10-Q 1 v158661_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from

Commission file number 002-95626-D

SIONIX CORPORATION

(Exact name of registrant as specified in its charter)

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

Issuer’s telephone number (714) 678-1000

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

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

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

¨ Yes ¨ No

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

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

Table of Contents

Part I - Financial Information		3

Item 1. Financial Statements		3

Balance Sheets as of June 30, 2009 (Unaudited) and September 30, 2008		3

Statements of Operations (Unaudited) for the three and nine months ended June 30, 2009 and June 30, 2008 and from inception (October 3, 1994) to June 30, 2009		4

Statement of Stockholders Equity (Deficit) (Unaudited) from Inception (October 3, 1994) to June 30, 2009		5

Statements of Cash Flows (Unaudited) for the three and nine months ended June 30, 2009 and June 30, 2008 and from inception (October 3, 1994) to June 30, 2009		8

Notes to unaudited financial statements		9

Forward-Looking Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		35

Item 4T. Controls and Procedures		36

Part II – Other Information		36

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Submission of Matters to a Vote of Security Holders		37

Item 5. Other Information		37

Item 6. Exhibits		38

Signatures		39

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

Part I, Item 1. Financial Statements.

Sionix Corporation

Balance Sheets

	June 30,
	2009			September 30,
	(Unaudited)			2008
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,582		$	1,220,588
Inventory		833,594
Other current assets		28,665			46,395
TOTAL CURRENT ASSETS		870,841			1,266,983

PROPERTY AND EQUIPMENT, net		152,661			87,101

DEPOSITS		28,495			33,095
TOTAL ASSETS	$	1,051,997		$	1,387,179

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable	$	317,158		$	259,355
Accrued expenses		2,739,329			2,629,470
Customer deposits		1,620,000			1,260,000
Liquidated damages liability		78,750			153,750
Notes payable to related parties		107,000			114,000
Short-term promissory notes payable		240,000			-
Convertible notes, net		1,761,333			2,041,443
10% subordinated debentures, net		482,492			400,796
Warrant and option liability		5,875,700			3,446,823
Beneficial conversion feature		-			26,000
TOTAL CURRENT LIABILITIES		13,221,762			10,331,637

STOCKHOLDERS' DEFICIT
Common Stock (150,000,000 shares authorized; 144,459,105 shares issued and outstanding at June 30, 2009; 136,684,616 shares issued and outstanding at September 30, 2008; 481,900 subject to cancellation)		143,976			134,274
Additional paid-in capital		13,514,364			12,688,495
Shares to be issued		400			126,429
Deficit accumulated during development stage		(25,828,505	)		(21,893,656	)
TOTAL STOCKHOLDERS' DEFICIT		(12,169,765	)		(8,944,458	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,051,997		$	1,387,179

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

Sionix Corporation

Statements of Operations (Unaudited)

	For the three months						For the nine months						Cummulative from
	ended June 30,						ended June 30,						Inception
	2009			2008			2009			2008			(October 3, 1994)

Revenues	$	-		$	-		$	-		$	-		$	-

Operating expenses
General and administrative		179,311			634,702			1,144,202			6,755,429			21,919,482
Research and development		182,980			280,972			567,790			846,904			3,604,663
Depreciation and amortization		12,559			8,157			37,404			24,472			594,779
Total operating expenses		374,850			923,831			1,749,396			7,626,805			26,118,924
Loss from Operations		(374,850	)		(923,831	)		(1,749,396	)		(7,626,805	)		(26,118,924	)

