UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One) 
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨TRANSITIONQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the transition period from          to

For the quarterly period ended December 31, 2010
Commission File Number: 0-29901

Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)

Nevada20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)

(818) 718-0905
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, 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 þo     No o

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

Large Accelerated Filer ¨o
Accelerated Filer ¨o
Non-Accelerated Filer ¨o  (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 o     No x

Indicate the numberAs of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  as of November 12, 2010,February 11, 2011, the issuer had 134,825,182138,681,636 shares of common stock outstanding.


TABLE OF CONTENTS
 
  
Page
Part I.FINANCIAL INFORMATION 3
   
Item 1.Consolidated Financial Statements23
   
 Consolidated Balance Sheets at September 30,December 31, 2010 (unaudited) and June 30, 201023
   
 Consolidated Statements of Operations - Three and Six Months Ended September 30,December 31, 2010 (unaudited) and September 30,December 31, 2009 (unaudited)34
   
 Consolidated Statement of Stockholders' Deficit - ThreeSix Months Ended September 30,December 31, 2010 (unaudited)45
   
 Consolidated Statements of Cash Flows – ThreeSix Months Ended September 30,December 31, 2010 (unaudited) and September 30,December 31, 2009 (unaudited)67
   
 Notes to Consolidated Financial Statements (unaudited)78
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations1617
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk2023
   
Item 4T.4.Controls and Procedures2024
   
Part II.OTHER INFORMATION 24
   
Item 1.Legal Proceedings2024
  
Item 1A.Risk Factors
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2024
   
Item 3.Defaults Upon Senior Securities2328
   
Item 4.(Removed and Reserved)2328
   
Item 5.Other Information2328
   
Item 6.Exhibits2329
   
Signatures 2430
 
12

PART I – FINANCIALINFORMATIONFINANCIAL INFORMATION

ITEM 1.  Consolidated Financial Statements.

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets

  December 31,  June 30, 
  2010  2010 
  (Unaudited)    
ASSETS 
       
Current assets:      
Cash and cash equivalents $185  $270 
Prepaid expenses and other current assets  588   3,158 
Total current assets  773   3,428 
         
Property and equipment, net  60,523   69,605 
Deferred costs  204,581   71,683 
Patents, net  90,910   92,284 
Other assets  9,500   9,500 
Total assets $366,287  $246,500 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT 
         
Current liabilities:        
Bank overdraft $13,027  $2,747 
Accounts payable  183,334   160,179 
Accrued expenses  88,014   75,656 
Accrued payroll  79,416   83,051 
Advances  67,896   17,262 
Deferred revenue  16,950   33,499 
Short-term loans  287,025   109,000 
Bank loan  498,760   524,750 
Total current liabilities  1,234,422   1,006,144 
         
Commitments and contingencies        
         
Stockholders' deficit:        
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of December 31, 2010 and June 30, 2010  111   111 
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 138,154,600 (unaudited) and 130,581,562 shares are issued and outstanding as of December 31, and June 30, 2010, respectively  138,155   130,582 
Additional paid-in capital  14,524,513   12,656,723 
Deficit accumulated during the development stage  (15,530,914)  (13,547,060)
Total stockholders' deficit  (868,135)  (759,644)
Total liabilities and stockholders' deficit $366,287  $246,500 
  September 30,  June 30, 
   2010  2010 
   (Unaudited)    
ASSETS      
       
Current assets:      
Cash and cash equivalents $10,529  $270 
Prepaid expenses and other current assets  2,735   3,158 
Total current assets  13,264   3,428 
         
Property and equipment, net  65,064   69,605 
Deferred costs  161,124   71,683 
Patents, net  91,715   92,284 
Other assets  9,500   9,500 
Total assets $340,667  $246,500 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current liabilities:        
Bank overdraft $-  $2,747 
Accounts payable  228,294   160,179 
Accrued expenses  61,786   75,656 
Accrued payroll  73,153   83,051 
Deferred revenue  104,484   50,761 
Short-term loan  379,165   109,000 
Bank loan  511,875   524,750 
Total current liabilities  1,358,757   1,006,144 
         
Commitments and contingencies        
         
Stockholders' deficit:        
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of September 30, 2010 and June 30, 2010  111   111 
         
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 133,690,545 (unaudited) and 130,581,562 shares are issued and outstanding as of September 30, and June 30, 2010, respectively  133,691   130,582 
Additional paid-in capital  13,559,745   12,656,723 
Deficit accumulated during the development stage  (14,711,637)  (13,547,060)
Total stockholders' deficit  (1,018,090)  (759,644)
Total liabilities and stockholders' deficit $340,667  $246,500 
See accompanying notes, which are an integral part of these financial statements
3
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
              January 29, 2007, 
              Inception, 
  For the Three Months Ended  For the Six Months Ended  Through 
  December 31,  December 31,  December 31, 
  2010  2009  2010  2009  2010 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
                
Revenue $248,600  $-  $248,600  $-  $248,600 
Cost of sales  36,700   -   36,700   -   36,700 
Gross profit  211,900   -   211,900   -   211,900 
General and administrative expenses  915,316   1,249,554   1,824,447   4,327,428   10,086,817 
Research and development expenses  104,817   91,968   346,070   154,933   4,969,470 
Total operating expenses  1,020,133   1,341,522   2,170,517   4,482,361   15,056,287 
Loss from operations  (808,233)  (1,341,522)  (1,958,617)  (4,482,361)  (14,844,387)
Interest expense  (9,544)  (10,167)  (22,237)  (93,749)  (510,702)
Loss before income taxes  (817,777)  (1,351,689)  (1,980,854)  (4,576,110)  (15,355,089)
Income tax expense  -   -   -   -   - 
Net loss $(817,777) $(1,351,689) $(1,980,854) $(4,576,110) $(15,355,089)
Deemed dividends to preferred stockholders  (1,500)  (1,500)  (3,000)  (3,000)  (175,825)
Net loss available to common stockholders $(819,277) $(1,353,189) $(1,983,854) $(4,579,110) $(15,530,914)
                     
Net loss available to common shareholders per share:                    
Basic and Diluted $(0.01) $(0.01)  (0.01) $(0.04)    
                     
Weighted average shares outstanding:                    
Basic and Diluted  136,734,911   111,567,617   134,613,680   107,253,064     

See accompanying notes, which are an integral part of these financial statements

24

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)

        January 29, 2007, 
         Inception, 
   For the Three Months Ended  Through 
   September 30,  September 30, 
   2010  2009  2010 
   (Unaudited)  (Unaudited)  (Unaudited) 
           
General and administrative expenses $909,131  $3,077,874  $9,171,501 
Research and development expenses  241,253   62,965   4,864,653 
Total operating expenses  1,150,384   3,140,839   14,036,154 
Loss from operations  (1,150,384)  (3,140,839)  (14,036,154)
Interest expense  (12,693)  (83,582)  (501,158)
Loss before income taxes  (1,163,077)  (3,224,421)  (14,537,312)
Income tax expense  -   -   - 
Net loss $(1,163,077) $(3,224,421) $(14,537,312)
Deemed dividends to preferred stockholders  (1,500)  -   (174,325)
Net loss available to common stockholders $(1,164,577) $(3,224,421) $(14,711,637)
             
Net loss available to common shareholders per share:            
Basic and Diluted $(0.01) $(0.03)    
             
Weighted average shares outstanding:            
Basic and Diluted  132,525,540   103,111,510     

See accompanying notes, which are an integral part of these financial statements

3

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited)

                Deficit                    Deficit    
                Accumulated                    Accumulated    
                During the                    During the    
 
Series A Preferred
  
Common Stock
  Additional Paid-in  Development     Series A Preferred  Common Stock  Additional Paid-in  Development    
 
Shares
  
Amount
  
Shares
  
Amount
  
Capital
  
Stage
  
Total
  Shares  Amount  Shares  Amount  Capital  Stage  Total 
                                          
Balance at inception, January 29, 2007  -  $-   -  $-  $-  $-  $-  -  $-   -  $-  $-  $-  $- 
                                                        
Issuance of common stock for services on January 29, 2007          42,993,630   42,994   (21,994)      21,000           42,993,630   42,994   (21,994)      21,000 
Common stock issued as payment for services on March 31, 2008          6,428,904   6,429   1,123,971       1,130,400           6,428,904   6,429   1,123,971       1,130,400 
Common stock issued as payment for services on April 16, 2008          51,180   51   8,949       9,000           51,180   51   8,949       9,000 
Common stock issued as payment for services on April 22, 2008          102,360   102   17,898       18,000           102,360   102   17,898       18,000 
Common stock issued as payment for services on June 18, 2008          3,787,320   3,788   662,212       666,000           3,787,320   3,788   662,212       666,000 
Common stock sold for cash on June 30, 2008          2,047,200   2,047   497,953       500,000           2,047,200   2,047   497,953       500,000 
Amortization of discount on convertible preferred stock                  47,879   (47,879)  -                   47,879   (47,879)  - 
Net loss                      (2,681,782)  (2,681,782)                      (2,681,782)  (2,681,782)
                                                        
Balance at June 30, 2008  -  $-   55,410,594  $55,411  $2,336,868  $(2,729,661) $(337,382) -  $-  55,410,594  $55,411  $2,336,868  $(2,729,661) $(337,382)
                                                        
