Sionix 10Q/A 2009 Q3 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment Number 1)

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

For the quarterly period ended: June 30, 2009

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

For the transition period from:

Commission file number: 002-95626-D

SIONIX CORPORATION

(Exact name of registrant as specified in its charter)

Nevada		87-0428526
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


2801 Ocean Park Blvd., Suite 339, Santa Monica, California		90405
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: (847) 235-4566

3880 East Eagle Drive, Anaheim, California 92807

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

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

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

¨ Yes ¨ No

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

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

EXPLANATORY NOTE

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

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

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

·	2001 Executive Officers Stock Option Plan

·	Advisory Board Compensation

·	Warrants Related to 2004 Stock Purchase Agreement

·	Convertible Notes 1

·	Convertible Notes 2

·	Subordinated Convertible Notes 3

·	Warrants related to Subordinated Convertible Notes 3

As a result of these transactions, we are filing this amendment number 1 (“Amendment 1”) to our Form 10-Q (the “Original Report”) that was originally filed with the Securities and Exchange Commission (the “SEC”) on August 19, 2009 for the period ended June 30, 2009.

The primary purpose of this Amendment 1 is to disclose the restatement of our financial statements for the three and nine months ended June 30, 2009 and cumulative inception to date operations for June 30, 2009. A complete discussion of the restatement is included in the section of this Amendment 1 titled “Management’s Discussion and Analysis or Plan of Operation” and in Note 16 to our financial statements for the periods ended June 30, 2009.

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

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

During the period ended June 30, 2009, certain investors converted $35,429 of convertibles note into 885,728 common shares at $0.04 per share; however, the conversion rate should have been $0.01. At June 30, 2009, the Company owes an additional 14,020,575 shares to the investors related to the $35,429 converted during the period ended June 30, 2009 and the $151,512 converted during the period ended September 30, 2008. The Company recorded a liability of $2,383,498, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares will be recorded as a change in fair value of beneficial conversion liability.

The following adjustments were made to our financial statements for the periods ended June 30, 2009:

	As Previously Stated			Beneficial Conversion Feature			Warrants and Options			Reclassifications		As Restated June 30, 2009
Balance Sheet
Other assets	$	28,665		$	-		$	-		$	155,000	$	183,665
Accrued expenses		2,739,329			2,383,498			-			155,000		5,277,827
Warrant and option liability		5,875,700			-			2,724,706			-		8,600,406
Beneficial conversion liability		-			10,437,445			-			-		10,437,445
Additional paid-in capital		13,514,364			-			(1,847,488	)		-		11,666,876
Deficit accumulated during developmental stage		(25,828,505	)		(12,820,943	)		(877,218	)		-		(39,526,666	)

Statement of Operations (for the three months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(3,623,669	)	$	-		$	(809,220	)	$	-	$	(4,432,889	)
Gain (loss) on change in fair value of beneficial conversion liability		-			(7,100,677	)		-			-		(7,100,677	)

Statement of Operations (for the nine months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(1,992,282	)	$	-		$	680,973		$	-	$	(1,311,309	)
Gain (loss) on change in fair value of beneficial conversion liability		26,000			(2,358,055	)		-			-		(2,332,055	)

Statement of Operations (since inception)
Gain on change in fair value of warrant and option liability	$	3,225,958		$	-		$	(292,754	)	$	-	$	2,933,204
Gain on change in fair value of beneficial conversion liability		1,426,767			21,899,975			-			-		23,326,742
General and administrative expense		21,919,482			3,787,032			83,855			-		25,790,369
Interest expense and financing costs		(2,521,065	)		(30,536,702	)		(897,793	)		-		(33,955,560	)

Statement of Cash Flows (for the nine months ended June 30, 2009)
Net income (loss)	$	(3,934,849	)	$	(2,358,055	)	$	680,973		$	-	$	(5,611,931	)
(Gain) loss on change in fair value of warrant and option liability		2,000,811			-			(680,973	)		-		1,319,838
(Gain) loss on change in fair value of beneficial conversion liability		(26,000	)		2,358,055			-					2,332,055