Other income (expense)
Interest income		2			1,564			3,870			2,843			70,244
Interest expense		(63,423	)		(313,696	)		(221,947	)		(977,912	)		(2,901,505	)
Decrease (increase) in warrant liability		(3,623,669	)		(2,210,711	)		(1,992,282	)		2,702,841			3,225,958
Decrease (increase) in beneficial conversion features liability					659,811			26,000			1,215,740			1,426,767
Impairment of intangibles														(1,267,278	)
Inventory obsolesence														(365,078	)
Legal settlement														344,949
Gain (loss) on settlement of debt		19,800						3,616						(351,795	)
Loss on lease termination											(125,015	)		(129,166	)
Write-off of property and equipment														(125,015	)
Write-off of beneficial conversion feature and discount														380,440
Miscellaneous		92			4,151			90						90
Total Other Income (Expense)		(3,667,198	)		(1,858,881	)		(2,180,653	)		2,818,497			308,611
Loss before income taxes		(4,042,048	)		(2,782,712	)		(3,930,049	)		(4,808,308	)		(25,810,313	)
Income Taxes		4,800						4,800			900			18,192
Net Income (Loss)	$	(4,046,848	)	$	(2,782,712	)	$	(3,934,849	)	$	(4,809,208	)	$	(25,828,505	)

Basic income (loss) per share	$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.04	)
Dilutive income (loss) per share	$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.04	)

Basic wighted average nubmer of shares of Common Stock outstanding		142,281,820			113,816,474			138,329,293			113,816,474
Dilutive wighted average nubmer of shares of Common Stock outstanding		142,281,820			113,816,474			138,329,293			113,816,474

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

SIONIX CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

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

(UNAUDITED)

																			Deficit			Total
	Common Stock						Additional			Stock		Stock			Shares		Unamortized		Accumulated			Stockholders'
	Number						Paid-in			to be		Subscription			to be		Consulting		from			Equity
	of Shares			Amount			Capital			Issued		Receivable			Cancelled		Fees		Inception			(Deficit)

Stock issued for cash October 3, 1994		10,000		$	10		$	90														$	100
Net loss from October 3, 1994, to December 31, 1994																				(1,521	)		(1,521	)
Balance at December 31, 1994		10,000			10			90			-		-			-		-		(1,521	)		(1,421	)
Shares issued for assignment rights		1,990,000			1,990			(1,990	)														-
Shares issued for services		572,473			572			135,046															135,618
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 for the year ended December 31, 1995																				(914,279	)		(914,279	)
Balance at December 31, 1995		4,370,370			4,370			4,744,633			-		(2,331,800	)		-		-		(915,800	)		1,501,403
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 for the year ended September 30, 1996																				(922,717	)		(922,717	)
Balance at September 30, 1996		23,599,696			23,600			5,282,717			-		(2,331,800	)		-		-		(1,838,517	)		1,136,000
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 for the year ended September 30, 1997																				(858,915	)		(858,915	)
Balance at September 30, 1997		24,054,590			24,055			5,028,702			-		(1,656,800	)		-		-		(2,697,432	)		698,525
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 for the year ended September 30, 1998																				(1,898,376	)		(1,898,376	)
Balance at September 30, 1998		27,421,875			27,422			4,079,081			-		-			-		-		(4,595,808	)		(489,305	)
Shares issued for compensation		3,847,742			3,847			389,078															392,925
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 for the year ended September 30, 1999																				(1,158,755	)		(1,158,755	)
Balance at September 30, 1999		41,358,363			41,358			5,612,405			-		-			-		-		(5,754,563	)		(100,800	)
Shares issued for cash		10,303,500			10,304			1,020,046															1,030,350
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 for the year ended September 30, 2000																				(2,414,188	)		(2,414,188	)

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

SIONIX CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) – Continued

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

(UNAUDITED)

																					Deficit			Total
	Common Stock						Additional			Stock			Stock		Shares			Unamortized			Accumulated			Stockholders'
	Number						Paid-in			to be			Subscription		to be			Consulting			from			Equity
	of Shares			Amount			Capital			Issued			Receivable		Cancelled			Fees			Inception			(Deficit)