Common stock sold in connection with reverse merger for cash on October 3, 2008          2,149,560   2,150   122,850       125,000           2,149,560   2,150   122,850       125,000 
Preferred stock sold for cash on March 17, 2009  111,111   111           99,889       100,000   111,111   111           99,889       100,000 
Preferred stock - beneficial conversion feature                  11,111   (11,111)  -                   11,111   (11,111)  - 
Common stock sold for cash on April 22, 2009          499,998   500   99,500       100,000           499,998   500   99,500       100,000 
Common stock sold for cash on June 4, 2009          499,998   500   99,500       100,000           499,998   500   99,500       100,000 
Common stock sold for cash on June 22, 2009          300,000   300   49,700       50,000           300,000   300   49,700       50,000 
Common stock sold for cash on June 30, 2009          300,000   300   49,700       50,000           300,000   300   49,700       50,000 
Bio common stock outstanding before reverse merger on October 3, 2008          27,840,534   27,840   (27,840)      -           27,840,534   27,840   (27,840)      - 
Common stock issued as payment for services on September 22, 2008          150,000   150   17,850       18,000           150,000   150   17,850       18,000 
Common stock issued as payment for services on December 3, 2008          450,000   450   187,150       187,600           450,000   450   187,150       187,600 
Common stock issued as payment for services on December 17, 2008          300,000   300   131,800       132,100           300,000   300   131,800       132,100 
Common stock issued as payment for services on February 27, 2009          590,565   591   156,893       157,484           590,565   591   156,893       157,484 
Common stock issued as payment for services on March 11, 2009          86,550   86   26,853       26,939           86,550   86   26,853       26,939 
Common stock issued as payment for services on March 22, 2009          150,000   150   50,350       50,500           150,000   150   50,350       50,500 
Common stock issued as payment for services on April 23, 2009          29,415   29   9,285       9,314           29,415   29   9,285       9,314 
Common stock issued as payment for services on May 28, 2009          152,379   152   38,959       39,111           152,379   152   38,959       39,111 
Common stock issued as payment for services on June 4, 2009          37,500   38   9,837       9,875           37,500   38   9,837       9,875 
Common stock issued as payment for services on June 30, 2009          37,500   38   8,712       8,750           37,500   38   8,712       8,750 
Warrants issued with convertible debt in December 2008, January 2009 and February 2009                  49,245       49,245                   49,245       49,245 
Amortization of discount on convertible preferred stock                  107,835   (107,835)  -                   107,835   (107,835)  - 
Warrants issued as payment for services on May 27, 2009   ��              56,146       56,146                   56,146       56,146 
Warrants issued as payment for services on June 3, 2009                  84,219       84,219                   84,219       84,219 
Warrants issued as payment for services on June 30, 2009                  5,678       5,678                   5,678       5,678 
Issuance of stock options as payment for services on August 8, 2008                  229,493       229,493                   229,493       229,493 
Issuance of stock options as payment for services on October 1, 2008                  4,598       4,598                   4,598       4,598 
Issuance of stock options as payment for services on October 7, 2008                  22,770       22,770                   22,770       22,770 
Issuance of stock options as payment for services on October 21, 2008                  47       47                   47       47 
Issuance of stock options as payment for services on October 28, 2008                  33       33                   33       33 
Issuance of stock options as payment for services on January 19, 2009                  50,571       50,571                   50,571       50,571 
Net loss                      (2,495,991)  (2,495,991)                      (2,495,991)  (2,495,991)
                                                        
Balance at June 30, 2009  111,111  $111   88,984,593  $88,985  $4,089,602  $(5,344,598) $(1,165,900) 111,111  $111  88,984,593  $88,985  $4,089,602  $(5,344,598) $(1,165,900)
 
45

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited) (Continued)

                 Deficit    
                 Accumulated    
                 During the    
  Series A Preferred  Common Stock  Additional Paid-in  Development    
  Shares  Amount  Shares  Amount  Capital  Stage  Total 
                      
Balance at June 30, 2009  111,111  $111   88,984,593  $88,985  $4,089,602  $(5,344,598) $(1,165,900)
                             
Common stock issued as payment for services on July 27, 2009          17,358,000   17,358   3,886,279       3,903,637 
Common stock issued as payment for services on August 5, 2009          165,000   165   44,935       45,100 
Common stock issued as payment for services on September 16, 2009          190,011   190   42,209       42,399 
Common stock issued as payment for services on October 7, 2009          130,500   131   42,500       42,631 
Common stock issued as payment for services on October 16, 2009          100,911   101   34,209       34,310 
Common stock issued as payment for services on October 23, 2009          30,000   30   9,270       9,300 
Common stock issued as payment for services on October 29, 2009          37,500   38   13,463       13,501 
Common stock issued as payment for services on November 3, 2009          37,500   37   13,464       13,501 
Common stock issued as payment for services on November 10, 2009          35,102   35   12,251       12,286 
Common stock issued as payment for services on November 16, 2009          1,505,000   1,505   405,944       407,449 
Common stock issued as payment for services on November 30, 2009          60,000   60   17,340       17,400 
Common stock issued as payment for services on December 4, 2009          49,157   49   12,240       12,289 
Common stock issued as payment for services on January 11, 2010          121,286   121   30,200       30,321 
Common stock issued as payment for services on February 1, 2010          5,125,102   5,125   1,071,146       1,076,271 
Common stock issued as payment for services on February 11, 2010          500,000   500   109,500       110,000 
Common stock issued as payment for services on February 15, 2010          127,500   128   26,648       26,776 
Common stock issued as payment for services on February 23, 2010          135,000   135   26,865       27,000 
Common stock issued as payment for services on March 5, 2010          346,098   346   82,897       83,243 
Common stock issued as payment for services on March 12, 2010          70,000   70   13,455       13,525 
Common stock issued as payment for services on March 22, 2010          50,000   50   8,450       8,500 
Common stock issued as payment for services on April 12, 2010          127,282   127   16,420       16,547 
Common stock issued as payment for services on April 19, 2010          100,000   100   16,900       17,000 
Common stock issued as payment for services on April 29, 2010          1,700,000   1,700   253,300       255,000 
Common stock issued as payment for services on May 10, 2010          773,750   774   115,288       116,062 
Common stock issued as payment for services on May 24, 2010          219,092   219   43,599       43,818 
Common stock issued as payment for services on June 1, 2010          163,794   164   29,319       29,483 
Common stock issued as payment for services on June 9, 2010          333,333   333   59,667       60,000 
Common stock issued as payment for services on June 14, 2010          46,544   47   8,331       8,378 
Common stock issued for debt and accrued interest conversion on August 7, 2009          1,122,375   1,122   189,681       190,803 
Conversion feature on convertible notes payable                  63,601       63,601 
Common stock sold for cash on October 13, 2009          208,104   208   34,156       34,364 
Common stock sold for cash on October 16, 2009          2,980,734   2,981   493,808       496,789 
Common stock sold for cash on November 4, 2009          217,117   217   36,183       36,400 
Common stock sold for cash on November 17, 2009          421,529   422   71,748       72,170 
Common stock sold for cash on December 4, 2009          352,451   352   59,565       59,917 
Common stock sold for cash on January 6, 2010          58,058   58   9,812       9,870 
Common stock sold for cash on February 4, 2010          888,235   888   150,112       151,000 
Common stock sold for cash on March 2, 2010          743,746   744   125,693       126,437 
Common stock sold for cash on March 12, 2010          352,941   353   59,647       60,000 
Common stock sold for cash on April 19, 2010          125,000   125   14,875       15,000 
Common stock sold for cash on June 1, 2010          700,000   700   69,300       70,000 
Common stock issued for conversion of note payable on June 1, 2010          2,789,217   2,789   276,133       278,922 
Common stock sold for cash on June 24, 2010          1,000,000   1,000   99,000       100,000 
Warrants issued as payment for services on July 15, 2009                  13,205       13,205 
Warrants issued as payment for services on February 11, 2010                  131,376       131,376 
Conversion feature of note payable on June 1, 2010                  223,137       223,137 
Dividends on preferred stock                      (6,000)  (6,000)
Net loss                      (8,196,462)  (8,196,462)
                             
Balance at June 30, 2010  111,111  $111   130,581,562  $130,582  $12,656,723  $(13,547,060) $(759,644)
                             
Common stock issued as payment for services on July 8, 2010          349,571   350   52,086       52,436 
Common stock issued as payment for services on August 3, 2010          1,854,009   1,854   350,406       352,260 
Common stock issued as payment for services on August 30, 2010          75,000   75   11,175       11,250 
Common stock issued as payment for services on September 8, 2010          237,192   237   35,342       35,579 
Common stock issued as payment for services on October 1, 2010          473,517   474   70,554       71,028 
Common stock issued as payment for services on November 1, 2010          1,020,482   1,020   131,643       132,663 
Common stock issued as payment for services on November 22, 2010          100,000   100   11,900       12,000 
Common stock issued as payment for services on December 7, 2010          459,056   459   50,037       50,496 
Common stock sold for cash on August 3, 2010          593,211   593   58,728       59,321 
Common stock sold for cash on October 1, 2010          661,000   661   78,659       79,320 
Common stock sold for cash on November 1, 2010          1,400,000   1,400   142,600       144,000 
Common stock sold for cash on November 22, 2010          350,000   350   41,650       42,000 
Warrants issued as payment for services on November 22, 2010                  46,735       46,735 
Amortization of restricted stock issued for services                  786,275       786,275 
Dividends on preferred stock                      (3,000)  (3,000)
Net loss                      (1,980,854)  (1,980,854)
                             
Balance at December 31, 2010 (unaudited)  111,111  $111   138,154,600  $138,155  $14,524,513  $(15,530,914) $(868,135)
                 Deficit    
                 Accumulated    
                 During the    
  