Statement of Cash Flows (since inception)
Net income (loss)	$	(25,828,505	)	$	(12,423,759	)	$	(1,274,402	)	$	-	$	(39,526,666	)
(Gain) loss on change in fair value of warrant and option liability		(3,217,429	)		-			292,754			-		(2,924,675	)
Gain on change in fair value of beneficial conversion liability		(1,426,768	)		(21,899,975	)		-			-		(23,326,743	)
Non-cash compensation expense		-			3,787,032			83,855			-		3,870,887
Non-cash financing costs		-			30,536,702			897,793			-		31,434,495

Table of Contents

Part I - Financial Information		3

Item 1. Financial Statements		3

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

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

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

Statements of Cash Flows (Unaudited) for the three and nine months ended June 30, 2009 and June 30, 2008 and from inception (October 3, 1994) to June 30, 2009 (Restated)		7

Notes to unaudited condensed financial statements		8

Forward-Looking Statements		10

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk		35

Item 4T. Controls and Procedures		36

Part II – Other Information		36

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

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

Item 3. Defaults Upon Senior Securities		37

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

Item 5. Other Information		37

Item 6. Exhibits		38

Signatures		39

Part I, Item 1. Financial Statements.

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
BALANCE SHEETS

	June 30,			September 30,
	2009			2008
	(Unaudited) (As Restated)			(As Restated)

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,582		$	1,220,588
Inventory		833,594			-
Other current assets		183,665			138,895
TOTAL CURRENT ASSETS		1,025,841			1,359,483

PROPERTY AND EQUIPMENT, net		152,661			87,101

DEPOSITS		28,495			33,095
TOTAL ASSETS		1,206,997			1,479,679

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable	$	317,158		$	259,355
Accrued expenses		5,277,827			4,312,844
Customer deposits		1,620,000			1,260,000
Liquidated damages liability		78,750			153,750
Notes payable – related parties		107,000			114,000
Short-term promissory notes payable		240,000			-
Convertible notes, net of debt discounts of $761,333		1,761,333			2,041,443
10% subordinated notes payable, net		482,492			400,796
Warrant and option liability		8,600,406			6,869,244
Beneficial conversion liability		10,437,445			8,881,272
TOTAL CURRENT LIABILITIES		28,922,411			24,292,704

STOCKHOLDERS' DEFICIT
Common stock (150,000,000 shares authorized; 144,459,104 and 143,977,204 shares issued and outstanding at June 30 ,2009, respectively, and 134,756,213 and 134,274,313 shares issued and outstanding at September 30, 2008, respectively)		143,976			134,274
Additional paid-in capital		11,666,876			10,841,007
Shares to be issued		400			126,429
Deficit accumulated during development stage		(39,526,666	)		(33,914,735	)
TOTAL STOCKHOLDERS' DEFICIT		(27,715,414	)		(22,813,025	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,206,997		$	1,479,679

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

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENT OF OPERATIONS
(UNAUDITED)
													Cumulative from
	For the three months						For the nine months						Inception
	ended June 30,						ended June 30,						(October 3, 1994) to
	2009			2008			2009			2008			June 30, 2009
	(As Restated)			(As Restated)			(As Restated)			(As Restated)			(As Restated)

Revenues	$	-		$	-		$	-		$	-		$	-

Operating expenses
General and administrative		179,219			718,557			1,144,112			6,839,284			25,790,279
Research and development		210,561			280,972			567,790			846,904			3,604,663
Depreciation and amortization		22,300			8,157			37,404			24,472			594,779
Total operating expenses		412,080			1,007,686			1,749,306			7,710,660			29,989,721
Loss from operations		(412,080	)		(1,007,686	)		(1,749,306	)		(7,710,660	)		(29,989,721	)

