 years from the date of issuance.

On the grant date, the Company applied Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 6 to determine if the options were within the scope and definition of a derivative. The options: had one or more underlings, and one or more notional amounts; required no initial investment; and required or permitted net settlement. Therefore, the options were determined to be derivatives. In order to determine how to classify the options, the Company followed the guidance of paragraphs 7 and 8 of Emerging Issue Task Force (EITF) 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, which states that contracts that require settlement in shares are equity instruments. In order to determine the value of the options, the Company applied EITF 00-19, paragraph 9, which states that contracts that require the company to deliver shares as part of a physical settlement or net-share settlement should be initially measured at fair value. In accordance with EITF 00-19, the options were recorded in additional paid-in capital at fair value on the date of issuance.

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

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

The Company analyzed the options by applying FASB 133, paragraph 6 to ascertain if the options issued remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the options issued were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

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The fair value of the options was determined to be $842,430 as of June 30, 2008, and was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 2.75 years.

The decrease in the fair value of the options was $1,084,484 for the nine months ended June 30, 2008, and was recorded by decreasing the warrant liability on the balance sheet.

Warrants Related to Convertible Debentures

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

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

The fair value of the warrants was determined to be $554,249 ($430,189 attributable to the holders of the Convertible Debentures and $124,060 attributable to the placement fee) at the date of issuance, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0% and an expected term of 5 years.

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

The fair value of the warrants was determined to be $499,932 ($379,672 attributable to the holders of the Convertible Debentures and $120,260 attributable to the placement fee) as of September 30, 2007, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term of 4.67 to 4.75 years.

The Company analyzed the warrants by applying FASB 133, paragraph 6 to ascertain if the warrants remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the warrants issued were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the warrants was determined to be $238,490 as of June 30, 2008, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 3.92 to 4 years.

The decrease in the fair value of the warrants was $261,442 for the nine months ended June 30, 2008, and recorded by decreasing warrant liabilities on the balance sheet by $261,442 ($188,034 related to the holders of the convertible bridge notes, and $73,408 related to the placement fee).

Options Related to Chief Executive Officer

On December 19, 2007, the Company entered into a one year Employment Agreement with Richard H. Papalian pursuant to which Mr. Papalian has been appointed as the Company’s Chief Executive Officer. As compensation for his services, the Company granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of the Company’s Common Stock at an exercise price of $0.25 per share. As per the terms of the stock option agreement,

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options for the purchase of 340,000 shares of Common Stock are not exercisable until the notes dated June 6, 2007 (Convertible Note 2 as discussed in Note 7 above) are eligible for conversion into shares of Common Stock. These options were issued outside of the 2001 Executive Officers Stock Option Plan. 

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

The fair value of the options was determined to be $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 Company analyzed the options as of June 30, 2008, by applying FASB 133, paragraph 6 to ascertain if the options issued remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the options issued were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the options was determined to be $990,390 as of June 30, 2008, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 4.42 years.

The decrease in the fair value of the options was $457,931 for the nine months ended June 30, 2008, and was recorded by decreasing the warrant liability on the balance sheet.

Warrants 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 to Mr. Maron a five year warrant to purchase up to 8,539,312 shares of the Company’s Common Stock at an exercise price of $0.25 per share. As per the terms of the stock option agreement, options for the purchase of 340,000 shares of Common Stock are not exercisable until the notes dated June 6, 2007 (Convertible Note 2 as discussed in Note 7 above) are eligible for conversion into shares of Common Stock. These warrants were issued outside of the 2001 Executive Officers Stock Option Plan.

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

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

The Company analyzed the warrants by applying FASB 133, paragraph 6 to ascertain if the warrants remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the warrants issued were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states

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that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the warrants was determined to be $990,390 as of June 30, 2008, using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 4.42 years.

The decrease in the fair value of the warrants was $457,931 for the nine months ended June 30, 2008, and recorded by decreasing the warrant liability on the balance sheet.

Warrants Related to 10% Subordinated Debentures

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

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

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

The Company analyzed the warrants by applying FASB 133, paragraph 6 to ascertain if the warrants remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the warrants issued were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the warrants was determined to be $76,248 as of June 30, 2008, using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 5.58 years.

The decrease in the fair value of the options was $20,566 for the nine months ended June 30, 2008, and recorded by decreasing the warrant liability on the balance sheet.

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.

The Company followed the guidance of FASB 133, paragraph 6, to determine if the warrants were within the scope and definition of a derivative at the date of issuance. The warrants had one or more underlings and one or more notional amounts, required no initial investment and required or permitted net settlement. Therefore, the warrants were determined to be derivatives at the date of issuance. In order to determine how to classify the warrants, the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the

21

control of the company) are liability instruments. In order to determine the value of the warrants, the Company followed the guidance of EITF 00-19, paragraph 9, which states that contracts which require the company to deliver shares as part of a physical settlement or net-share settlement should be initially measured at fair value.

The fair value of the warrants was determined to be $483,476 at the date of issuance, which was calculated using the Black Sholes option pricing model, using the following assumptions: risk free rate of return of 1.32% to 2.17%, volatility of 72.4% to 77.86%, dividend yield of 0%, and expected term of 3 years.

The Company analyzed the warrants by applying FASB 133, paragraph 6 to ascertain if the warrants remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the warrants were determined to be within the scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which states that if share settlement is not controlled by the company, the contract is required to be classified as a liability. Paragraph 9 also states that contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the warrants was determined to be $553,363 as of June 30, 2008, which was calculated using the Black-Sholes option pricing model, using the following assumptions: risk free rate of return of 2.36%, volatility of 74.72%, dividend yield of 0% and expected term of 2.67 to 2.83 years.

The increase in the fair value of the warrants of $69,887 for the nine month period ended June 30, 2008 was recorded in decrease in warrant liability in the other income (expense) section of the statement of operations.