Series A Preferred
  
Common Stock
  Additional Paid-in  Development    
  
Shares
  
Amount
  
Shares
  
Amount
  
Capital
  
Stage
  
Total
 
                      
Balance at June 30, 2009  111,111  $111   88,984,593  $88,985  $4,089,602  $(5,344,598) $(1,165,900)
                             
Common stock issued as payment for services on July 27, 2009          17,358,000   17,358   3,886,279       3,903,637 
Common stock issued as payment for services on August 5, 2009          165,000   165   44,935       45,100 
Common stock issued as payment for services on September 16, 2009          190,011   190   42,209       42,399 
Common stock issued as payment for services on October 7, 2009          130,500   131   42,500       42,631 
Common stock issued as payment for services on October 16, 2009          100,911   101   34,209       34,310 
Common stock issued as payment for services on October 23, 2009          30,000   30   9,270       9,300 
Common stock issued as payment for services on October 29, 2009          37,500   38   13,463       13,501 
Common stock issued as payment for services on November 3, 2009          37,500   37   13,464       13,501 
Common stock issued as payment for services on November 10, 2009          35,102   35   12,251       12,286 
Common stock issued as payment for services on November 16, 2009          1,505,000   1,505   405,944       407,449 
Common stock issued as payment for services on November 30, 2009          60,000   60   17,340       17,400 
Common stock issued as payment for services on December 4, 2009          49,157   49   12,240       12,289 
Common stock issued as payment for services on January 11, 2010          121,286   121   30,200       30,321 
Common stock issued as payment for services on February 1, 2010          5,125,102   5,125   1,071,146       1,076,271 
Common stock issued as payment for services on February 11, 2010          500,000   500   109,500       110,000 
Common stock issued as payment for services on February 15, 2010          127,500   128   26,648       26,776 
Common stock issued as payment for services on February 23, 2010          135,000   135   26,865       27,000 
Common stock issued as payment for services on March 5, 2010          346,098   346   82,897       83,243 
Common stock issued as payment for services on March 12, 2010          70,000   70   13,455       13,525 
Common stock issued as payment for services on March 22, 2010          50,000   50   8,450       8,500 
Common stock issued as payment for services on April 12, 2010          127,282   127   16,420       16,547 
Common stock issued as payment for services on April 19, 2010          100,000   100   16,900       17,000 
Common stock issued as payment for services on April 29, 2010          1,700,000   1,700   253,300       255,000 
Common stock issued as payment for services on May 10, 2010          773,750   774   115,288       116,062 
Common stock issued as payment for services on May 24, 2010          219,092   219   43,599       43,818 
Common stock issued as payment for services on June 1, 2010          163,794   164   29,319       29,483 
Common stock issued as payment for services on June 9, 2010          333,333   333   59,667       60,000 
Common stock issued as payment for services on June 14, 2010          46,544   47   8,331       8,378 
Common stock issued for debt and accrued interest conversion on August 7, 2009          1,122,375   1,122   189,681       190,803 
Conversion feature on convertible notes payable                  63,601       63,601 
Common stock sold for cash on October 13, 2009          208,104   208   34,156       34,364 
Common stock sold for cash on October 16, 2009          2,980,734   2,981   493,808       496,789 
Common stock sold for cash on November 4, 2009          217,117   217   36,183       36,400 
Common stock sold for cash on November 17, 2009          421,529   422   71,748       72,170 
Common stock sold for cash on December 4, 2009          352,451   352   59,565       59,917 
Common stock sold for cash on January 6, 2010          58,058   58   9,812       9,870 
Common stock sold for cash on February 4, 2010          888,235   888   150,112       151,000 
Common stock sold for cash on March 2, 2010          743,746   744   125,693       126,437 
Common stock sold for cash on March 12, 2010          352,941   353   59,647       60,000 
Common stock sold for cash on April 19, 2010          125,000   125   14,875       15,000 
Common stock sold for cash on June 1, 2010          700,000   700   69,300       70,000 
Common stock issued for conversion of note payable on June 1, 2010          2,789,217   2,789   276,133       278,922 
Common stock sold for cash on June 24, 2010          1,000,000   1,000   99,000       100,000 
Warrants issued as payment for services on July 15, 2009                  13,205       13,205 
Warrants issued as payment for services on February 11, 2010                  131,376       131,376 
Conversion feature of note payable on June 1, 2010                  223,137       223,137 
Dividends on preferred stock                      (6,000)  (6,000)
Net loss                      (8,196,462)  (8,196,462)
                             
Balance at June 30, 2010  111,111  $111   130,581,562  $130,582  $12,656,723  $(13,547,060) $(759,644)
                             
Common stock issued as payment for services on July 8, 2010          349,571   350   52,086       52,436 
Common stock issued as payment for services on August 3, 2010          1,854,009   1,854   350,406       352,260 
Common stock issued as payment for services on August 30, 2010          75,000   75   11,175       11,250 
Common stock issued as payment for services on September 8, 2010          237,192   237   35,342       35,579 
Common stock sold for cash on August 3, 2010          593,211   593   58,728       59,321 
Amortization of restricted stock issued for services                  395,285       395,285 
Dividends on preferred stock                      (1,500)  (1,500)
Net loss                      (1,163,077)  (1,163,077)
                             
Balance at September 30, 2010 (unaudited)  111,111  $111   133,690,545  $133,691  $13,559,745  $(14,711,637) $(1,018,090)
See accompanying notes, which are an integral part of these financial statements
5

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
        January 29, 2007, 
         Inception, 
   For the Three Months Ended  Through 
   September 30,  September 30, 
   2010  2009  2010 
   (Unaudited)  (Unaudited)  (Unaudited) 
Operating activities:         
Net loss $(1,163,077) $(3,224,421) $(14,537,312)
Adjustments to reconcile net loss to net cash used in operating activities:            
Depreciation and amortization  5,110   3,539   34,697 
Warrants issued in connection with convertible notes payable  -   -   49,245 
Beneficial conversion feature on convertible notes payable  -   63,601   286,738 
Common stock issued for services  846,810   2,805,282   9,806,954 
Stock option compensation  -   -   307,512 
Warrants issued for services  -   5,173   290,624 
Effect of changes in:            
Prepaid expenses and other current assets  423   466   (2,735)
Deposits  -   -   (9,500)
Bank overdraft  (2,747)  -   - 
Accounts payable and accrued expenses  52,745   101,248   293,039 
Accrued payroll  (9,898)  -   352,075 
Deferred revenue  53,723   7,480   104,484 
Net cash used in operating activities  (216,911)  (237,632)  (3,024,179)
             
Investing activities:            
Purchase of property and equipment  -   (21,020)  (99,192)
Payments for systems  (89,441)  -   (161,124)
Payments for patents  -   -   (92,284)
Net cash used in investing activities  (89,441)  (21,020)  (352,600)
             
Financing activities:            
Proceeds from (payments on) bank loan borrowings  (12,875)  (9,041)  511,875 
Proceeds from sales of preferred stock  -   -   725,000 
Proceeds from convertible notes payable  -   -   235,000 
Payments on convertible notes payable  -   (20,000)  (55,000)
Proceeds from sale of common stock  59,321   289,684   1,591,268 
Proceeds from short-term loans  279,165   -   388,165 
Payments of short-term loans  (9,000)  -   (9,000)
Net cash provided by financing activities  316,611   260,643   3,387,308 
Net increase in cash  10,259   1,991   10,529 
Cash, beginning of period  270   5,038   - 
Cash, end of period $10,529  $7,029  $10,529 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $12,693  $20,201  $163,675 
Cash paid for income taxes $1,600  $-  $6,728 
Supplemental disclosure of non-cash investing and financing activities:            
Warrants issued in connection with preferred stock $-  $-  $155,714 
Beneficial conversion feature on preferred stock $-  $-  $11,111 
Conversion of preferred to common shares in reverse merger $-  $-  $625,000 
Proceeds from sales of preferred shares used to purchase shares of Bio $-  $-  $400,000 
Conversion of note payable to common stock $-  $-  $278,922 
Accrued dividends issued to preferred stockholders $1,500  $-  $7,500 
Conversion of convertible notes payable and accrued interest to common stock $-  $190,803  $190,803 

See accompanying notes, which are an integral part of these financial statements

6

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited) 
        January 29, 2007, 
        Inception, 
  For the Six Months Ended  Through 
  December 31,  December 31, 
  2010  2009  2010 
  (Unaudited)  (Unaudited)  (Unaudited) 
Operating activities:         
Net loss $(1,980,854) $(4,576,110) $(15,355,089)
Adjustments to reconcile net loss to net cash            
used in operating activities:            
Depreciation and amortization  10,456   7,940   40,043 
Warrants issued in connection with convertible notes payable  -   -   49,245 
Beneficial conversion feature on convertible notes payable  -   63,601   286,738 
Common stock issued for services  1,503,987   3,763,232   10,464,131 
Stock option compensation  -   -   307,512 
Warrants issued for services  46,735   5,173   337,359 
Effect of changes in:            
Prepaid expenses and other current assets  2,570   1,989   (588)
Deposits  -   -   (9,500)
Bank overdraft  10,280   -   13,027 
Accounts payable and accrued expenses  32,513   131,914   272,807 
Accrued payroll  (3,635)  -   358,338 
Advances  67,896   -   67,896 
Deferred revenue  (33,811)  7,480   16,950 
Net cash used in operating activities  (343,863)  (594,781)  (3,151,131)
             
Investing activities:            
Purchase of property and equipment  -   (21,020)  (99,192)
Payments for systems  (132,898)  -   (204,581)
Payments for patents  -   -   (92,284)
Net cash used in investing activities  (132,898)  (21,020)  (396,057)
             