Other income (expense)
Interest income		2			1,564			3,870			2,843			70,244
Interest expense and financing costs		(63,423	)		(313,696	)		(221,947	)		(977,912	)		(33,955,560	)
Gain (loss) on change in fair value of warrant and option liability		(4,432,889	)		(2,431,943	)		(1,311,309	)		1,497,546			2,933,204
Gain (loss) on change in fair value of beneficial conversion liability		(7,100,677	)		(4,786,825	)		(2,332,055	)		14,136,053			23,326,742
Impairment of intangibles		-			-			-			-			(1,267,278	)
Inventory obsolesence		-			-			-			-			(365,078	)
Legal settlement		-			-			-			-			344,949
Loss on settlement of debt		19,800			-			3,616			-			(351,795	)
Loss on lease termination		-			-			-			-			(129,166	)
Write-off of property and equipment		-			4,151			-			(125,015	)		(125,015	)
Total other income (expense)		(11,577,187	)		(7,526,749	)		(3,857,825	)		14,533,515			(9,518,753	)
Loss before income taxes		(11,989,267	)		(8,534,435	)		(5,607,131	)		6,822,855			(39,508,474	)
Income taxes		4,800			-			4,800			900			18,192
Net income (loss)	$	(11,994,067	)	$	(8,534,435	)	$	(5,611,931	)	$	6,821,955		$	(39,526,666	)

Basic income (loss) per share	$	(0.08	)	$	(0.07	)	$	(0.04	)	$	0.06
Dilutive income (loss) per share	$	(0.08	)	$	(0.07	)		(0.04	)	$	0.06

Basic weighted average number of
shares of common stock outstanding		142,281,820			113,816,474			138,329,293			113,816,474
Dilutive weighted average number of
shares of common stock outstanding		142,281,820			113,816,474			138,329,293			113,816,474

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

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM OCTOBER 3, 1994 (INCEPTION) TO JUNE 30, 2009
(UNAUDITED)