Balance at September 30, 2000		54,166,322			54,166			8,104,350			-			-		-			-			(8,168,751	)		(10,235	)
Shares issued for services and prepaid expenses		2,517,376			2,517			530,368											(141,318	)					391,567
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 for the year ended September 30, 2001																						(1,353,429	)		(1,353,429	)
Balance at September 30, 2001		62,688,698			62,688			9,229,213			113,295			-		-			(141,318	)		(9,522,180	)		(258,302	)
Shares issued for services and prepaid expenses		1,111,710			1,112			361,603											54,400						417,115
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 for services related to raising equity (967,742 shares)								(300,000	)		300,000														-
Cancellation of shares		(7,533,701	)		(7,534	)																			(7,534	)
Net loss for the year ended September 30, 2002																						(1,243,309	)		(1,243,309	)
Balance at September 30, 2002		74,540,411			74,540			11,074,334			300,000			-		-			(86,918	)		(10,765,489	)		596,467
Shares issued for services and prepaid expenses		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 for the year ended September 30, 2003																						(1,721,991	)		(1,721,991	)
Balance at September 30, 2003		85,112,470			85,112			12,625,336			-			-		(7,349	)		-			(12,487,480	)		215,619
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 for the year ended September 30, 2004																						(1,593,136	)		(1,593,136	)

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

SIONIX CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) - Continued

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

(UNAUDITED)

																		Deficit			Total
	Common Stock				Additional			Stock			Stock		Shares		Unamortized			Accumulated			Stockholders'
	Number				Paid-in			to be			Subscription		to be		Consulting			from			Equity
	of Shares		Amount		Capital			Issued			Receivable		Cancelled		Fees			Inception			(Deficit)

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

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

Sionix Corporation

A Development Stage Company

Statement of Cash Flows (Unaudited)

							Cummulative
							from
	For the Nine Months						Inception
	Ended June 30,						(October 3, 1994) to
	2009			2008			June 30,2009

Operating activities:
Net income (loss)	$	(3,934,849	)	$	(4,809,208	)	$	(25,828,505	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		37,404			24,472			681,696
Amortization of beneficial conversion features discount and warrant discount		2,890			1,073,445			2,050,229
Stock based compensation expense - employee		187,844						3,866,746
Stock based compensation expense - consultant		238,244			5,799,646			6,888,835
Impairment of assets								514,755
Write-down of obsolete assets								38,862
Impairment of intangible assets								1,117,601
Loss on settlement of debt		(19,800	)					364,777
Loss on lease termination					126,111			129,166
Write-off of beneficial conversion features								(576,000	)
Stock issued for services and rent								114,850
Accrual of liquidating damages					138,375			153,750
Other		27,582						(771,462	)
(Increase) decrease in assets:
Inventory		(833,594	)					(833,594	)
Other current assets		17,730			(77,269	)		(28,665	)
Other assets		4,600						(128,495	)
Increase (decrease) in liabilities:
Accounts payable		197,604			409,406			613,123
Accrued expenses		288,074			(139,840	)		2,933,286
Customer deposits		360,000			900,000			1,620,000
Warrant liability		2,000,811			(2,702,841	)		(3,217,429	)
Beneficial conversion feature liability		(26,000	)		(1,215,741	)		(1,426,768	)
Net cash used in operating activities		(1,451,460	)		(473,444	)		(11,723,242	)

Investing activities:
Acquisition of property and equipment		(5,546	)		(26,111	)		(473,553	)
Acquisition of patents								(158,212	)
Net cash used in investing activities		(5,546	)		(26,111	)		(631,765	)

Financing activities:
Payment on notes payable to officer					(19,260	)		(218,502	)
Proceeds from notes payable, related party								442,433
Payments on notes payable to related party					(5,000	)		428,664
Receipt from (payments to) equity line of credit					(27,336	)
Receipt of proceeds from short term notes		240,000						240,000
Proceeds from convertible notes payable								2,861,000
Proceeds from 10% subordinted notes payable					425,000			425,000
Issuance of common stock		5,000			330,000			8,184,594
Receipt of cash for stock to be issued					420,000			400
Net cash provided by (used in) financing activities		245,000			1,123,404			12,363,589