Financing activities:            
Proceeds from (payments on) bank loan borrowings  (25,990)  (86,771)  498,760 
Proceeds from sales of preferred stock  -   -   725,000 
Proceeds from convertible notes payable  -   -   235,000 
Payments on convertible notes payable  -   (20,000)  (55,000)
Proceeds from sale of common stock  324,641   709,510   1,856,588 
Proceeds from short-term loans  187,025   18,500   296,025 
Payments of short-term loans  (9,000)  -   (9,000)
Net cash provided by financing activities  476,676   621,239   3,547,373 
Net increase in cash  (85)  5,438   185 
Cash, beginning of period  270   5,038   - 
Cash, end of period $185  $10,476  $185 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $22,237  $30,368  $173,219 
Cash paid for income taxes $1,600  $-  $6,728 
Supplemental disclosure of non-cash investing and financing activities:            
Warrants issued in connection with preferred stock $-  $-  $155,714 
Beneficial conversion feature on preferred stock $-  $-  $11,111 
Conversion of preferred to common shares in reverse merger $-  $-  $625,000 
Proceeds from sales of preferred shares used to purchase shares of Bio $-  $-  $400,000 
Conversion of note payable to common stock $-  $-  $278,922 
Accrued dividends issued to preferred stockholders $3,000  $-  $9,000 
Conversion of convertible notes payable and accrued interest to common stock $-  $190,803  $190,803 

See accompanying notes, which are an integral part of these financial statements
7
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30,December 31, 2010

Note 1 - Nature of Operations

Cavitation Technologies, Inc. (the “Company”) is a Nevada Corporation originally incorporated under the name Bio Energy, Inc. The Company designs and engineers environmentally friendly NANO technology based systems that have potential commercial applications in industries such as vegetable oil refining, renewable fuels, water treatment, water-oil emulsions, alcoholic beverage enhancement, algae oil extraction, and crude oil yield enhancement.

We are  focused on merchandising our NANO Neutralization System – a vegetable oil refining system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors.  The principleprincipal global market for our systems includes the approximate 300 major refiners who process vegetable oils including soybean, canola and rapeseed.  The finished product is used for human consumption as well as animal feed.  To date,During the three months ended December 31, 2010, we have not sold or licensed products and have recorded no revenue.revenue of $248,600. Our cumulative loss since inception on January 29, 2007 is $14,537,312.$15,355,089, including $10,464,131 in common stock issued for services.  Cumulative net cash used in operating activities of $3,024,179$3,151,131 was funded largely with $2,498,764$2,816,588, in equity issuances, including proceeds of $725,000 from the sale of preferred stock and $511,875$235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through September 30,December 31, 2010 is $4,864,653,$4,969,470, consisting of $2,713,195$2,737,662 paid in cash and $2,151,458$2,231,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

Note 2 – Basis of Presentation and Going Concern

Management’s Plan Regarding Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  The Company has no significant operating history and, from January 29, 2007, (inception), through September 30,December 31, 2010, generated a net loss of $14,537,312.$15,355,089.  The Company also has negative cash flow from operations and negative net equity.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s plan is to generate income from operations by successfully finalizing licensing arrangements with prospective customers.  We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.

Basis of Presentation
 
We have prepared the accompanying consolidated unaudited financial statements of the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30,December 31, 2010 are not indicative of the results that may be expected for the fiscal year ending June 30, 2011.  You should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.

78

Note 3 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated throughin consolidation.

Fair Value Measurement
 
FASB Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30,December 31, 2010, the carrying value of certain accounts such as deferred costs, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.
 
Use of Estimates

The preparation of financial statements in conformity with GAAP in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our common stock issued for services, among other items. Actual results could differ from these estimates.

Revenue Recognition

The Company recognizes revenue when an arrangement exists;exists, delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

Deferred Revenue

The Company received total deposits of $104,484$16,950 as of September 30,December 31, 2010 from prospective customers relating to potential ordersfabrication of the Company’s NANO Neutralization System and Bioforce 9000 Reactor Skid Systems.  Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidateconsolidated balance sheetssheet as of September 30,December 31, 2010.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.

Property and Equipment

Property and equipment is presented at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

8

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.

Leasehold improvementsShorter of life of asset or lease
Furniture5-7 Years
Office equipment5-7 Years
Equipment5-7 Years
 
9
Stock-Based Compensation

The Company accounts for its share-based compensation in accordance ASC 718-20, Share-Based Payment.  Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period.  There were no stock options granted during the threesix months ended September 30,December 31, 2010 or 2009.  There were no warrants granted during the three months ended September 30, 2010.  Warrants granted during the threesix months ended September 30,December 31, 2010 and 2009 were valued using the following assumptions.

  Six Six
  Months Ended Months Ended
  December 31, December 31,
  2010 2009
     
Expected life in years 3.0 3.0
Stock price volatility 132.1% 64.0%
Risk free interest rate 0.72% 1.60%
Expected dividends None None
Forfeiture rate 0% 0%
Three
Months Ended
September 30,
2009
Expected life in years3.0
Stock price volatility64%
Risk free interest rate1.6%
Expected dividendsNone
Forfeiture rate0%

Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.
 
The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

 
9

Advertising and Promotion Costs

Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred.  Advertising expenses amounted to $350, $211,$12,281, $11,291 and $139,653$151,584 for the threesix months ended September 30,December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through September 30,December 31, 2010, respectively.  Advertising expenses amounted to $8,178 and $8,556 for the three months ended December 31, 2010 and 2009, respectively.

10
Research and Development Costs

Research and development expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred.

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of September, 30,December 31, 2010, the Company had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet.  The Company had one patent issued during the threesix months ended September 30,December 31, 2010 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029.  For the three and six months ended September 30,December 31, 2010, amortization amounted to $569.$806 and $1,375, respectively.  The Company is awaiting final approval and issuance of additional pending patents.  Once the patents are issued, the Company will begin amortizing the capitalized patent costs over their estimated useful lives.

Intangible and Long-Lived Assets
 
In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
 
Deferred costs

Deferred costs represent costs associated with customizing specific units of the Company’s NANO Neutralization System and Reactor Skid products that it plans on licensing in the short term.licensing.  The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs.Deferred Costs.  When sales or licensing of the specific products are made, the amounts recorded as deferred costs will be expensed.expensed as cost of sales.

Note 4 -Net Loss Per Share – Basic and Diluted

The Company computes the loss per common share using ASC 260, Earnings Per Share.  The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.

On September 30,December 31, 2010, the Company had 1,915,9571,810,957 stock options and 12,545,61813,145,618 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.  In addition, the Company had 111,111 shares of Series A Preferred Stock outstanding which are convertible into approximately 333,333 shares of common stock.  These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.
11

Note 5 - Property and Equipment

Property and equipment consisted of the following as of September 30,December 31, 2010 (unaudited) and June 30, 2010.

  December 31,  June 30, 
  2010  2010 
  (Unaudited)    
       
Leasehold  improvement $2,475  $2,475 
Furniture  26,837   26,837 
Office equipment  1,500   1,500 
Equipment  68,380   68,380 
         
   99,192   99,192 
         
Less: accumulated depreciation and amortization  (38,669)  (29,587)
         
  $60,523  $69,605 
10
 
  September 30,  June 30, 
   2010  2010 
   (Unaudited)    
        
Leasehold  improvement $2,475  $2,475 
Furniture  26,837   26,837 
Office equipment  1,500   1,500 
Equipment  68,380   68,380 
         
   99,192   99,192 
         
Less: accumulated depreciation and amortization  (34,128)  (29,587)
         
  $65,064  $69,605 

Depreciation expense amounted to $4,541, $3,539$9,082, $7,940 and $34,128$38,669 for the threesix months ended September 30,December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through September 30,December 31, 2010, respectively.  Depreciation expense amounted to $4,541 and $4,401 for the three months ended December 31, 2010 and 2009, respectively.

Note 6 -Bank Loan

On February 7, 2007, the Company executed a $700,000 revolving line of credit from National Bank of California. The line of credit bears interest at the Prime rate plus 1%.  On August 1, 2009, the revolving line of credit was replaced by a one-year variable rate loan which matured August 1, 2010.   This loan bears interest at the prime rate plus 2.75%, and was repaid with equal monthly installments of $7,396 beginning September 1, 2009 with unpaid amounts due on August 1, 2010. This line of credit is secured by personal guarantees of the Company’s principals and assets.

On August 1, 2010 the Company renewed theits loan with National Bank of California until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payment of $6,000 and a final payment of $474,171  The interest rate floor was increased from 7.0% to 7.5%. As of September 30,December 31, 2010, the outstanding balance on the loan was $511,875.  The Company is in the process of negotiating a renewal of the terms of this loan.$498,760.

Note 7 – Short-Term Loans

In January 2010, the Company borrowed $9,000 from a shareholder as a short-term loan.  The borrowing bears no interest and is due on demand.  As of June 30, 2010, the total outstanding amount related to this short-term loan amounted to $9,000.  On July 6, 2010, the outstanding short-term loan amount of $9,000 was repaid.  There were no amounts outstanding as of September 30, 2010.

In MayOn October 26, 2010, the Company receivedentered into a short-term loan from a shareholder inagreement with Desmet Ballestra North America, Inc. under which the amount of $100,000.Company borrowed $75,000.  The borrowingloan bears no interest and is due on demand.  As of September 30, 2010, the total outstanding amount related to this short-term loan amounted to $100,000.  Management expects the shareholder to convert this short-term loan into common stock or another financial instrument during the year ended June 30,repayable at $25,000 per month beginning January 25, 2011.