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

Stock issued for cash, October 3, 1994		10,000		$	10		$	90		$	-		$	-		$	-		$	-		$	-		$	100
Net loss		-			-			-			-			-			-			-			(1,521	)		(1,521	)
Balance at December 31, 1994		10,000			10			90			-			-			-			-			(1,521	)		(1,421	)
Shares issued for assignment rights		1,990,000			1,990			(1,990	)		-			-			-			-			-			-
Shares issued for services		572,473			572			135,046			-			-			-			-			-			135,618
Shares issued for debt		1,038,640			1,038			1,164,915			-			-			-			-			-			1,165,953
Shares issued for cash		232,557			233			1,119,027			-			-			-			-			-			1,119,260
Shares issued for subscription receivable		414,200			414			1,652,658			-			(1,656,800	)		-			-			-			(3,728	)
Shares issued for productions costs		112,500			113			674,887			-			(675,000	)		-			-			-			-
Net loss		-			-			-			-			-			-			-			(914,279	)		(914,279	)
Balance at December 31, 1995		4,370,370			4,370			4,744,633			-			(2,331,800	)		-			-			(915,800	)		1,501,403
Shares issued for reorganization		18,632,612			18,633			(58,033	)		-			-			-			-			-			(39,400	)
Shares issued for cash		572,407			573			571,834			-			-			-			-			-			572,407
Shares issued for services		24,307			24			24,283			-			-			-			-			-			24,307
Net loss		-			-			-			-			-			-			-			(922,717	)		(922,717	)
Balance at September 30, 1996		23,599,696			23,600			5,282,717			-			(2,331,800	)		-			-			(1,838,517	)		1,136,000
Shares issued for cash		722,733			723			365,857			-			-			-			-			-			366,580
Shares issued for services		274,299			274			54,586			-			-			-			-			-			54,860
Cancellation of shares		(542,138	)		(542	)		(674,458	)		-			675,000			-			-			-			-
Net loss		-			-			-			-			-			-			-			(858,915	)		(858,915	)
Balance at September 30, 1997		24,054,590			24,055			5,028,702			-			(1,656,800	)		-			-			(2,697,432	)		698,525
Shares issued for cash		2,810,000			2,810			278,190			-			-			-			-			-			281,000
Shares issued for services		895,455			895			88,651			-			-			-			-			-			89,546
Shares issued for compensation		2,200,000			2,200			217,800			-			-			-			-			-			220,000
Cancellation of shares		(2,538,170	)		(2,538	)		(1,534,262	)		-			1,656,800			-			-			-			120,000
Net loss		-			-			-			-			-			-			-			(1,898,376	)		(1,898,376	)
Balance at September 30, 1998		27,421,875			27,422			4,079,081			-			-			-			-			(4,595,808	)		(489,305	)
Shares issued for compensation		3,847,742			3,847			389,078			-			-			-			-			-			392,925
Shares issued for services		705,746			706			215,329			-			-			-			-			-			216,035
Shares issued for cash		9,383,000			9,383			928,917			-			-			-			-			-			938,300
Net loss		-			-			-			-			-			-			-			(1,158,755	)		(1,158,755	)
Balance at September 30, 1999		41,358,363			41,358			5,612,405			-			-			-			-			(5,754,563	)		(100,800	)
Shares issued for cash		10,303,500			10,304			1,020,046			-			-			-			-			-			1,030,350
Shares issued for compensation		1,517,615			1,518			1,218,598			-			-			-			-			-			1,220,116
Shares issued for services		986,844			986			253,301			-			-			-			-			-			254,287
Net loss		-			-			-			-			-			-			-			(2,414,188	)		(2,414,188	)
Balance at September 30, 2000		54,166,322			54,166			8,104,350			-			-			-			-			(8,168,751	)		(10,235	)
Shares issued for services		2,517,376			2,517			530,368			-			-			-			(141,318	)		-			391,567
Shares issued for cash		6,005,000			6,005			594,495			-			-			-			-			-			600,500
Shares to be issued for cash (100,000 shares)		-			-			-			10,000			-			-			-			-			10,000
Shares to be issued for debt (639,509 shares)		-			-			-			103,295			-			-			-			-			103,295
Net loss		-			-			-			-			-			-			-			(1,353,429	)		(1,353,429	)
Balance at September 30, 2001		62,688,698			62,688			9,229,213			113,295			-			-			(141,318	)		(9,522,180	)		(258,302	)
Shares issued for services		1,111,710			1,112			361,603			-			-			-			54,400			-			417,115
Shares issued as a contribution		100,000			100			11,200			-			-			-			-			-			11,300
Shares issued for compensation		18,838			19			2,897			-			-			-			-			-			2,916
Shares issued for cash		16,815,357			16,815			1,560,782			(10,000	)		-			-			-			-			1,567,597
Shares issued for debt		1,339,509			1,340			208,639			(103,295	)		-			-			-			-			106,684
Shares to be issued related to equity
financing (967,742 shares)		-			-			(300,000	)		300,000			-			-			-			-			-
Cancellation of shares		(7,533,701	)		(7,534	)		-			-			-			-			-			-			(7,534	)
Net loss		-			-			-			-			-			-			-			(1,243,309	)		(1,243,309	)
Balance at September 30, 2002		74,540,411			74,540			11,074,334			300,000			-			-			(86,918	)		(10,765,489	)		596,467
Shares issued for services		2,467,742			2,468			651,757			(300,000	)		-			-			-			-			354,225
Shares issued for capital equity line		8,154,317			8,154			891,846			-			-			-			-			-			900,000
Amortization of consulting fees		-			-			-			-			-			-			86,918			-			86,918
Cancellation of shares		(50,000	)		(50	)		50			-			-			-			-			-			-
Shares to be cancelled (7,349,204 shares)		-			-			7,349			-			-			(7,349	)		-			-			-
Net loss		-			-			-			-			-			-			-			(1,721,991	)		(1,721,991	)
Balance at September 30, 2003		85,112,470			85,112			12,625,336			-			-			(7,349	)		-			(12,487,480	)		215,619
Shares issued for capital equity line		19,179,016			19,179			447,706			-			-			-			-			-			466,885
Shares issued for services		5,100,004			5,100			196,997			-			-			-			(13,075	)		-			189,022
Share to be issued for cash (963,336 shares)		-			-			-			28,900			-			-			-			-			28,900
Shares to be issued for debt (500,000 shares)		-			-			-			15,000			-			-			-			-			15,000
Cancellation of shares		(7,349,204	)		(7,349	)		-			-			-			7,349			-			-			-
Issuance of warrants related to 2004 stock purchase		-			-			24,366			-			-			-			-			-			24,366
Net loss		-			-			-			-			-			-			-			(1,593,135	)		(1,593,135	)
Balance at September 30, 2004		102,042,286			102,042			13,294,405			43,900			-			-			(13,075	)		(14,080,615	)		(653,343	)
Amortization of consulting fees		-			-			-			-			-			-			13,075			-			13,075
Net loss		-			-			-			-			-			-			-			(722,676	)		(722,676	)
Balance at September 30, 2005		102,042,286			102,042			13,294,405			43,900			-			-			-			(14,803,291	)		(1,362,944	)
Net loss		-			-			-			-			-			-			-			(1,049,319	)		(1,049,319	)
Balance at September 30, 2006		102,042,286			102,042			13,294,405			43,900			-			-			-			(15,852,610	)		(2,412,263	)
Stock issued for consulting		4,592,915			4,593			80,336			-			-			-			-			-			84,929
Reclassification to warrant and option liability		-			-			(2,277,013	)		-			-			-			-			-			(2,277,013	)
Net loss		-			-			-			-			-			-			-			(33,612,516	)		(33,612,516	)
Balance at September 30, 2007, restated		106,635,201			106,635			11,097,728			43,900			-			-			-			(49,465,126	)		(38,216,863	)