NOTE 10 BENEFICIAL CONVERSION FEATURES LIABILITY

As of September 30, 2007, the Company had Convertible Bridge Notes outstanding totaling $1,861,000 that were issued between October 17, 2006, and July 17, 2007. The bridge notes included embedded beneficial conversion features that allowed the holders of the convertible notes to convert their notes into shares of Common Stock at rates between $0.01 and $0.22. The bridge notes mature between June 17, 2008 and December 31, 2008. The bridge notes accrue interest at rates between 8% and 10%, and any accrued but unpaid interest is also convertible by the holder of the convertible bridge notes into shares of Common Stock at the same rate.

The Company followed the guidance of FASB 133, paragraph 6, to ascertain if the embedded beneficial conversion features remained derivatives subsequent to the date of issuance. All of the criteria in the original analysis were met, and the embedded beneficial conversion features issued were determined to be within the scope and definition of a derivative. The Company followed the guidance of FASB 133, paragraph 12, to determine if the embedded beneficial conversion features should be separated from the convertible bridge notes. All of the criteria in the original analysis were met, and the embedded beneficial conversion features were separated from the convertible bridge notes. In order to determine the classification of the embedded conversion features, the Company applied paragraphs 7 and 8 of EITF 00-19. Paragraph 7 states that contracts which require net-cash settlement are liabilities, and paragraph 8 states that contracts which give the counterparty (ho lders of the convertible notes) a choice of net-cash settlement or settlement in shares are liabilities. Therefore the embedded conversion features were determined to be liabilities. In order to determine the value of the embedded conversion features, the Company followed the guidance of EITF 00-19, paragraph 9, which states that all contracts classified as liabilities are to be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the embedded beneficial conversion features was determined to be $1,430,812 at the date of issuance using the Black Sholes model with the following assumptions: risk free rate of return of 2.02% to 5.09%; volatility of 108.5% to 274.86%; dividend yield of 0% and an expected term of 1 to 1.5 years.

The fair value of the embedded beneficial conversion features was determined to be $1,430,812 as of September 30, 2007, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 4.05%; volatility of 126.94%; dividend yield of 0% and an expected term of .58 to 1.25 years.

The Company analyzed the beneficial conversion features by applying FASB 133, paragraph 6 to ascertain if the beneficial conversion features remained derivatives as of June 30, 2008. All of the criteria in the original analysis were met, and the beneficial conversion features were determined to be within the scope and definition of a derivative. FASB 133, paragraph 12 was applied to determine if the embedded beneficial conversion features should be separated from the convertible bridge notes. All of the criteria in the original analysis were met, and the

22

embedded beneficial conversion features were separated from the convertible bridge notes. EITF 00-19, paragraphs 7 and 8 were applied to determine the classification. Paragraph 7 states that contracts which require net-cash settlement are liabilities, and paragraph 8 states that contracts which give the counterparty (holders of the convertible notes) a choice of net-cash settlement or settlement in shares are liabilities. The embedded conversion features were determined to be liabilities and the Company followed the guidance of EITF 00-19, paragraph 9 to determine their value. Paragraph 9 states that all contracts classified as liabilities are to be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

The fair value of the monthly embedded beneficial conversion features was determined to be $215,071 as of June 30, 2008, using the Black Sholes model with the following assumptions: risk free rate of return of 2.36%; volatility of 74.72%; dividend yield of 0%; and an expected term of 1.42 to 3.75 years.

The decrease in the fair value of the beneficial conversion features was $1,215,740 for the nine months ended June 30, 2008, and recorded by decreasing the beneficial conversion features liability on the balance sheet.

NOTE 11

STOCKHOLDERS’ DEFICIT

COMMON STOCK

The Company has 150,000,000 authorized shares with $0.001 par value. As of June 30, 2008, the Company had 121,479,647 shares issued and 120,997,747 shares outstanding.

In January 2008, the Company issued 150,000 shares of Common Stock to a vendor to in lieu of $25,000.

In April 2008, the Company issued 748,750 shares of Common Stock as part of the settlement of the termination of an operating lease.

During the three months ended June 30, 2008, the Company issued 10,163,796 shares of Common Stock for the conversion of convertible notes payable and accrued interest for $799,253.

On May 28, 2008, the Company completed an offering of units consisting of shares of Common Stock and warrants to purchase shares of Common Stock. The Company issued 3,300,000 shares of Common Stock, at an offering price of $0.10, for total proceeds of $330,000.

STOCK OPTIONS

2001 Executive Officers Stock Option Plan

In October 2000, the Company entered into amendments to the employment agreements of each of the executive officers eliminating the provisions of stock bonuses. In lieu of the bonus provision, the Company adopted the 2001 Executive Officers Stock Option Plan. The Company reserved 7,576,680 shares of Common Stock for issuance under the plan, and there are options for the purchase of 7,034,140 shares of Common Stock outstanding. The exercise price of the options is $0.15 and the options expire in September 2011.

Options Related to Chief Executive Officer

On December 19, 2007, the Company entered into a one year Employment Agreement with Richard H. Papalian pursuant to which Mr. Papalian was appointed as the Company’s Chief Executive Officer. As compensation for his services, the Company granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of the Company’s Common Stock at an exercise price of $0.25 per share. As per the terms of the stock option agreement, options for the purchase of 340,000 shares of Common Stock are not exercisable until the notes dated June 6, 2007 (Convertible Note 2 as discussed in Note 7 above) are eligible for conversion into shares of Common Stock. These options were issued outside of the 2001 Executive Officers Stock Option Plan. 