During the three months ended September 30,As of December 31, 2010, the Company receivedhad short-term loans from investorsshareholders in the aggregate totalamount of $279,165.$212,025.  The borrowings bear no interest and are due on demand.  Management expects investorsthe shareholders to convert these short-term loans into common stock or otheranother financial instrumentsinstrument during the year endedending June 30, 2011.

The total outstanding balances of the above loans amounted to $379,165$287,025 as of September 30,December 31, 2010, and are recorded as short-term loans on the accompanying consolidated balance sheet.

 
11

Note 8 – Stockholders’ EquityDeficit

Common Stock

On July 8, 2010, the Company issued an aggregate total of 349,571 shares of restricted common stock with an aggregate fair value of $52,436 for the payment of services rendered.
12

On August 3, 2010, the Company issued an aggregate total of 1,854,009 shares of restricted common stock with an aggregate fair value of $352,260 for the payment of services rendered.

On August 3, 2010, the Company sold an aggregate total of 593,211 shares of restricted common stock for proceeds of $59,321.

On September 8,August 30, 2010, the Company issued an aggregate total of 237,19275,000 shares of restricted common stock with an aggregate fair value of $35,579$11,250 for the payment of services rendered.

On September 8, 2010, the Company issued an aggregate total of 75,000237,192 shares of restricted common stock with an aggregate fair value of $11,250$35,579 for the payment of services rendered.

On October 1, 2010, the Company issued an aggregate total of 473,517 shares of restricted common stock with an aggregate fair value of $71,028 for the payment of services rendered.

On October 1, 2010, the Company sold an aggregate total of 661,000 shares of restricted common stock for proceeds of $79,320.

On November 1, 2010, the Company issued an aggregate total of 1,020,482 shares of restricted common stock with an aggregate fair value of $132,663 for payment of services rendered.

On November 1, 2010, the Company sold an aggregate total of 1,400,000 shares of restricted common stock for proceeds of $144,000.

On November 22, 2010, the Company issued an aggregate total of 100,000 shares of restricted common stock with an aggregate fair value of $12,000 for payment of services rendered.

On November 22, 2010, the Company sold an aggregate total of 350,000 shares of restricted common stock for proceeds of $42,000.

On December 7, 2010, the Company issued an aggregate total of 459,056 shares of restricted common stock with an aggregate fair value of $50,496 for payment of services rendered.

Preferred Stock

The Company has 5,000,000 shares of Series A Preferred Stock authorized and 111,111 shares outstanding.  Series A Preferred Stock is convertible into common stock at a rate of 3 shares of common stock per share of each Series A Preferred Stock held at any time at the option of the preferred shareholders.  In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will have liquidation preferences prior to distributions made to any other class of stockholder.  The Series A Preferred Stock is not redeemable.  On the third anniversary date of the issuance of the preferred shares, any Series A Preferred shares outstanding are automatically converted into common stock, at a conversion rate of 3 shares offor common to 1 share of Series A Preferred Stock.
 
The holders of the Series A Preferred Stock are entitled to receive out of any funds legally available dividends at the rate of 6% per annum payable on September 30 and March 30. Dividends shall accrue and be cumulative whether or not they have been declared. Dividends may be paid in cash or through the issuance of additional shares of Series A Preferred Stock at the Company’s option.  As of September 30,December 31, 2010, cumulative dividends amounted to $7,500.$9,000.  As of September 30,December 31, 2010, none of the cumulative dividends were paid.paid and are recorded in accrued expenses on the accompanying consolidated balance sheet.

The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock.  The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock.  There are no shares of Series B Preferred Stock outstanding.
13

Stock Options

A summary of the stock option activity for the threesix months ended September 30,December 31, 2010 is presented below.

        Weighted- 
        Average 
     Weighted-  Remaining 
     Average  Contractual 
     Exercise  Life 
  Options  Price  (Years) 
          
Outstanding at June 30, 2010  1,987,612  $0.56   6.16 
Granted  -   -     
Forfeited  (176,655)  0.67     
Outstanding at December 31, 2010 (unaudited)  1,810,957   0.55   6.23 
             
Vested and expected to vest            
at December 31, 2010 (unaudited)  1,810,957   0.55   6.23 
             
Exercisable at December 31, 2010 (unaudited)  1,810,957   0.55   6.23 
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        Weighted- 
         Average 
      Weighted-  Remaining 
      Average  Contractual 
      Exercise  Life 
   Options  Price  (Years) 
          
Outstanding at June 30, 2010  1,987,612  $0.56   6.16 
Granted  -   -     
Forfeited  (71,655)  0.67     
Outstanding at September 30, 2010 (unaudited)  1,915,957   0.56   6.13 
             
Vested and expected to vest at September 30, 2010 (unaudited)  1,915,957   0.56   6.13 
             
Exercisable at September 30, 2010 (unaudited)  1,915,957   0.56   6.13 

The following table summarizes information about outstanding stock options as of September 30,December 31, 2010.

    Options Outstanding  Options Exercisable 
       Weighted  Weighted     Weighted 
       Average  Average     Average 
 Exercise  Number  Remaining  Exercise  Number  Exercise 
 Price  of Shares  Life (Years)  Price  of Shares  Price 
                  
 $0.33   637,297   6.06  $0.33   637,297  $0.33 
  0.67   1,173,660   6.71   0.67   1,173,660   0.67 
      1,810,957           1,810,957     
   Options Outstanding  Options Exercisable 
      Weighted  Weighted     Weighted 
      Average  Average     Average 
Exercise  Number  Remaining  Exercise  Number  Exercise 
Price  of Shares  Life (Years)  Price  of Shares  Price 
                 
$0.33   637,297   6.06  $0.33   637,297  $0.33 
 0.67   1,278,660   6.16   0.67   1,278,660   0.67 
     1,915,957           1,915,957     

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Warrants

A summary of the warrant activity for the threesix months ended September 30,December 31, 2010 is presented below.

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        Weighted- 
        Average 
     Weighted-  Remaining 
     Average  Contractual 
     Exercise  Life 
  Warrants  Price  (Years) 
          
Outstanding at June 30, 2010  12,545,618  $0.42   2.66 
Granted  600,000   0.25     
Exercised  -   -     
Outstanding at December 31, 2010 (unaudited)  13,145,618   0.42   2.19 
             
Vested and expected to vest            
at December 31, 2010 (unaudited)  13,145,618   0.42   2.19 
             
Exercisable at December 31, 2010 (unaudited)  13,145,618   0.42   2.19 
        Weighted- 
         Average 
      Weighted-  Remaining 
      Average  Contractual 
      Exercise  Life 
   Warrants  Price  (Years) 
           
Outstanding at June 30, 2010  12,545,618  $0.42   2.66 
Granted  -   -     
Exercised  -   -   - 
Outstanding at September 30, 2010 (unaudited)  12,545,618   0.42   2.41 
             
Vested and expected to vest at September 30, 2010 (unaudited)
  12,545,618   0.42   2.41 
             
Exercisable at September 30, 2010 (unaudited)  12,545,618   0.42   2.41 

The following table summarizes information about outstanding warrants as of September 30,December 31, 2010.

    Warrants Outstanding  Warrants Exercisable 
       Weighted  Weighted     Weighted 
       Average  Average     Average 
 Exercise  Number  Remaining  Exercise  Number  Exercise 
 Price  of Shares  Life (Years)  Price  of Shares  Price 
                  
 $0.20 - 0.37   2,939,374   2.27  $0.29   2,939,374  $0.29 
  0.42 - 0.58   10,206,244   2.16   0.45   10,206,244   0.45 
      13,145,618           13,145,618     
   Warrants Outstanding  Warrants Exercisable 
      Weighted  Weighted     Weighted 
      Average  Average     Average 
Exercise  Number  Remaining  Exercise  Number  Exercise 
Price  of Shares  Life (Years)  Price  of Shares  Price 
                 
$0.20 - 0.37   2,339,374   2.36  $0.30   2,339,374  $0.30 
 0.42 - 0.58   10,206,244   2.42   0.45   10,206,244   0.45 
     12,545,618           12,545,618     

Note 9 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net operating losses in the year ending June 30, 2011, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period ended September 30,December 31, 2010.

ASC 740-10, Accounting for Uncertainty in Income Taxes, indicates criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in the financial statements. ASC 740-10 includes a higher standard that tax benefits must meet before they can be recognized in a company’s financial statements. As the Company has no uncertain tax positions as defined in ASC 740, there are no corresponding unrecognized tax benefits. Any future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. It is the Company’s policy to classify income tax penalties and interest, if any, as part of general and administrative expense in its Statements of Operations. The Company has not incurred any interest or penalties since inception.

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Note 10 - Commitments and Contingencies

Lease Agreements

On December 30, 2009, the Company extended its existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010.  Monthly rent under the extended lease agreement is $4,250 per month.  The Company has a security deposit of $9,500 associated with this lease. 

Total rent expense was $12,750, $15,118,$25,500, $30,235, and $212,533$226,183 for the threesix months ended September 30,December 31, 2010 and 2009, and for the period from January 29, 2007 (date of inception) through September 30,December 31, 2010, respectively.  Total rent expense was $12,750 and $15,118 for the three months ended December 31, 2010 and 2009, respectively.

Future minimum lease payments under non-cancelable operating leases are as follows.