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

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE PERIOD FROM OCTOBER 3, 1994 (INCEPTION) TO JUNE 30, 2009
(UNAUDITED)

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

Conversion of note payable into common stock		17,149,359		17,149		886,633			-			-		-		-		-			903,782
Common stock issued for services		1,539,750		1,540		254,330			-			-		-		-		-			255,870
Common stock issued for cash		8,950,003		8,950		784,550			(43,500	)		-		-		-		-			750,000
Common stock to be issued for cash		-		-		-			126,029			-		-		-		-			126,029
Issuance of warrants with stock		-		-		(2,182,234	)		-			-		-		-		-			(2,182,234	)
Net income		-		-		-			-			-		-		-		15,550,391			15,550,391
Balance at September 30, 2008, restated		134,274,313		134,274		10,841,007			126,429			-		-		-		(33,914,735	)		(22,813,025	)
Conversion of note payable into common stock		7,169,419		7,169		447,173			-			-		-		-		-			454,342
Common stock issued for services		1,200,139		1,200		225,029			(126,029	)		-		-		-		-			100,200
Common stock issued for property and equipment		833,333		833		124,167			-			-		-		-		-			125,000
Common stock issued for cash and debt settlement		500,000		500		29,500			-			-		-		-		-			30,000
Net loss		-		-		-			-			-		-		-		(5,611,931	)		(5,611,931	)
Balance at June 30, 2009, (unaudited) restated		143,977,204	$	143,976	$	11,666,876		$	400		$	-	$	-	$	-	$	(39,526,666	)	$	(27,715,414	)

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

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
							Cumulative
							from
	For the Nine Months						Inception
	Ended June 30,						(October 3, 1994) to
	2009			2008			June 30, 2009
	(As Restated)			(As Restated)			(As Restated)

OPERATING ACTIVITIES:
Net income (loss)	$	(5,611,931	)	$	6,821,955		$	(39,526,666	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation		37,404			24,472			681,696
Amortization of beneficial conversion features discount and
warrant discount		2,890			1,073,445			2,050,229
Stock based compensation expense - employee		187,844			-			3,866,746
Stock based compensation expense - consultant		238,244			5,799,646			6,888,835
Increase (decrease) in fair value of warrant and option liability		1,319,838			(1,497,546	)		(2,924,675	)
Increase (decrease) in fair value of beneficial conversion liability		2,332,055			(14,136,054	)		(23,326,743	)
Non-cash compensation costs		-			-			3,870,887
Non-cash financing costs		-			83,855			31,434,495
Impairment of assets		-			-			514,755
Write-down of obsolete assets		-			-			38,862
Impairment of intangible assets		-			-			1,117,601
Loss on settlement of debt		(19,800	)		-			364,777
Loss on termination of lease		-			126,111			129,166
Write-off of beneficial conversion features		-			-			(576,000	)
Stock issued for services and rent		-			-			114,850
Other		27,582			-			(771,462	)
(Increase) decrease in assets:
Inventory		(833,594	)		-			(833,594	)
Other current assets		17,730			(77,269	)		(28,665	)
Other assets		(150,400	)		-			(128,495	)
Increase (decrease) in liabilities:
Accounts payable		197,604			409,406			613,123
Accrued expenses		451,603			(139,840	)		2,933,286
Customer deposits		360,000			900,000			1,620,000
Net cash used in operating activities		(1,451,460	)		(611,819	)		(11,876,992	)