Net increase (decrease) in cash and cash equivalents		(1,212,006	)		623,849			8,582

Cash and cash equivalents balances:
Beginning of period		1,220,588			372,511
End of month	$	8,582		$	996,360		$	8,582

Cash and cash equivalents paid for:
Interest	$	-		$	-		$	-
Income taxes	$	-		$	-		$	-

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

Sionix Corporation

June 30, 2009

Notes to Financial Statements (Unaudited)

Note 1 ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

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

INVENTORY

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

PROPERTY AND EQUIPMENT

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

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

		Years

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

WARRANTS AND OPTIONS

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

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

The Company followed the guidance of EITF 00-19, paragraph 9, which states that all contracts classified as liabilities should be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities. The Company analyzed the warrants and options as of June 30, 2009 by following the guidance of SFAS 133, paragraph 6 to ascertain if the warrants and options issued remained derivatives as of June 30, 2009. All of the criteria in the original analysis were met, and the warrants and options issued were determined to be within the scope and definition of a derivative. The Company next followed the guidance of EITF 00-19, paragraph 19, which states that if a company is required to obtain shareholder approval to increase the company’s authorized shares in order to net-share or physically settle a contract, share settlement is not controlled by the company, and the contract is required to be classified as a liability.

BENEFICIAL CONVERSION FEATURES

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

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

The Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the embedded beneficial conversion features remained derivatives as of June 30, 2009. All of the criteria in the original analysis were met, and the embedded beneficial conversion features were determined to be within the scope and definition of a derivative. The Company followed the guidance of SFAS 133, paragraph 12, to determine if the embedded beneficial conversion features should be separated from the convertible notes. All of the criteria in the original analysis were met, and the embedded beneficial conversion features were separated from the convertible notes. In order to determine the classification of the embedded conversion features, the Company applied paragraph 19 of EITF 00-19, which states that if a company is required to obtain shareholder approval to increase the company’s authorized shares in order to net-share or physically settle a contract, share settlement is not controlled by the company, and the contract is required to be classified as a liability. In order to determine the value of the embedded conversion features, the Company followed the guidance of EITF 00-19, paragraph 9, which states that all contracts classified as liabilities are to be measured at fair value at each balance sheet date, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as liabilities.

REVENUE RECOGNITION

The Company applies Securities Exchange Commission Staff Accounting Bulletin No. 104 for the recognition of revenues. The Company does not recognize revenue unless: (i) there is persuasive evidence of an arrangement; (ii) title and risk of loss has passed to the customer, delivery has occurred or the services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collection of the related receivable is reasonably assured. In general, the Company plans to require a deposit from a customer before a unit is fabricated and shipped. It is the Company's policy to require an arrangement with its customers, either in the form of a written contract or purchase order containing all of the terms and conditions governing the arrangement, prior to the recognition of revenue. Title and risk of loss will generally pass to the customer at the time of delivery of the product to a common carrier. At the time of the transaction, the Company will assess whether the sales price is fixed or determinable and whether or not collection is reasonably assured. If the sales price is not deemed to be fixed or determinable, revenue will be recognized as the amounts become due from the customer. The Company does not plan to offer a right of return on its products and the products will generally not be subject to customer acceptance rights. The Company plans to assess collectability based on a number of factors, including past transaction and collection history with a customer and the creditworthiness of the customer. The Company plans to perform ongoing credit evaluations of its customers' financial condition. If the Company determines that collectability of the sales price is not reasonably assured, revenue recognition will be deferred until such time as collection becomes reasonably assured, which is generally upon receipt of payment from the customer.