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

	Weighted
	Average		Number of
	Exercise		Outstanding
	Price		Options
Outstanding as of September 30, 2007	$	0.15		7,034,140
Granted		0.25		10,539,312
Forfeited		––		––
Exercised		––		––
Outstanding as of June 30, 2008	$	0.20		17,573,452

OUTSTANDING OPTIONS:

Exercise Price		Stock Options Outstanding	Stock Options Exercisable	Weighted Average Remaining Contractual Life In Years		Weighted Average Exercise Price of Options Outstanding		Weighted Average Exercise Price of Options Exercisable
$	0.15	7,034,140	7,034,140	2.25	$	0.15	$	0.15
	0.25	10,539,312	4,561,794	4.42		0.25		0.25

STOCK WARRANTS

Warrants Related to Convertible Debentures

On July 17, 2007 the Company completed an offering of $1,025,000 of Convertible Bridge Notes to a group of institutional and accredited investors which included warrants to purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common Stock to holders of the convertible bridge notes, 465,908 shares of Common Stock as a placement fee) at an exercise price of $0.30 per share. The warrants expire five years from the date of issuance.

Warrants Related to Special Adviser

On December 19, 2007, the Company entered into a one year Consulting Agreement with Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the Company. As compensation for his services, the Company granted to Mr. Maron a five year warrant to purchase up to 8,539,312 shares of the Company’s Common Stock at an exercise price of $0.25 per. As per the terms of the stock option agreement, options for the purchase of 340,000 shares of Common Stock are not exercisable until the notes dated June 6, 2007 (Convertible Note 2 as discussed in Note 7 above) are eligible for conversion into shares of Common Stock. These warrants were issued outside of the 2001 Executive Officers Stock Option Plan.

Warrants Related to 10% Subordinated Debentures

In January 2008, the Company completed an offering of units consisting of $425,000 of Subordinated Debentures to a group of institutional and accredited investors which included warrants to purchase 850,000 shares of Common Stock at an exercise price of $0.40 per share. The warrants expire six years from the date of issuance.

Warrants Related to $750,000 Issuance of Common Stock

On May 28, 2008 the Company completed an offering of $750,000 of units consisting of Common Stock and warrants to purchase the Company’s Common Stock to a group of institutional and accredited investors. 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.

24

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

	Weighted
	Average		Number of
	Exercise		Outstanding
	Price		Warrants
Outstanding as of September 30, 2007	$	0.39		2,795,454
Granted		0.16		33,579,312
Forfeited		––		––
Exercised		––		––
Outstanding as of June 30, 2008	$	0.17		36,374,766

WARRANTS OUTSTANDING

	Exercise Price	Warrants Outstanding		Warrants Exercisable		Average Remaining Contractual Life In Years		Average Exercise Price of Options Outstanding		Average Exercise Price of Options Exercisable
$	0.30		2,795,454		2,795,454		4.00	$	0.30	$	0.30
	0.25		17,329,312		17,329,312		4.42		0.25		0.25
	0.40		850,000		850,000		5.58		0.40		0.40
	0.10		15,000,000		15,000,000		2.75		0.10		0.10
	0.15		400,000		400,000		5.75		0.15		0.15

All outstanding warrants were exercisable as of June 30, 2008.

NOTE 12

GOING CONCERN (RESTATED)

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2008, the Company has incurred cumulative losses of $42,643,171 including income for the nine months ended June 30, 2008, of $6,821,995. As the Company has no cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate financing to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. Its ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements. Accordingly, there is no assurance that the Company will be able to implement its plans.

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

NOTE 13

COMMITMENT

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

25

NOTE 14

SUPPLEMENTAL CASHFLOW DISCLOSURE

During the nine months ended June 30, 2008, the Company had the following noncash transactions:

Conversion of $724,667 in principal amount of convertible notes, and $74,586 of accrued interest into 10,163,795 shares of Common Stock.

Issuance of 748,750 shares of Common Stock for $114,850 in lieu of payment to vendor.

NOTE 15

SUBSEQUENT EVENTS (RESTATED)

Operating Lease

On July 21, 2008, the Company entered into a three year agreement beginning August 1, 2008, for a 12,000 square foot industrial facility in Anaheim, California for research and development and manufacturing and distribution of its water filtration systems. Monthly lease payments are $8,650 for fiscal year 2009, $8,995 for fiscal year 2010, and $9,355 for fiscal year 2011.

Issuance of $1,000,000 in Subordinated Convertible Notes Payable and Related Warrants

In July 2008, the Company completed an offering of $1,000,000 in principal amount of Subordinated Convertible Debentures to a group of institutional and accredited investors, which bear interest at the rate of 12% per annum, and mature 12 months from the date of issuance. The Subordinated Convertible Debentures are convertible into 4,000,000 shares of Common Stock at an initial conversion rate of $0.25 per share. As part of the offering, the Company issued warrants to purchase 1,000,000 shares of Common Stock at an initial exercise price of $0.30 per share, which expire five years from the date of grant.

Warrant and Stock Issued to Legal Counsel

On July 22, 2008, the Company agreed to issue 641,000 shares of Common Stock to a vendor for payment for $96,149 of services provided to the Company. As part of the agreement, the Company issued warrants to purchase 641,000 shares of common stock at an exercise price of $0.15 per share.

Lease of Administrative Offices and Manufacturing Facility

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

NOTE 16

RESTATEMENT

On October 1, 2004, the Company formed an advisory board consisting of four members. Each member was to receive $5,000 monthly from October 1, 2004 to February 22, 2007 for a total of $576,000. Of the total amount, $96,000 should have been accrued during the nine months ended June 30, 2007, and included in general and administrative expenses. Due to an oversight, these agreements were not included in the minutes to the Board of Directors meetings, and therefore, these items were not recorded in the appropriate periods. The Company is in the process of restating the appropriate periods for these unbooked changes.