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

FINANACING ACTIVITIES:
Accrual of liquidated damages		-			138,375			153,750
Payment on notes payable to officer		-			(19,260	)		(218,502	)
Proceeds from notes payable, related party		-			-			457,433
Payments on notes payable to related party		-			(5,000	)		(15,000	)
Receipt from (payments to) equity line of credit		-			(27,336	)		428,664
Receipt of proceeds from short term notes		240,000			-			240,000
Proceeds from convertible notes payable		-			-			2,861,000
Proceeds from 10% subordinated notes payable		-			425,000			425,000
Issuance of common stock		5,000			330,000			8,184,594
Receipt of cash for stock to be issued		-			420,000			400
Net cash provided by financing activities		245,000			1,261,779			12,517,339

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,212,006	)		623,849			8,582

CASH AND CASH EQUIVALENTS, BEGINNING		1,220,588			372,511			-
CASH AND CASH EQUIVALENTS, ENDING	$	8,582		$	996,360		$	8,582

SUPPLEMENTAL INFORMATION:
Cash and cash equivalents paid for interest	$	-		$	-		$	-
Cash and cash equivalents paid for taxes	$	-		$	-		$	-

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

Sionix Corporation

June 30, 2009

Notes to Financial Statements (Unaudited)

NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these unaudited financial statements reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The results of the nine month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year ending September 30, 2009 and should be read in conjunction with the audited financial statements for the year ended September 30, 2008.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

INVENTORY VALUATION

Inventory is stated at the lower of cost or market, with costs generally determined on a first-in first-out basis. Management utilizes specific product identification, historical product demand, and comparison of inventory costs to market value as the basis for determining excess or obsolete inventory reserve. Changes in market conditions, lower than expected customer demand, or changes in technology or features are also considered by management in determining whether an allowance for obsolete inventory is required. As of June 30, 2009, the Company believes that no reserve is required. Inventory at June 30, 2009, was $833,594 and consisted of work in process.

PROPERTY AND EQUIPMENT

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

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

		Years

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

ACCRUED DERIVATIVE LIABILITIES

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

ADVERTISING

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

REVENUE RECOGNITION

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

The Company's policy for shipping and handling costs, billed to customers, is to include it in revenue in accordance with Emerging Issues Task Force ("EITF") issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The purpose of this issue was to clarify the classification of shipping and handling revenues and costs. The consensus reached was that all shipping and handling billed to customers should be recorded as revenue. Accordingly, the Company records its shipping and handling amounts within net sales and operating expenses.

The Company has not earned any revenue since its inception to the date of this report.

RESEARCH AND DEVELOPEMENT

The cost of research and development is expensed as incurred. Total research and development costs were $210,561 and $567,790 for the three and nine months ended June 30, 2009, respectively. Total research and development costs were $280,972 and $846,904 for the three and nine months ended June 30, 2008.