Year Ended   
 June 30,   
    
2011 (remainder of)  25,500 
2012  29,750 
Total $55,250 
Year Ended   
June 30,   
    
2011 (remainder of)  38,250 
2012  29,750 
Total $ 68,000 

Royalty Agreements

The Company has
On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with each of itsour President and CEO where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company.  In exchange, the Company agreed to pay a royalty of 5% of future gross revenues to each of the CEO and President for future licensing, leasing, or rental revenue generated from products using the assigned technologies. In connection withThese were subsequently assigned to Cavitation Technologies on May 13, 2010.
On April 30, 2008, our wholly owned subsidiary entered into an employment agreement with Varvara Grichko, a key employee formember of the Board of Directors.  For any technologies invented by the employee,Ms. Grichko, the Company shall pay a royalty of 5% of future revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.

During the three months ended December 31, 2010, we incurred royalty expenses relating to these agreements.  As of September 30,December 31, 2010, the Companywe had not paid any amounts related to these royalties.royalties, and the amounts are reflected in accrued expenses on the accompanying balance sheet.

Licensing Agreement

On November 15, 2010 we signed a Technology License, Marketing &Collaboration Agreement with N.V. Desmet Ballestra Group S.A. (“Desmet”).  The agreement gives Desmet the exclusive worldwide license to market the CTI Nano Reactor System (“CTI System”) in the field of vegetable oil processing (the “Licensed Field”). Under this Agreement, Desmet is responsible for the marketing of the CTI System to end users in the Licensed Field, as well as the construction, installation and maintenance of the system.  In consideration for services rendered, we  agreed to pay Desmet a fee.  We intend to generate revenues from the licensing of systems.  This agreement supersedes a previous agreement between the parties signed January 15, 2010.

As of December 31, 2010, the Company received advances of $67,896 from Desmet to assist with funding the production of specific CTI Systems.  The Company has agreed to pay these amounts back at the time the systems are sold or licensed.  These amounts are reflected as Advances on the accompanying consolidated balance sheets as of December 31, 2010 and June 30, 2010.
16

Note 11 – Subsequent Events

The company became listed on the Frankfurt (Germany)On January 10, 2011, we issued 110,000 restricted shares of common stock exchange and began trading October 27, 2010 under the trading symbol WTC.to Anita McCormick for a total purchase price of $12,100.

On October 25,January 10, 2010, we received a purchase orderissued 31,836 shares of common stock to Michael Psomas for a 10 gallons/minute NANO Neutralization System. The purchase order requires delivery before December 9, 2010.  This agreement is attached as Exhibit 99.2.accounting services.

On October 26,January 10, 2010, we issued 76,080 shares of common stock to Tomer Tal for legal services.

On January 10, 2011, we issued 9,000 shares of common stock to Shannon Stokes for administrative services.

On February 1, 2011, we issued convertible promissory notes in an amount equal to $61,212 to the Tripod Group, LLC.  The notes bear interest rate of 6% per annum and have a maturity of one year or less.  The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of our common stock at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.

On Feb 8, 2011 the Company entered into a loan agreementSecurities Purchase Agreement with Desmet Ballestra North America,Asher Enterprises, Inc. under which we receivedAsher Enterprises, Inc. purchased a loanconvertible promissory note in the amount of $75,000.$42,500. The loanconvertible promissory note bears no interest at a rate of 8% p.a. and is repayablematures on Nov 10, 2011. The holder of the note may elect to convert principal and accrued interest into shares of common stock at $25,000 per month beginning January 25, 2011. This document is attached as Exhibit 99.1.a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.

On October 1, 2010, the Board of Directors granted 1,134,517 common shares including 661,000 shares to equity investors valued at $79,320 and 473,517 shares issued to service providers.

On November 1, 2010, the Board of Directors granted 2,422,265 common shares including 1,400,000 shares to equity investors valued at $140,000 and 1,022,265 shares issued to service providers.

15
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

Overview

We design and engineer NANO technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water purification, alcoholic beverage enhancement, algae oil extraction, water-oil emulsions and crude oil yield enhancement.  To date,During the three months ended December 31, 2010, we have sold no products and have recorded no revenue.revenue of $248,600.  Our cumulative loss since inception on January 29, 2007 through September 30, 2010 is $14,537,312.$15,355,089, including $10,464,131 in common stock issued for services.  Cumulative net cash used in operating activities of $3,024,179$3,151,131 was funded largely with approximately $2.5 million$2,816,588 in proceeds from equity sales, including proceeds of $725,000 from the sale of preferred stock and $500,000$235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through December 31, 2010 is $4,864,653$4,969,470, consisting of $2,713,195$2,737,662 paid in cash and $2,151,458$2,231,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

The company is focused on merchandising our NANO Neutralization System – a vegetable oil refining  system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The principleprincipal market for our systems includes the approximate 300 major global refiners who process vegetable oils including soybean, canola and rapeseed.  The finished product is used for human consumption as well as animal feed. To date, we have not sold or licensed productsone system and have recorded nonominal revenue.
17

Management’s Plan

We are a development stage entity engaged in merchandising our NANO Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed.  Our near term goal is to successfully merchandise our systems. We have no significant operating history and, from January 29, 2007, (inception), through September 30,December 31, 2010, generated a net loss of $14,537,312.$15,355,089.  We also have negative cash flow from operations and negative net equity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
 
Management’s plan is to generate income from operations by successfully finalizing arrangements with prospective clients. We will also attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to stock options, warrants, and common stock issued for services, among others. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue when an arrangement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

16

Deferred Revenue

The Company received total deposits of $104,484$16,950 as September 30,of December 31, 2010 from prospective customers relating to potential ordersfabrication of the Company’s NANO Neutralization System and Bioforce 9000 Reactor Skid Systems.  Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of September 30,December 31, 2010.

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  We accountThe Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of September, 30,December 31, 2010, the Company had incurred $92,284 in gross patent costs less $569 in amortization.  These costswhich are capitalized in the accompanying consolidated balance sheet.  WeThe Company had one patent issued during the threesix months ended September 30,December 31, 2010 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029. For the three and six months ended September 30,December 31, 2010, amortization amounted to $569.  We are$806 and $1,375, respectively. In addition to one approved patent, we have 10 pending United States patents and 10 pending international patent applications filed under the Patent Corporation Treaty.  The Company is awaiting final approval and issuance of these additional pending patents.  Once the patents are issued, wethe Company will begin amortizing the capitalized patent costs over their estimated useful lives. CTi also received the “CE Marking” certification which allows us to market our systems in the European Union. We plan to continue to file for new and improved patents on a regular basis.

Intangible and Long-Lived Assets
 
In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
 
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Stock-Based Compensation

We account for our share-based compensation in accordance ASC 718-20. Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the requisite vesting period.

Income Taxes
 
We account for income taxes in accordance with ASC 740-10. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates on the date of enactment.
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid. We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
 
Deferred costs

Deferred costs represent costs associated with customizing specific units of our NANO Neutralization System that we plan to  lease or rent in the short term.rent.  The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs on the balance sheet.  When sales or licensing of the specific products are made, the amounts recorded as Deferred Costsdeferred costs will be expensed.expensed as cost of sales.

 
17

Results of Operations for the Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009

The following is a comparison of our results of operations for the three months ended September 30,December 31, 2010 and 2009.

  For the Three Months Ended       
  December 31,       
  2010  2009  $ Change  % Change 
  (Unaudited)  (Unaudited)       
             
Revenue $248,600  $-  $248,600   100.0%
Cost of sales  36,700   -   36,700   100.0%
Gross profit  211,900   -   211,900   100.0%
General and administrative expenses  915,316   1,249,554   (334,238)  -26.7%
Research and development expenses  104,817   91,968   12,849   14.0%
Total operating expenses  1,020,133   1,341,522   (321,389)  -24.0%
Loss from operations  (808,233)  (1,341,522)  533,289   -39.8%
Interest expense  (9,544)  (10,167)  623   -6.1%
Loss before income taxes  (817,777)  (1,351,689)  533,912   -39.5%
Income tax expense  -   -   -   0.0%
Net loss $(817,777) $(1,351,689)  533,912   -39.5%
19
  For the Three Months Ended       
  September 30,       
  2010  2009  $ Change  % Change 
             
General and administrative expenses $909,131  $3,077,874  $(2,168,743)  -70.5%
Research and development expenses  241,253   62,965   178,288   283.2%
Total operating expenses  1,150,384   3,140,839   (1,990,455)  -63.4%
Loss from operations  (1,150,384)  (3,140,839)  1,990,455   -63.4%
Interest expense  (12,693)  (83,582)  70,889   -84.8%
Loss before income taxes  (1,163,077)  (3,224,421)  2,061,344   -63.9%
Income tax expense  -   -   -   0.0%
Net loss $(1,163,077) $(3,224,421)  2,061,344   -63.9%

Revenue

During the three months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.

In addition, we also recognized revenue of $35,000 associated with the rental of a NANO Neutralization System. From May through November 2010, we received monthly rental payments of $5,000 from a commercial vegetable oil refining plant located in South Carolina.  These payments were received as compensation for use of our NANO Neutralization System.  This facility was sold in mid December 2010 and will be used for purposes other than soybean oil refining.  As a result, we will receive no further monthly rental payments from this facility.  The equipment has been returned to us and we expect to use it in another facility.

We also recognized $26,000 in revenue associated with the sale of a Bioforce 9000 Reactor Skid System.

We had no revenue during the three months ended December 31, 2009.

Cost of Sales

During the three months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above.  We had no cost of sales during the three months ended December 31, 2009, as we had no sales during that period.  One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year.  As a result, we  do not expect our gross profit percentage to be as high on future sales.

Operating Expenses

Our operating expenses for the three months ended September 30,December 31, 2010 amounted to $1,150,384$1,020,133 compared with $3,140,839$1,341,522 in 2009, a decrease of $1,990,455,$321,389, or 63.4%24.0%.  The decrease consisted of a decrease in general and administrative expenses in 2010 of $2,168,743,$334,238, or 70.5%26.7%, offset by an increase in research and development expenses of $178,288,$12,849, or 283.2%14.0%.  These components of our operating expenses increased primarily due to the following.