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

ADVERTISING

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

RESEARCH AND DEVELOPEMENT

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

STOCK BASED COMPENSATION

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

EARNINGS PER SHARE

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

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

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

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

Diluted Earnings Per Share	$	(4,046,011	)		142,281,820	$	(0.03	)	$	(2,782,712	)		113,816,474	$	(0.02	)

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

Diluted Earnings Per Share	$	(4,809,208	)		138,328,293	$	(0.03	)	$	(4,809,208	)		113,816,474	$	(0.04	)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CONCENTRATION OF CREDIT RISK

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

RELATED PARTY TRANSACTION

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

USE OF ESTIMATES

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

RECLASSIFICATIONS

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

Note 3 PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

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

NET PROPERTY AND EQUIPMENT	$	152,661		$	87,101

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

Note 4 ACCRUED EXPENSES

Accrued expenses consisted of the following at:

	June 30,
	2009		September 30,
	(Unaudited)		2008

Accrued salaries	$	1,486,880	$	1,400,944
Advisory board compensation		576,000		576,000
Auto allowance accruals		104,785		94,408
Interest payable		339,618		272,016
Other accruals		232,046		286,102

TOTAL ACCRUED EXPENSES	$	2,739,329	$	2,629,470

Note 5 CUSTOMER DEPOSITS

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

Note 6 NOTES PAYABLE – RELATED PARTIES

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

Note 7 SHORT-TERM PROMISSORY NOTES

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

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

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

Note 8 CONVERTIBLE NOTES

Convertible Notes 1

Between October 2006 and February 2007, the Company completed an offering of $750,000 in principal amount of convertible notes, which bear interest at 10% per annum and mature at the earlier of (i) 18 months from the date of issuance (ii) an event of default or (iii) the closing of any equity related financing by the Company in which the gross proceeds are a minimum of $2,500,000. These notes are convertible into shares of the Company’s Common Stock at $0.05 per share or shares of any equity security issued by the Company at a conversion price equal to the price at which such security is sold to any other party. In the event that a registration statement covering the underlying shares was not declared effective within 180 days after the closing, the conversion price was to be reduced by $0.0025 per share for each 30 day period that the effectiveness of the registration statement was delayed but in no case could the conversion price to be reduced below $0.04 per share. As of March 31, 2009 the conversion price was $0.04 per share.

The fair value of the embedded beneficial conversion features was $750,000 at the date of issuance using the Black Sholes valuation 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, which is $41,667 per month.

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

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

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

For the three and nine months ended June 30, 2008, interest expense was $17,259 and $55,593, respectively, and amortization expense for the embedded beneficial conversion feature discount was $35,000 and $285,000, respectively, which was included in interest expense in the other income (expense) section of the statement of income (operations).

Calico Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and 2 for the Company and received a fee of $75,000. Southridge Investment Group LLC, Ridgefield, Connecticut (“Southridge) acted as an agent for the Company in arranging the transaction for Convertible Notes 1 and 2. The Company recorded these fees as an expense during the period.

Convertible Notes 2

On June 6, 2007, the Company completed an offering of $86,000 in principal amount of convertible notes, which bear interest at 10% per annum and are due and payable upon the earlier of (i) the occurrence of an Event of Default or (ii) the Maturity Date, which is defined as any business day that is not sooner than December 31, 2008, as the holder of the notes may specify in written notice delivered to the Company not less than 30 days prior to such specified date. These notes are convertible into shares of the Company’s Common Stock at $0.01 per share or shares of any equity security issued by the Company at a conversion price equal to the price at which such security is sold to any other party. There are no registration rights associated with these notes.

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

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

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

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

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

For the three and nine months ended June 31, 2008, interest expense was $2,191 and $6,526, respectively, and amortization expense for the embedded beneficial conversion feature discount was $16,556 and $43,000, which was included in interest expense in the other income (expense) section of the statement of income (operations).

Calico Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and 2 for the Company and received a fee of $75,000. Southridge acted as an agent for the Company in arranging the transaction for Convertible Notes 1 and 2. The Company recorded these fees as an expense during the period.