	As Previously Reported		Adjustment		As Restated
General and Administrative Expenses	$	932,668	$	96,000	$	1,028,668

26

NOTE 17

SUBSEQUENT RESTATEMENT

The Company issued 25 secured convertible promissory notes between October 17, 2006 and February 27, 2007 for total proceeds to the Company of $750,000 (“Convertible Notes 1”). Convertible Notes 1 could be converted into shares of the Company’s common stock at a conversion price of $0.05 per share. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price of less than $0.05.

On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on or about December 31, 2008, and are convertible into common stock at $0.01 per share.

As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows:

·

Warrants and Options

·

Beneficial Conversion Feature

The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2008. The analysis and results were as follows:

Warrants and Options Liability

As of June 30, 2008, the Company had 36,374,766 warrants outstanding and 11,595,934 options outstanding that were vested at that date.

Balance Sheet

The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) as of June 6, 2007.

At June 30, 2008, the Company determined the fair value of all warrants and options to be $7,523,660 and $2,377,780, respectively, using the Black Sholes model with the following assumptions:

·

risk free rate of return between 1.79% and 3.61%;

·

volatility between 242% and 263%;

·

dividend yield of 0%; and

·

expected term between 2.70 years and 5.99 years.

Statement of Operations

For the three and nine months ended June 30, 2008, the Company recorded an additional $221,232 and $1,205,295, respectively, as a loss on change in fair value of warrant and option liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the decrease in fair value of the warrant and option liability of $1,205,295.

Beneficial Conversion Liability

As of June 30, 2008, the Company had $1,280,333 in convertible notes and accrued compensation that could be converted into 80,417,651 shares of common stock. During the period ended June 30, 2008, certain investors converted $105,281 of convertible notes into 2,632,029 common shares at $0.04 per share; however, the conversion

27

rate should have been $0.01. At June 30, 2008, the Company owes an additional 7,896,096 shares to the investors. The Company recorded a liability of $1,658,180, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares will be recorded as a change in fair value of beneficial conversion liability.

Balance Sheet

The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS 133 as of June 6, 2007.

At June 30, 2008, the Company determined the fair value of the embedded conversion features to be $15,846,679 using the Black Sholes model with the following assumptions:

·

risk free rate of return between 1.60% and 2.36%;

·

volatility between 138% and 170%;

·

dividend yield of 0%; and

·

expected term of 0.03 years to 1.5 years.

Statement of Operations

For the three and nine months ended June 30, 2008, the Company recorded an additional $5,446,636 as a loss on change in fair value of beneficial conversion liability and will record $12,920,313 as a gain on change in fair value of beneficial conversion liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the $12,920,313 change in fair value of the beneficial conversion liability.

28

The following table shows the effect of each of the changes discussed above on the Company’s balance sheet, statement of operation, and statement of cash flows for the nine months ended June 30, 2008.

	As Previously Stated			Beneficial Conversion Features			Warrants and Options			As Restated June 30, 2008
Balance Sheet
Accrued expenses	$	2,429,688		$	1,658,180		$	––		$	4,087,868
Warrant and option liability		5,530,616			––			4,370,825			9,901,441
Beneficial conversion feature liability		215,071			15,631,608			––			15,846,679
Additional paid-in capital		12,262,574			––			(2,117,339	)		10,145,235
Deficit accumulated during developmental stage		(23,099,897	)		(17,289,788	)		(2,253,486	)		(42,643,171	)
Statement of Operations (for the three months ended June 30, 2008)
Loss on change in fair value of warrant and option liability	$	(2,210,711	)	$	––			(221,232	)	$	(2,431,943	)
Gain (loss) on change in fair value of beneficial conversion liability		659,811			(5,446,636	)		––			(4,786,825	)
General and administrative expenses		634,702			––			83,855			718,557
Statement of Operations (for the nine months ended June 30, 2008)
Gain (loss) on change in fair value of warrant and option liability	$	2,702,841		$	––			(1,205,295	)	$	1,497,546
Gain on change in fair value of beneficial conversion liability		1,215,740			12,920,313			––			14,136,053
General and administrative expenses		6,755,429			––			83,855			6,839,284
Statement of Operations (since inception)
Gain (loss) on change in fair value of warrant and option liability	$	3,172,152		$	––			(1,346,133	)	$	1,826,019
Gain on change in fair value of beneficial conversion liability		941,845			17,108,241			––			18,050,086
General and administrative expenses		20,084,934			3,787,032			83,855			23,955,821
Interest and financing costs		(2,154,841	)		(30,536,702	)		(897,793	)		(33,589,336	)
Statement of Cash Flows (for the nine months ended June 30, 2008)
Net income (loss)	$	(4,809,208	)	$	12,920,313		$	(1,289,150	)	$	6,821,955
(Gain) loss on change in fair value of warrant and option liability		(2,702,841	)		––			1,205,295			(1,497,546	)
Gain on change in fair value of beneficial conversion liability		(1,215,741	)		(12,920,313	)		––			(14,136,054	)
Non-cash compensation expense		––			––			83,855			83,855
Statement of Cash Flows (since inception)
Net loss	$	(23,099,895	)	$	(17,215,493	)	$	(2,327,781	)	$	(42,643,169	)
(Gain) loss on change in fair value of warrant and option liability		(3,172,152	)		––			1,346,133			(1,826,019	)
Gain on change in fair value of beneficial conversion liability		(1,211,697	)		(17,108,241	)		––			(18,319,938	)
Non-cash compensation expense		––			3,787,032			83,855			3,870,887
Non-cash financing costs		––			30,536,702			897,793			31,434,495

29

FORWARD-LOOKING STATEMENTS

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

Ø

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

Ø

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

Ø

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

Ø

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

Ø

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

Ø

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

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

30

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

DEVELOPMENT STAGE COMPANY. Sionix Corporation (referred to as “the Company”, “we”, “us” or “our”) is a development stage company as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.” The Company designs and develops turn-key stand-alone water treatment systems for municipalities (both potable and wastewater), industry (both make-up water and wastewater), emergency response, military and small residential communities. To date, the Company’s efforts have been principally devoted to research and development, organizational activities, and raising capital. Development of our ELIXIR water treatment system was completed in 2002. Recent tests undertaken by independent third parties indicated that the levels of manganese and iron in the water should be reduced. The Company is currently in the process of determining the optimum way to achieve this result. We have earned no revenues from sales of our product, however, we have received an order for our first sale. Because we earn no revenues, our operations are, and have been in the past, dependent on our ability to borrow money or to raise capital by selling our equity or debt securities.