Our general and administrative expenses decreased by $2,168,743$334,238 for the three months ended September 30,December 31, 2010 as compared to 2009.  This decrease is primarily due to a decrease in our expenses related to the issuance of 17,938,011share-based compensation as payment for services.  During the three months ended December 31, 2009, we issued 1,985,670 shares of common stock valued at $2,805,282 issued during the three months ended September 30, 2009$562,667 to consultants, service providers and other key personnel who contributed to the success of the Company.  During the three months ended September 30,December 31, 2010, we issued 2,515,7722,053,055 shares of common stock valued at $451,525$266,187, including $247,275$185,837 in G&Ageneral and administrative expenses and $80,350 in research and development expenses.  We also issued 600,000 warrants as payment for services and $204,250 in R&D.  We also recognized the quarterly amortization of $395,285 in restricted stock issued for services during the yearthree months ended June 30, 2010.December 31, 2010 resulting in $46,734 in general and administrative expenses.  As a result, our total share-based general and administrative expenses relating to share-based compensation decreased by $330,096.  The primary reason for this decrease is due to the decrease in the value of our common stock in 2010 as compared to 2009.  During the three months ended December 31, 2010, our common stock had an average value per share of approximately $0.13 per share, as compared with an average value per share of approximately $0.29 during the three months ended December 31, 2009.  The remaining expenses for the three months ended September 30, 2010 amounted to $642,560. Share based compensation, therefore declined by $2,162,722 from $2,805,282 to $642,560  during the three months ended September 30, 2010.  The remaining expenses for the periods ending September 30,December 31, 2010 and 2009 consisted largelymostly of compensation expense and professional fees for legal, audit, and accounting services.services which remained fairly consistent between the periods.

Our research and development expenses increased by $178,288$12,849 for the three months ended September 30,December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $204,250$80,350 and issued to consultants that were added in 2010 involved in research and development.  There was no such expense in 2009.  The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.

Interest Expense

Our interest expense decreased by $70,889,$623, or 84.8%6.1%, for the three months ended SeptemberDecember 31, 2010 as compared to 2009.  This decrease was primarily due to a decrease in the outstanding balance of the loan in 2010.
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Results of Operations for the Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009

The following is a comparison of our results of operations for the six months ended December 31, 2010 and 2009.

  For the Six Months Ended       
  December 31,       
  2010  2009  $ Change  % Change 
  (Unaudited)  (Unaudited)       
             
Revenue $248,600  $-  $248,600   100.0%
Cost of sales  36,700   -   36,700   100.0%
Gross profit  211,900   -   211,900   100.0%
General and administrative expenses  1,824,447   4,327,428   (2,502,981)  -57.8%
Research and development expenses  346,070   154,933   191,137   123.4%
Total operating expenses  2,170,517   4,482,361   (2,311,844)  -51.6%
Loss from operations  (1,958,617)  (4,482,361)  2,523,744   -56.3%
Interest expense  (22,237)  (93,749)  71,512   -76.3%
Loss before income taxes  (1,980,854)  (4,576,110)  2,595,256   -56.7%
Income tax expense  -   -   -   0.0%
Net loss $(1,980,854) $(4,576,110)  2,595,256   -56.7%

Revenue

During the six months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.  In addition, we recognized revenue amounting to $35,000 associated with the rental of a NANO Neutralization System, as well as $26,000 associated with the sale of a Bioforce 9000 Reactor Skid System.  We had no revenue during the six months ended December 31, 2009.

Cost of Sales

During the six months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above.  We had no cost of sales during the six months ended December 31, 2009, as we had no sales during that period. One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year.  As a result, we go not expect our gross profit percentage to be as high on future sales.

Operating Expenses
Our operating expenses for the six months ended December 31, 2010 amounted to $2,170,517 compared with $4,482,361 in 2009, a decrease of $2,311,844 or 51.6%.  The decrease consisted of a decrease in general and administrative expenses in 2010 of $2,502,981, or 57.8%, offset by an increase in research and development expenses of $191,137, or 123.4%.  These components of our operating expenses increased primarily due to the following.

Our general and administrative expenses decreased by $2,502,981 for the six months ended December 31, 2010 as compared to 2009.  This decrease is primarily due to a decrease in share-based compensation during the six months ended December 31, 2010.  During the six months ended December 31, 2009, our total share-based compensation recorded as general and administrative expenses amounted to $3,768,405 which consisted of $3,763,232 relating to the issuance of 19,698,681 shares of common stock to consultants, service providers and other key personnel who contributed to the success of the Company, as well as $5,173 relating to the issuance of warrants as payment for services.  The increased number of shares issued for services was due primarily to bonuses in July 2009 to kep employees and consultants.  During the six months ended December 31, 2010, we issued 4,568,827 shares of common stock as payment for services valued at $717,712, including $433,112 in general and administrative expenses and $284,600 in research and development.  During the six months ended December 31, 2010, we also recognized amortization of $786,275 in restricted stock issued for services during the year ended June 30, 2010, as well as $46,734 in expenses relating to warrants issued as payment for services.  As a result, total share-based general and administrative expenses for the six months ended December 31, 2010 amounted to $1,266,121.  Share based compensation, therefore declined by $2,502,284 during the six months ended December 31, 2010.  The remaining expenses for the six months ending December 31, 2010 and 2009 consisted largely of salaries, professional fees for legal, audit, and accounting services, and remained fairly consistent between the periods.
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Our research and development expenses increased by $191,137 for the six months ended December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $284,600 and issued to consultants that were added in 2010 involved in research and development.  There was no such expense in 2009.  The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.

Interest Expense
Our interest expense decreased by $71,512, or 76.3%, for the six months ended December 31, 2010 as compared to 2009.  This decrease was primarily due to $63,601 attributable to the beneficial conversion feature on convertible debt during 2009. This amount arose as we converted debt into restricted common shares at a 25% discount to the market price. There was no such charge in 2010.  The remaining decrease was due primarily to a decrease in the outstanding loan balance in 2010.

Liquidity and Capital Resources

Bank Loan

On August 1, 2010 we renewed our loan from the National Bank of California through November 1, 2010 for $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On August 1, 2010, we renewed the loan until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%. On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payments of $6,000 and a final payment of $474,171.  The interest rate floor was increased from 7.0% to 7.5%. As of September 30,December 31, 2010, the outstanding balance on the loan was $511,875.  We are in the process of negotiating a renewal of the terms of this loan.

$498,760.
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Short-Term Loans

During the three months ended September 30,As of December 31, 2010, we received proceeds fromhad outstanding short-term loans from investorsshareholders in the aggregate totalamount of $279,165.$212,025.  The borrowings bear no interest and are due on demand.  Management expects investorsWe expect the shareholders to convert these short-term loans into common stock or otheranother financial instrumentsinstrument during the year endedending June 30, 2011.

On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000.  The total outstanding balances of short-term loans amounted to $379,165 as of September 30, 2010,loan bears no interest and are recorded as short-term loansis repayable at $25,000 per month beginning January 25, 2011.  This agreement was restructured on January 21, 2011 extending the due date on the accompanying consolidated balance sheet.initial payment to March 31, 2011.

Common Stock

During the threesix months ended September 30,December 31, 2010, we issued 593,2113,004,211 shares of common stock for $59,321$324,641 in cash.

Share-based Compensation

During the threesix months ended September 30,December 31, 2010, we issued 2,515,7724,568,827 shares of common stock valued at $451,525$717,712 as payments to service providers.  In addition, we incurred $395,285$786,275 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010.  We also issued warrants as payment for services during the six months ending December 31, 2010, resulting in $46,735 in expenses.

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Cash Flow

Net cash used in operating activities during the threesix months ended September 30,December 31, 2010 amounted to $216,911$343,863 compared to $237,632$594,781 for the same period in fiscal 2010.2009.  During the threesix months ended September 30,December 31, 2010, our net loss amounted to $1,163,077,$1,980,854, including non-cash operating expenses of $851,920$1,561,178 arising primarily from common stock issued for services provided.  The remaining net cash of $311,157$419,676 was used largely to pay salary and related expenses, research and development, interest expense and professional fees such as attorneys and accountants.  During the threesix months ended September 30,December 31, 2009, our net loss amounted to $3,224,421,$4,576,110, including non-cash operating expenses of $2,877,595$3,839,946 arising primarily from common stock issued for services provided.  The remaining net cash of $346,826$736,164 was used largely to pay similar salary and professional expenses as in 2010.

Net cash used in investing activities during the threesix months ended September 30,December 31, 2010 amounted to $89,441$132,898 which was the result of payment for customization of systems.  During the threesix months ended September 30,December 31, 2009, our net cash used in investing activities amounted to $21,020 which resulted from amounts spent for the purchase of property and equipment.

Net cash provided by financing activities during the threesix months ended September 30,December 31, 2010 amounted to $316,611,$476,676, which resulted from proceeds from the sale of common stock amounting to $59,321$324,641 and proceeds from short-term loans of $279,165,$187,025, offset by the payment of short-term loans of $9,000 and payments for the bank loan of $12,875.$25,990.  During the threesix months ended September 30,December 31, 2009, our net cash provided from financing activities amounted to $260,643$621,239 which resulted from proceeds from the sale of common stock of $289,684$709,510 offset by payments for convertible notes payable of $20,000 and payments for the bank loan of $9,041.$86,771.

Commitments

Lease Agreements

On December 30, 2009, we extended our existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010.  Monthly rent under the extended lease agreement is $4,250 per month.