Convertible Notes 3

On July 17, 2007, the Company completed an offering of $1,025,000 in principal amount of Subordinated Convertible Debentures to a group of institutional and accredited investors, which bear interest at the rate of 8% per annum, and mature 12 months from the date of issuance. Convertible Notes 3 are convertible into shares of the Company’s Common Stock at an initial conversion rate of $0.22 per share, subject to anti-dilution adjustments. As part of the above offering the Company issued warrants to purchase 2,329,546 shares of Common Stock at an initial exercise price of $0.50 per share. An amendment dated March 13, 2008 reduces the conversion rate of the notes to $0.15 per share and the exercise price of the warrants to $0.30 per share.

Under the terms of a Registration Rights Agreement signed in conjunction with this offering, the Company is required to file a registration statement under the Securities Act of 1933 in order to register the resale of the shares of Common Stock issuable upon conversion of the Convertible Notes 3 and the warrant shares (collectively, the "Registrable Securities"). If the Company did not file a registration statement with respect to the Registrable Securities within 45 days following the closing of the offering, or if the registration statement was not declared effective by the Securities and Exchange Commission within 90 days, then the Company was required to pay to each purchaser damages equal to 1.5% of the purchase price paid by the purchaser for Convertible Notes 3 for each 30 day period that followed these deadlines. The aggregate amount of damages payable by the Company is limited to 15% of the purchase price. The Company had until August 31, 2007 to file the registration statement and has accrued $153,750 of expenses as liquidated damages. For the three and six months ended March 31, 2009, $75,000 of the liquidating damages were converted into 937,500 shares of Common Stock For the three and six months ended March 31, 2008, the Company recorded $92,250 and $138,375 as liquidated damages, respectively. No derivative liability is recorded as the amount of liquidated damage is fixed with a maximum ceiling.

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

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

The fair value of the embedded beneficial conversion features was $594,811 at the date of issuance using the Black Sholes valuation 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.

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

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

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

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

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

12% SUBORDINATED CONVERTIBLE NOTES

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

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

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

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

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

Note 9 10% SUBORDINATED DEBENTURES

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

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

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

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

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

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

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

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

Note 10 WARRANT LIABILITY

2001 Executive Officers Stock Option Plan

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

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

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

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

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

Warrants Related to Convertible Notes 3

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

The fair value of the warrants was $554,249 ($430,189 attributable to the holders of the Convertible Notes 3 and $124,060 attributable to the placement fee) at the date of issuance calculated using the Black Sholes valuation 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 fair value of the warrants was determined to be $267,636 ($213,924 attributable to the holders of the Convertible Notes 3 and $53,712 attributable to the placement fee) as of June 30, 2009, which was calculated using the Black Sholes valuation model with the following assumptions: risk free rate of return of 0.56%; volatility of 130.03%; dividend yield of 0%; and an expected term of 2.92 to 3.00 years.

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

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

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

Warrant Issued to Legal Counsel

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

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

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

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

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

Warrants Issued to Advisory Board Members

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

The fair value of the warrants was $1,557,705 at the date of issuance and was calculated using the Black Sholes option valuation model with the following assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0% and expected term of 5 years.

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

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

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

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

Option Issued to Director

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

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

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

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

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

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

Option Issued to Former Chief Financial Officer

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

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

Option Issued to Former Chief Executive Officer

On December 19, 2007, the Company entered into a one year Employment Agreement with Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the Company’s Chief Executive Officer. As compensation for his services, the Company granted Mr. Papalian a five year option to purchase up to 8,539,312 shares of the Company’s Common Stock at an exercise price of $0.25 per share. As per the terms of the stock option agreement, the right to purchase 340,000 shares of Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible Notes 2 as discussed in Note 7 above) are eligible for conversion into shares of Common Stock. These options were not issued from the 2001 Executive Officers Stock Option Plan. On August 14, 2008, Mr. Papalian resigned as the Company’s Chief Executive Officer

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

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

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

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

Warrant Issued to Consultant

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

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

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

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

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

Warrants Related to 10% Subordinated Debentures

In January 2008, the Company completed an offering of $425,000 in principal amount of Subordinated Debentures to a group of institutional and accredited investors. As part of the above offering, the Company issued warrants to purchase 850,000 shares of Common Stock at an exercise price of $0.40 per share.