Our lack of operating capital has slowed the pace of the development and testing of our product. During the 2007 fiscal year we began raising working capital through sales of debt securities, which has allowed us to complete installation of the ELIXIR water treatment system at the Villa Park Dam, Villa Park, California. In order to conserve our cash, whenever possible we use our securities, particularly our common stock, to pay vendors.

On June 13, 2008, the Company took an order for its initial sale of 2 ELIXIR units. The total sales price for the initial units is approximately $4.3 million. A customer deposit of $900,000 was received at the date of the order. Delivery of the initial unit is anticipated to be late January or February 2009.

Our plan for the next 12 months is to continue to raise capital, complete the verification of equipment production standards and test data, and continue the introduction of the ELIXIR water treatment system to the market place. In addition, we plan to hire competent production support and administrative staff to effectively run the Company.

MANAGEMENT. On December 19, 2007, the Company entered into a one year Employment Agreement with Richard H. Papalian and a one year Consulting Agreement with Mark Maron pursuant to which Mr. Papalian has been appointed as the Company’s Chief Executive Officer and Mr. Maron has been appointed as Special Adviser to the Company. As compensation for these services, the Company granted each person a five year option to purchase up to 8,539,312 shares of the Company’s common stock at an exercise price of $0.25 per share which represented 5% of the outstanding shares of the Company’s Common Stock on a fully diluted basis on the date the options were issued. On August 14, 2008, Mr. Papalian resigned as the Company’s Chief Executive Officer, although he continues to serve as a director. Mr. James Houtz, the Company’s President and Chief Operating Officer, has assumed the position of Chief Executive Offi cer.

PLAN OF OPERATION. As stated above, during the next twelve months we plan to continue to raise capital, verify equipment production standards and test data and continue the introduction of the ELIXIR water treatment system to the market place. Provided that our production standards and test data are confirmed and that we are able to raise sufficient capital, we intend to hire competent production support and administrative staff. Additionally, we plan to increase our promotional activities, including using various types of media, and to directly contact public agencies and potential private customers. If the unit continues to operate successfully, we believe we will receive orders for additional units.

PRODUCTION FACILITIES. In January 2008 the Company reevaluated its decision to manufacture the ELIXIR units and decided to have the units manufactured by third parties. Consequently, as described below, in March 2008 the Company terminated its lease of the 60,000 square foot manufacturing facility in Garden Grove, California. On July 21, 2008, the Company entered into a three year lease agreement beginning as of August 1, 2008 for a 12,000 square foot facility which houses its research and development and subassembly operations. Monthly lease payments are $8,650 for the 2009 fiscal year, $8,995 for the 2010 fiscal year, and $9,355 for the 2011 fiscal year.

Effective November 1, 2007, the Company leased a 60,000 square foot research and development, production, engineering and administrative office facility in Garden Grove, California. On March 18, 2008 the Company negotiated a termination of the lease by issuing 748,750 shares of its Common Stock plus relinquishing any claim to its $100,000 security deposit. During the three months ended March 31, 2008, the Company recognized a loss on the transaction of $125,915 which is made up of a $25,915 write off of leasehold improvements and the forfeiture of the $100,000 deposit. $89,850 of rent expense was attributed to the 748,750 shares of Common Stock.

31

RESTATEMENT OF FINANCIAL STATEMENTS. Subsequent to filing our Quarterly Report on Form 10-QSB for the nine months ended June 30, 2008, the Company determined that the beneficial conversion feature discounts and warrant discounts related to the issuance of the convertible notes payable were not properly accounted for, and certain warrants and options were omitted. As a result, the Company recorded the following adjustments.

The Company issued 25 secured convertible promissory notes between October 17, 2006 and February 27, 2007 for total proceeds to the Company of $750,000 (“Convertible Notes 1”). Convertible Notes 1 had a conversion price of $0.05 into common stock. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price less than $0.05.

On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on or about December 31, 2008, and are convertible into common stock at $0.01.

As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows:

·

Warrants and Options

·

Beneficial Conversion Feature

The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2008. The analysis and results were as follows:

Warrants and Options Liability

As of June 30, 2008, the Company had 36,374,766 warrants outstanding and 11,595,934 options outstanding that were vested at that date.

Balance Sheet

The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) as of June 6, 2007.

At June 30, 2008, the Company determined the fair value of all warrants and options to be $7,523,660 and $2,377,780, respectively, using the Black Sholes model with the following assumptions:

·

risk free rate of return between 1.79% and 3.61%;

·

volatility between 242% and 263%;

·

dividend yield of 0%; and

·

expected term between 2.70 years and 5.99 years.

Statement of Operations

For the three and nine months ended June 30, 2008, the Company recorded an additional $221,232 and $1,205,295, respectively, as a loss on change in fair value of warrant and option liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the decrease in fair value of the warrant and option liability of $1,205,295.

Beneficial Conversion Liability

32

As of June 30, 2008, the Company had $1,280,333 in convertible notes and accrued compensation that could be converted into 80,417,651 shares. During the period ended June 30, 2008, certain investors converted $105,281 of convertible notes into 2,632,029 common shares at $0.04 per share; however, the conversion rate should have been $0.01. At June 30, 2008, the Company owed an additional 7,896,096 shares to the investors. The Company recorded a liability of $1,658,180, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares will be recorded as a change in fair value of beneficial conversion liability.