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Future minimum lease payments under non-cancelable operating leases are as follows.

Year Ended   
 June 30,   
    
2011 (remainder of)  25,500 
2012  29,750 
Total $55,250 
Year Ended   
June 30,   
    
2011 (remainder of)  38,250 
2012  29,750 
Total $68,000 

Royalty Agreements

WeOn July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President and CEO where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company.  In exchange, the Company agreed to pay a royalty of 5% of future gross revenues to each of the CEO and President for future licensing, leasing, or rental revenue generated from products using the assigned technologies. In connection withThese were subsequently assigned to Cavitation Technologies on May 13, 2010.
On April 30, 2008, our wholly owned subsidiary  entered into an employment agreement with Varvara Grichko, a key employee, formember of the Board of Directors.  For any technologies invented by the employee,Ms. Grichko, the Company shall pay a royalty of 5% of future revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.  As of September 30, 2010, we have not paid any amounts related to these royalties.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

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ITEM 4.  Controls and Disclosures

Evaluation of  Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-15(b)(e) and 15d-15(b)(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

ThereIn accordance with the requirements of Rule 13a-15(d) of the Securities Exchange Act of 1934, there were no changes in financialinternal  control over financial reporting during the firstsecond quarter of fiscal 2011 that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
Our conclusion about the effectiveness of our Internal Controls over Financial Reporting changed from “ineffective” to “effective” during the 4th quarter of fiscal 2010 as we implemented internal controls which we evaluated as working properly and effectively.  Changes to our design and operations of our controls primarily related to the increased use of outside consultants and implementation of new internal control procedures. Steps we have taken include:

a. With the assistance of an outside consultant, we were able to design, implement, and test processes and procedures for Internal Controls over Financial Reporting.

b. With the help of an outside consultant, we were able to raise our knowledge and expertise of GAAP to a level that is consistent with our conclusion that our internal controls are effective.

c. We updated and implemented new internal control procedures which address our risk assessment process, entity level control evaluations, and testing of key controls over financial reporting.

d. We continue to monitor our internal control processes and procedures on a regular basis.

PART II – OTHER INFORMATION

Item 1  Legal Proceedings

We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
 
TheSince our previous disclosure in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, the following is a listing of unregistered security activity during the three monthsquarter ended September 30,December 31, 2010.
 
Sales of Restricted Common Stock

On August 3,October 1, 2010, we issued 593,211100,000 shares of common stock to Suzahnna TepperCharles Collier for a total purchase price of $59,321. The$12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances

20

Issuance of Restricted Common Stock for Servicesissuances.

On July 8,October 1, 2010, we issued 125,00042,000 shares of common stock to RL Hartshorn, the Company’s CFO,Richard Burns for services provided.  Thea total purchase price of $5,040.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaserpurchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Nathanial D. Conrad for a total purchase price of $10,080.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Constance Troncale for a total purchase price of $10,080.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
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On October 1, 2010, we issued 16,000 shares of common stock to Nick Pomeranz for a total purchase price of $1,920. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 126,000 shares of common stock to Gerald Healy for a total purchase price of $15,120. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 125,000 shares of common stock to David P. Conrad for a total purchase price of $15,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Philip L. Terry for a total purchase price of $10,080. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Kathleen Elliott for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Patricia Morales for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 1,000,000 shares of common stock to West Pointe Partners, LTD for a total purchase price of $100,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Anna Mosk for a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Suzahnna Tepper for  a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
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On November 22, 2010, we issued 100,000 shares of common stock to Janice Tamoto for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 22, 2010, we issued 150,000 shares of common stock to Rose De Santos for a total purchase price of $18,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

Issuance of Restricted Common Stock for Services

On October 1, 2010, we issued 101,370 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On July 8,October 1, 2010, we issued 98,02578,147 shares of common stock to Mike PsomasTomer Tal for accountinglegal services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On July 8,October 1, 2010, we issued 97,546250,000 shares of common stock to Tomer TalRL Hartshorn for legalCFO services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On July 8,October 1, 2010, we issued 10,0009,000 shares of common stock to Irakli GaguaShannon Stokes for consultingoffice services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On July 8,October 1, 2010, we issued 9,00035,000 shares of common stock to Shannon StokesVarvara Grichko for services provided.  Theresearch and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On July 8,November 1, 2010, we issued 10,00088,800 shares of common stock to Fred RambergMichael Psomas for consultingaccounting services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 250,000116,954 shares of common stock to Undiscovered Equity, Inc.Tomer Tal for consultinglegal services.
The These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaserservice provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
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On November 1, 2010, we issued 47,728 shares of common stock to Kelly Lowry & Kelley, LLP for legal  services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 250,000150,000 shares of common stock to Christopher CastaldoJames Hurley for consultinglegal services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

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On August 3, 2010, we issued 75,000 shares of common stock to Viktor Grichko for research and development services.  The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 37,500 shares of common stock500,000 to James FullerAM-PM Appliance Service for consultingresearch and development services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 50,00030,000 shares of common stock to Kirk WigginsIrakli Gagua for consultingIT services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 1,000,00037,500 shares of common stock to Bioworld Technology ManagementJames Fuller for research and developmentboard of director services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 1, 2010, we issued 91,09950,000 shares of common stock to Mike PsomasKirk Wiggins for accountingmarketing and sales services.  TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 22, 2010, we issued 60,41075,000 shares of common stock to Tomer TalViktor Grichko for legalresearch and development services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 3,November 22, 2010, we issued 40,00025,000 shares of common stock to Stacie JovancevicStrategic IR, LTD for consultinginvestor relation services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On August 30,December 7, 2010, we issued 75,00055,062 shares of common stock to Fred RamburgMichael Psomas for consultingaccounting services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaserservice provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
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On December 7, 2010, we issued 170,107 shares of common stock to Tomer Tal for legal  services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On September 8,December 7, 2010, we issued 156,66010,000 shares of common stock to Tomer TalVarvara Grichko for legalresearch and development services.  TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On September 8,December 7, 2010, we issued 80,532226,887 shares of common stock to Mike PsomasSnapshot, LTD for accountinginvestor relation services. TheThese shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  TheThese shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

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With the exception of RL Hartshorn, Varvara Grichko, and JimJames Fuller who are affiliates of the company, none of the aforementioned service providers are affiliates of the Company.

Issuance of Warrants

On November 22, 2010, we issued Pinnacle Financial Group warrants to purchase 600,000 shares of common stock at an exercise price of $0.25 for investor relation services.  The warrants are fully vested as of the issuance date and can be exercised at any time through November 22, 2013.

We have granted the above securities in reliance on Section 4(2) of the Securities Act of 1933, as amended. These warrants were not offered via general solicitation to the public but solely to the aforementioned service provider.  No sales commissions or other remuneration was paid in connection with these issuances.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – (Reserved and Removed)

Item 5 – Other Information

On October 25, 2010, we received a purchase order for a 10 gallons/minute NANO Neutralization System. The purchase order requires delivery before December 9, 2010.None

On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which we received a loan of $75,000.  The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011.

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On October 1, 2010, the Board of Directors granted 1,134,517 common shares including 661,000 shares to equity investors valued at $79,320 and 473,517 shares issued to service providers.

On November 1, 2010, the Board of Directors granted 2,422,265 common shares including 1,400,000 shares to equity investors valued at $140,000 and 1,022,265 shares issued to service providers.

Item 6 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:report or incorporated by reference.

31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1  Nano Reactor Loan Agreement between the Company and Desmet Ballestra North America, Inc. dated October 26, 2010.

99.2  Purchase Order from AG Natural, LLC dated October 25, 2010.

    Incorporated by Reference  
  Filed    
ExhibitExhibit DescriptionHerewithFormPd. EndingExhibitFiling Date
       
3(i)(a)Articles of Incorporation - original name of Bioenergy, Inc. SB-2N/A3.1Oct. 19, 2006
3(i)(b)Articles of Incorporation - Amended and Restated 10-QDec. 31, 20083-1February 17, 2009
3(i)( c )Articles of Incorporation - Amended and Restated 10-QJune 30 20093-1May 14, 2009
3(i)(d)Articles of Incorporation - Amended; increase in authorized shares 8KN/AN/AOctober 29, 2009
3(i)(e)Articles of Incorporation - Certificate of Amendment; forward split 10Q30-Sep-093-1November 16, 2009
       
3(ii)(a)By-laws - originally Bioenergy, Inc. SB-2N/A3.2Oct. 19, 2006
       
10.1Licensing  agreementX    
10.2CFO agreementX    
10.3Employment AgreementX    
10.4Employment AgreementX    
10.5Assignment of Patent Assignment Agreement 8KN/A10.3May 18, 2010
10.6Assignment of Patent Assignment Agreement 8KN/A10.4May 18, 2010
10.7Patent Assignment Agreement 8KN/A10.1May 18, 2010
10.8Patent Assignment Agreement 8KN/A10.2May 18, 2010
       
31.1Certificat of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002X    
31.2Certificat of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002X    
32.1Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adoptedX    
 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
32.2Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adoptedX    
 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
 
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SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE
     
/s/ Roman Gordon Chief Executive Officer and Director November 12, 2010February 11, 2011
Roman Gordon 
(Principal Executive Officer)
Chairman of the Board
  
     
/s/  Igor Gorodnitsky President November 12, 2010February 11, 2011
Igor Gorodnitsky    
     
/s/  R.L. Hartshorn Chief Financial Officer November 12, 2010February 11, 2011
R.L. Hartshorn 
(Principal Financial Officer and
Accounting Officer)
  

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