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

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

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

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

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

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

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

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

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

Warrant Issued to Legal Counsel

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

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

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

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

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

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

Warrant Issued to Director (John Pavia)

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

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

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

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

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

Warrant Issued to Director (Marcus Woods)

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

Warrant Issued to Legal Counsel

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

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

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

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

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

Warrant Issued to Advisory Board Member

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

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

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

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

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

Option Issued to Former Chief Executive Officer

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

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

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

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

Option Issued to Director (Rodney Anderson)

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

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

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

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

Option Issued to interim Chief Financial Officer (Robert Hasson)

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

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

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

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

Option Issued to Employee

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

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

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

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

Note 10 BENEFICIAL CONVERSION FEATURES LIABILITY

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

The fair value of the embedded beneficial conversion features was $1,430,811 at the date of issuance using the Black Sholes valuation 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 $26,000 as of September 30, 2008, which was calculated using the Black Sholes model with the following assumptions: risk free rate of return of 1.78%; volatility of 84.94%; dividend yield of 0% and an expected term of .25.

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

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

Note 11 STOCKHOLDERS’ EQUITY

COMMON STOCK

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

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

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

STOCK OPTIONS

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

	Weighted
	Average				Aggregate
	Exercise		Number		Intrinsic
	Price		of Options		Value
Outstanding at October 1, 2008	$	0.19		11,967,666	$	175,854
Granted		0.20		7,333,650		95,841
Expired		-		-		-
Forfeited		-		-		-
Exercised		-		-		-
Outstanding at June 30, 2009	$	0.19		19,301,316	$	271,695

Options outstanding as of June 30, 2009:

Weighted

Average

Remaining

Weighted Average

Exercise

Options

Contractual

Exercise Price

Price

Outstanding

Exercisable

Life

Outstanding Exercisable

$0.15 - $0.25

19,301,316

17,863,696

3.22

0.19

0.20

									Weighted
									Average
	Outstanding				Exercisable				Remaining
Option			Exercise				Exercise		Contractual
Holder	Amount		Price		Amount		Price		Life
2001 Executive Officers Stock Option Plan		7,034,140	$	0.15		7,034,140	$	0.15		1.75
Director		1,000,000		0.25		1,000,000		0.25		3.42
Former Chief Financial Officer		1,000,000		0.25		1,000,000		0.25		3.42
Former Chief Executive Officer		2,933,526		0.25		2,933,526		0.25		3.42
Former Chief Executive Officer		3,500,000		0.25		3,500,000		0.25		4.33
Director		1,380,114		0.15		690,057		0.15		4.67
Director		958,412		0.15		479,206		0.15		4.67
Employee		1,495,124		0.15		747,562		0.15		4.67

STOCK WARRANTS

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

	Weighted
	Average				Aggregate
	Exercise		Number		Intrinsic
	Price		of Options		Value
Outstanding at October 1, 2008	$	0.20		39,515,766	$	1,151,025
Granted		-		-		-
Expired		-		-		-
Forfeited		-		-		-
Exercised		-		-		-
Outstanding at March 31, 2009	$	0.20		39,515,766	$	1,151,025

Warrants outstanding as of March 31, 2009:

Weighted

Average

Remaining

Weighted Average

Exercise

Warrants

Options

Contractual

Exercise Price

Price

Outstanding

Exercisable

Life

Outstanding Exercisable

$0.10 - $0.25

39,515,766

39,515,7662

0.19

									Weighted
									Average
	Outstanding				Exercisable				Remaining
Warrant			Exercise				Exercise		Contractual
Holder	Amount		Price		Amount		Price		Life