Balance Sheet

The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS 133 as of June 6, 2007.

At June 30, 2008, the Company determined the fair value of the embedded conversion features to be $15,846,679 using the Black Sholes model with the following assumptions:

·

risk free rate of return between 1.60% and 2.36%;

·

volatility between 138% and 170%;

·

dividend yield of 0%; and

·

expected term of 0.03 years to 1.5 years.

Statement of Operations

For the three and nine months ended June 30, 2008, the Company recorded an additional $5,446,636 as a loss on change in fair value of beneficial conversion liability and recorded an additional $12,920,313 as a gain on change in fair value of beneficial conversion liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the $12,920,313 change in fair value of the beneficial conversion liability.

33

The following table shows the effect of each of the changes discussed above on the Company’s balance sheet, statement of operation, and statement of cash flows for the nine months ended June 30, 2008.

	As Previously Stated			Beneficial Conversion Features			Warrants and Options			As Restated June 30, 2008
Balance Sheet
Accrued expenses	$	2,429,688		$	1,658,180		$	––		$	4,087,868
Warrant and option liability		5,530,616			––			4,370,825			9,901,441
Beneficial conversion feature liability		215,071			15,631,608			––			15,846,679
Additional paid-in capital		12,262,574			––			(2,117,339	)		10,145,235
Deficit accumulated during developmental stage		(23,099,897	)		(17,289,788	)		(2,253,486	)		(42,643,171	)
Statement of Operations (for the three months ended June 30, 2008)
Loss on change in fair value of warrant and option liability	$	(2,210,711	)	$	––			(221,232	)	$	(2,431,943	)
Gain (loss) on change in fair value of beneficial conversion liability		659,811			(5,446,636	)		––			(4,786,825	)
General and administrative expenses		634,702			––			83,855			718,557
Statement of Operations (for the nine months ended June 30, 2008)
Gain (loss) on change in fair value of warrant and option liability	$	2,702,841		$	––			(1,205,295	)	$	1,497,546
Gain on change in fair value of beneficial conversion liability		1,215,740			12,920,313			––			14,136,053
General and administrative expenses		6,755,429			––			83,855			6,839,284
Statement of Operations (since inception)
Gain (loss) on change in fair value of warrant and option liability	$	3,172,152		$	––			(1,346,133	)	$	1,826,019
Gain on change in fair value of beneficial conversion liability		941,845			17,108,241			––			18,050,086
General and administrative expenses		20,084,934			3,787,032			83,855			23,955,821
Interest and financing costs		(2,154,841	)		(30,536,702	)		(897,793	)		(33,589,336	)
Statement of Cash Flows (for the nine months ended June 30, 2008)
Net income (loss)	$	(4,809,208	)	$	12,920,313		$	(1,289,150	)	$	6,821,955
(Gain) loss on change in fair value of warrant and option liability		(2,702,841	)		––			1,205,295			(1,497,546	)
Gain on change in fair value of beneficial conversion liability		(1,215,741	)		(12,920,313	)		––			(14,136,054	)
Non-cash compensation expense		––			––			83,855			83,855
Statement of Cash Flows (since inception)
Net loss	$	(23,099,895	)	$	(17,215,493	)	$	(2,327,781	)	$	(42,643,169	)
(Gain) loss on change in fair value of warrant and option liability		(3,172,152	)		––			1,346,133			(1,826,019	)
Gain on change in fair value of beneficial conversion liability		(1,211,697	)		(17,108,241	)		––			(18,319,938	)
Non-cash compensation expense		––			3,787,032			83,855			3,870,887
Non-cash financing costs		––			30,536,702			897,793			31,434,495

34

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES.The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no changes in accounting policies or significant changes in accounting estimates during the nine months ended June 30, 2008. Management believes the following critical acco unting policies reflect its more significant estimates and assumptions.

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

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

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

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

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

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

35

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

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

Accrued Derivative Liabilities. The Company applies a two-step model to determine whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for equity treatment.  The Company further evaluates and determines which instruments or embedded features require liability accounting and records it at its fair value as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statements of operations.

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

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

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

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

Contractual Obligations	Payments Due by Period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		Over 5 Years
Operating lease obligations		402,200		72,500		329,700		0		0

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007

The Company had no revenues for the three months ended June 30, 2008 and June 30, 2007. The Company has negotiated the sale of two water treatments units and has received $900,000 which has been recorded in customer deposits. Based on the Company’s revenue recognition policy, none of the proceeds have been recognized as revenue because the units have not been delivered and title has not passed to the customer.

The Company incurred operating expenses of $1,007,686 for the three months ended June 30, 2008, a decrease of $3,106,535 or approximately 76%, as compared to $4,114,221 for the three months ended June 30, 2007. General and administrative expenses were $718,557 for the three months ended June 30, 2008, a decrease of $3,387,728 or approximately 83%, as compared to $4,106,285 for the three months ended June 30, 2007. The decrease in general and administrative expenses was primarily due to the recording of advisory board compensation expense of $3,710,932 during the three months ended June 30, 2007 with no corresponding expense recorded during the three months ended June 30, 2008. Depreciation and amortization expense was $8,157 for the three months ended June 30, 2008, an increase of $221 or approximately 3%, as compared to $7,936 for the three months ended June 30, 2007. The Company incurred research and development expens es of $280,972 for the three months ended June 30, 2008 as compared to no such expenses for the three months ended June 30, 2007. Research and development

36

expenses for the three months ended June 30, 2008 primarily consist of salaries of personnel directly responsible for the water treatment system located at Villa Park Dam and the costs of the independent third party testing.

Other income and (expense) was $(7,526,749) for the three months ended June 30, 2008, a decrease of $14,400,350 or approximately 66%, as compared to $(21,927,099) for the three months ended June 30, 2007. Loss on change in fair value of the warrant and option liability was $2,431,943 for the three months ended June 30, 2008 compared to the gain on change in fair value of the warrant and option liability of $692,799 for the three months ended June 30, 2007 representing a decrease of $3,124,742 or a change of 451%. The loss on change in fair value for the three months ended June 30, 2008 represents the increase in the fair value of the warrant and option liability. The options and warrants were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Loss on change in fair value of the beneficial conversion liability was $4,786,8 25 for the three months ended June 30, 2008 as compared to a gain on change in fair value of $7,923,801 for the three months ended June 30, 2007 representing a decrease of $12,710,626 or a change of 160%. The loss on change in fair value for the three months ended June 30, 2008 represents the increase in the fair value of the beneficial conversion liability. The beneficial conversion features were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Interest expense was $313,696 during the three months ended June 30, 2008, a decrease of $30,230,059 or approximately 99%, as compared to $30,543,755 for the three months ended June 30, 2007. The decrease is primarily due to the recording of the fair value of beneficial conversion features of the Company’s convertible debt and warrants issued with debt for the for three months ended June 30, 2007 as compared to no suc h expenses for the three months ended June 30, 2008. Net loss was $8,534,435 for the three months ended June 30, 2008, a decrease of $19,214,256 or approximately 74%, as compared to a net loss of $26,042,220 for the three months ended June 30, 2007.

NINE MONTHS ENDED JUNE 30, 2008 COMPARED TO NINE MONTHS ENDED JUNE 30, 2007

During the 2007 fiscal year, the Company began to raise money for its operations by selling debentures. As a result of these offerings, the Company was able to resume its operating activities, finalize the beta unit and begin evaluating the effectiveness of the unit.

The Company had no revenues for the nine months ended June 30, 2008 and June 30, 2007. The Company has negotiated the sale of two water treatments units and has received $900,000 which has been recorded in customer deposits. Based on the Company’s revenue recognition policy, none of the proceeds have been recognized as revenue because the units have not been delivered and title has not passed to the customer.

The Company incurred operating expenses of $7,710,660 for the nine months ended June 30, 2008, an increase of $3,092,528 or approximately 67%, as compared to $4,618,132 for the nine months ended June 30, 2007. General and administrative expenses were $6,839,284 for the nine months ended June 30, 2008, an increase of $2,244,875 or approximately 49%, as compared to $4,594,409 for the nine months ended June 30, 2007. The increase in general and administrative expenses was primarily due to the issuance of warrants and options. Depreciation and amortization expense was $24,472 for the nine months ended June 30, 2008, an increase of $749 or approximately 3%, as compared to $23,723 for the nine months ended June 30, 2007. The Company incurred research and development expenses of $846,904 for the nine months ended June 30, 2008 as compared to no such expenses for the nine months ended June 30, 2007.Research and development expenses for the nine months ended June 30, 2008 primarily consist of salaries of personnel directly responsible for the water treatment system located at Villa Park Dam and the costs of the independent third party testing.

Other income and (expense) was $14,533,515 for the nine months ended June 30, 2008, an increase of $36,530,592 or approximately 166%, as compared to $(21,997,077) for the nine months ended June 30, 2007. Gain on change in fair value of the warrant and option liability was $1,497,546 for the nine months ended June 30, 2008 compared to the gain on change in fair value of the warrant and option liability of $692,799 for the nine months ended June 30, 2007, an increase of $804,747 or 116%. The gain on change in fair value for the nine months ended June 30, 2008 represents the decrease in the fair value of the warrant and option liability. The options and warrants were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Gain on change in fair value of the beneficial conversion liability was $14,136,053 for the nine months ended June 30, 2008 as compared to a gain on change in fair value of $7,923,801 for the prior period, an increase of $6,212,252 or 78%.The gain on change in fair value for the nine months ended June 30, 2008 represents the decrease in the fair value of the beneficial conversion liability. The beneficial conversion features

37

were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Interest expense was $977,912 during the nine months ended June 30, 2008, a decrease of $29,636,431 or approximately 97%, as compared to $30,614,343 for the nine months ended June 30, 2007. The decrease is primarily due to the recording of the fair value of beneficial conversion features of the Company’s convertible debt and warrants issued with debt for the for nine months ended June 30, 2007 as compared to no such expenses for the nine months ended June 30, 2008. Miscellaneous expense of $125,015 relates to the termination of the lease of the production facility.

Net income was $6,821,955 for the nine months ended June 30, 2008, an increase of $33,487,255 or approximately 126%, as compared to the net loss $26,616,109 for the nine months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES. Net cash flows used in our operating activities totaled $611,819 for the nine months ended June 30, 2008, an increase of $10,998 or approximately 2%, as compared to $600,821 for the nine months ended June 30, 2007. The increase in cash flows used in operating activities, not including the decrease in net loss, is primarily attributable to amortization of beneficial conversion feature discount and warrant discount of $1,073,445, warrants and stock issued to nonemployees for $5,799,646, decrease in warrant and option liability of $1,497,546, decrease in beneficial conversion liability of $14,136,053, and receipt of customer deposit of $900,000.

Net cash flows used in our investing activities was $26,111 for the purchase of equipment, as compared to $25,360 for investing activities during the nine months ended June 30, 2007.

Net cash flows provided by financing activities totaled $1,261,779 for the nine months ended June 30, 2008, an increase of cash flows provided of $184,579 or approximately 17%, as compared to net cash flows provided by financing activities of $1,077,200 for the nine months ended June 30, 2007. Cash provided by financing activities for the nine months ended June 30, 2008 included the accrual of $138,375 for liquidated damages, issuance of notes payable of $425,000, issuance of stock of $330,000, and receipt of cash to be issued for stock of $420,000. Cash used in financing activities for the nine months ended June 30, 2008 included payments on notes payable to officer of $19,260, payments on notes payable to related party of $5,000, and payments on equity line of credit of $27,336.