Convertible Notes 3		2,795,454	$	0.30		2,795,454	$	0.30		3.00
Richarson & Patel LLP		150,000		0.25		150,000		0.25		3.25
Advisory Board Members		8,640,000		0.25		8,640,000		0.25		3.42
Consultant		8,539,312		0.25		8,539,312		0.25		3.42
10% Subordinated Notes Payable		850,000		0.18		850,000		0.18		4.58
Stockholders		15,000,000		0.10		15,000,000		0.10		1.83
Richarson & Patel LLP		400,000		0.15		400,000		0.15		4.92
Director		500,000		0.25		500,000		0.25		4.00
Director		500,000		0.25		500,000		0.25		4.00
Richarson & Patel LLP		641,000		0.15		641,000		0.15		5.00
Advisory Board Member		1,500,000		0.25		1,500,000		0.25		4.17

Note 12 GOING CONCERN

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

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

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

Management expects an order for 14 additional water treatment systems from the customer who purchased two water treatment systems. Additionally, management will continue to identify new markets and demonstrate the water treatment unit to potential customers. Management will closely monitor and evaluate expenses to identify opportunities to reduce operating expenses.

Note 13 COMMITMENTS

Operating Lease

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

For the Fiscal Year Ended September 30,
2009	$	52,590
2010		108,660
2011		93,550

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

Issuance of Shares of Common Stock for Services

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

Note 14 SUPPLEMENTAL CASH FLOW INFORMATION

The Company had the following noncash transactions.

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

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

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

Note 15 SUBSEQUENT EVENT

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

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

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

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

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

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

changes in regulatory requirements that adversely affect our business;

loss of our key personnel; and

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

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

Overview

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

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

Application of Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used or a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no changes in accounting policies or significant changes in accounting estimates during the three and six months ended March 31, 2009. Management believes the following critical accounting policies reflect its more significant estimates and assumptions.

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

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

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

Operating Activities

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

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

Investing Activities

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

Financing Activities

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

During the nine months ended June 30, 2008 the Company received $1,123,404 in financing activities. Cash provided from financing activities for the nine months ended June30, 2008 consisted proceeds of $425,000 from the issuance of 10% subordinated notes payable and $330,000 for the purchase of Common Stock. Cash used in financing activities for the nine months ended June 30, 2008 included a payment of $5,000 toward a note payable, payments of $27,336 toward notes payable under an equity line of credit, and payments totaling $19,260 to officers for loans made to us.

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

Off-Balance Sheet Arrangements

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

Capital Expenditures

The Company currently has no commitments for capital expenditures.

Material Trends, Events or Uncertainties

We are not certain how the current economic downturn may affect our business. Because of the global recession, government agencies and private industry may not have the funds to purchase our water treatment systems. It may also be more difficult for us to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.

Going Concern Opinion

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

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

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

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

Part I, Item 4T. Controls and Procedures.

(a) Disclosure Controls and Procedures

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

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses in our disclosure controls and procedures:

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

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

3. We do not have review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically feasible. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

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

(b) Changes in internal control over financial reporting

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

Part II, Item 1. Legal Proceedings.

Not applicable.

Part II, Item 1A. Risk Factors.

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

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

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

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

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

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

Part II, Item 3. Defaults upon Senior Securities.

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

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

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

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

Part II, Item 5. Other Information.

None.

Part II, Item 6. Exhibits.

Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation(1)

3.2		Bylaws(1)

10.1		Promissory note dated June 5, 2009 for $75,000

10.2		Promissory note dated June 11, 2009 for $50,000

10.3		Promissory note dated June 18, 2009 for $75,000

10.4		Promissory note dated June 26, 2009 for $40,000

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith.

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

SIGNATURES

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

August 19, 2009

SIONIX CORPORATION

By:	/s/ Rodney Anderson
	Rodney Anderson, Interim Chief Executive Officer

By:	/s/ Robert Hasson
	Robert Hasson, Interim Chief Financial Officer