On June 30, 2008, the Company had cash and cash equivalents of $996,360. The sole source of liquidity has been borrowings from affiliates and the sale of our securities. Management anticipates that additional capital will be required to finance the Company's operations. The Company believes that anticipated proceeds from sales of securities and other financing activities, plus anticipated cash flow from operations during the 2008 fiscal year, will be sufficient to finance the Company's operations. However, the Company has limited commitments for sales, and there can be no assurance that financing will be available or that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. Also, the Company may not be able to generate sufficient revenues from operations during the fiscal year and, while there are anticipated sources of additional sales, none of these sources have progr essed to the stage where we can rely on any of these cash resources.

As of June 30, 2008, the Company had an accumulated deficit of $42,643,171. It can be expected that the future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a developmental business enterprise, many of which the Company cannot control.

GOING CONCERN OPINION. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2008, the Company incurred cumulative losses of $42,643,171 including a net income for the nine months ended June 30, 2008 of $6,821,955. As the Company has no cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate financing to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its cost structure. In order for the Company to meet its basic financial obligations, including rent, salaries, deb t service and operations, it plans to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. Its ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if obtained, any such financing will likely involve additional fees and debt service requirements. Accordingly, there is no assurance that the Company will be able to implement its plans.

38

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

ITEM 3

CONTROLS AND PROCEDURES

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

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of June 30, 2008, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions re garding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2008, 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 results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses which have caused management to conclude that, as of June 30, 2008, our disclosure controls and procedures were not effective at the reasonable assurance level:

1.

We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2009. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2.

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

3.

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

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

39

Remediation of Material Weaknesses

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

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended June 30, 2008, the Company has not made any change to internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

40

PART II - OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

None

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 28, 2008 the Company completed an offering of units consisting of Common Stock and warrants to purchase Common Stock to a group of institutional and accredited investors. The warrants have an exercise price of $0.10 and expire 3 years from the date of issuance. The Company sold a total of 7,500,000 units at a price of $0.10 per unit for gross proceeds of $750,000. As of June 30, 2008, 3,300,000 shares of Common Stock has been issued. The remaining 4,200,000 shares of Common Stock and warrants for the purchase of the 15,000,000 shares of Common Stock have not yet been issued. We relied on section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder to issue the securities inasmuch as the securities were offered and sold without any form of general solicitation or general advertising and the offerees made representations that they were accredited investors. 

During the three months ended June 30, 2008, the Company issued 10,163,796 shares of Common Stock in exchange for $724,667 in principal amount and $74,586 in interest owed to seventeen 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.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

Under the terms of a Registration Rights Agreement executed in connection with an offering that closed on July 18, 2007, we were required to file a registration statement under the Securities Act of 1933 in order to register the resale of the shares of common stock issuable upon conversion of certain units it sold consisting of Subordinated Convertible Debentures and Warrants. The units had a value of $1,025,000. If we did not file a registration statement with respect to the these securities within 45 days following the closing of the offering, or if the registration statement was not declared effective by the Securities and Exchange Commission within 90 days of the closing, then we are required to pay to each purchaser damages equal to 1.5% of the purchase price paid by the purchaser for the Subordinated Convertible Debentures for each 30 days that transpires after these deadlines. The amount of the aggregate damages payable by us is limited t o 15% of the purchase price. We had until August 31, 2007 to file the registration statement. We filed the registration statement on November 14, 2007, incurring a penalty for 78 days which amounted to $38,437.50. The registration statement has not been declared effective as of the date of this report, therefore we have incurred an additional penalty totaling $153,750.

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5

OTHER INFORMATION

None

ITEM 6

EXHIBITS

3.1

Articles of Incorporation, as amended and restated ⁽¹⁾

3.2

Bylaws, as amended and restated ⁽¹⁾

10.1

Agreement to Convert Debt dated June 24, 2008 between the registrant and Richardson & Patel, LLP*

31.1

Certification Pursuant to Rule 13a - 14(a) and 15d - 14(a)(4)*

31.2

Certification Pursuant to Rule 13a - 14(a) and 15d - 14(a)(4)*

32.1

Certification Pursuant to Section 1350 of Title 18 of the United States Code*

32.2

Certification Pursuant to Section 1350 of Title 18 of the United States Code*

(1)

Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2003.

(2)

Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2007.

———————

*

Filed herewith.

41

SIGNATURES

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

Date: January 13, 2010

SIONIX CORPORATION
By:	/s/ David R. Wells
	David R. Wells President, Chief Financial Officer, and Principal Financial and Accounting Officer

42

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13A-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, James R. Currier, certify that:

1.

I have reviewed this Amendment No. 1 to the Quarterly Report Form 10-Q of Sionix Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

(5)

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: January 13, 2010

/s/ James R. Currier

James R. Currier

Chief Executive Officer and Principal Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13A-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, David R. Wells, certify that:

1.

I have reviewed this Amendment No. 1 to the Quarterly Report Form 10-Q of Sionix Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: January 13, 2010

/s/ David R. Wells

David R. Wells

President, Chief Financial Officer, and Principal Financial and Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350 (AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002)

In connection with Amendment No. 1 to the Quarterly Report of Sionix Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James R. Currier, Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and,

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

Date: January 13, 2010

/s/ James R. Currier

James R. Currier

Chief Executive Officer and Principal Executive Officer

A certification furnished pursuant to this Item will not be deemed “filed” for purposes of section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350 (AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002)

In connection with Amendment No. 1 to Quarterly Report of Sionix Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Wells, Chief Financial Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and,

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

Date: January 13, 2010

/s/ David R. Wells

David R. Wells

President, Chief Financial Officer, and Principal Financial and Accounting Officer

A certification furnished pursuant to this Item will not be deemed “filed” for purposes of section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.