STOCK BASED COMPENSATION

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

EARNINGS PER SHARE

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

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

	For the Three Months Ended June 30,
	2009								2008
	Net					Per			Net					Per
	Loss			Shares		Share			Loss			Shares		Share
Basic Earnings Per Share
Net Loss Available to Stockholders	$	(11,994,067	)		142,281,820	$	(0.08	)	$	(8,534,435	)		113,816,474	$	(0.07	)
Effect of Dilutive Securities					-		-			-			-		-

Diluted Earnings Per Share	$	(11,994,067	)		142,281,820	$	(0.08	)	$	(8,534,435	)		113,816,474	$	(0.07	)

	For the Nine Months Ended June 30,
	2009								2008
	Net					Per			Net				Per
	Loss			Shares		Share			Income		Shares		Share
Basic Earnings Per Share
Net Loss Available to Stockholders	$	(5,611,931	)		138,329,293	$	(0.04	)	$	6,821,955		113,816,474	$	0.06
Effect of Dilutive Securities							-			-		-		-

Diluted Earnings Per Share	$	(5,611,9341	)		138,329,293	$	(0.04	)	$	6,821,955		113,816,474	$	0.06

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CONCENTRATION OF CREDIT RISK

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

RELATED PARTY TRANSACTION

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

USE OF ESTIMATES

RECLASSIFICATIONS

Certain items in the prior year financial statements have been reclassified to conform to the current period’s presentation. These reclassifications have no effect on the previously reported net loss.

NOTE 3 PROPERTY AND EQUIPMENT (RESTATED)

Property and equipment consisted of the following at:


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

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

Depreciation expenses for the three and nine months ended June 30, 2009 were $22,600 and $37,404, respectively. Depreciation expenses for the three and nine months ended June 30, 2008 were $8,157 and $24,472, respectively

NOTE 4 ACCRUED EXPENSES (RESTATED)

Accrued expenses consisted of the following at:


	June 30,		September 30,
	2009		2008
	(Unaudited)
Accrued salaries	$	1,641,880	$	1,493,444
Advisory board compensation		576,000		576,000
Auto allowance accruals		104,785		94,408
Interest payable		339,618		272,016
Other accruals		2,615,544		1,876,976

TOTAL ACCRUED EXPENSES	$	5,277,827	$	4,312,844

NOTE 5 CUSTOMER DEPOSITS

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

NOTE 6 NOTES PAYABLE – RELATED PARTIES

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

NOTE 7 SHORT-TERM PROMISSORY NOTES

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

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

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

NOTE 8 CONVERTIBLE NOTES

Convertible Notes 1

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

The first class, as defined in paragraph 9, is financial instruments that are mandatorily redeemable financial instruments. There are no terms or conditions that require the Company to unconditionally redeem the convertible notes by transferring assets at a specified or determinable date. The second class, as defined in paragraph 11, is financial instruments that require the repurchase of shares of Common Stock by transferring assets. There are no terms or conditions that require the Company to repurchase shares of Common Stock. The third class, as defined in paragraph 12, is financial instruments that require the issuance of a variable number of shares of Common Stock. There are no terms or conditions that require the Company to issue a variable number of shares of Common Stock. Therefore, the Company concluded that the convertible notes were not within the scope of SFAS 150.

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

Based on the calculation of the fair value of the embedded beneficial conversion feature, the Company allocated $750,000 to the beneficial conversion feature and the beneficial conversion feature discount, and none to the convertible note at the date of issuance. The embedded beneficial conversion feature discount is amortized to interest expense over the term of the note, which is $41,667 per month.

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

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

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

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

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

Convertible Notes 2

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

There are no terms or conditions that require the Company to unconditionally redeem the convertible notes by transferring assets at a specified or determinable date. The second class, as defined in paragraph 11, is financial instruments that require the repurchase of shares of Common Stock by transferring assets. There are no terms or conditions that require the Company to repurchase shares of Common Stock. The third class, as defined in paragraph 12, is financial instruments that require the issuance of a variable number of shares of Common Stock. There are no terms or conditions that require the Company to issue a variable number of shares of Common Stock. Therefore, the Company concluded that the convertible notes were not within the scope of SFAS 150.

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

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

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

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

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

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

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

Convertible Notes 3

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

Under the terms of a Registration Rights Agreement signed in conjunction with this offering, the Company is required to file a registration statement under the Securities Act of 1933 in order to register the resale of the shares of Common Stock issuable upon conversion of the Convertible Notes 3 and the warrant shares (collectively, the "Registrable Securities"). If the Company did not file a registration statement with respect to the Registrable Securities within 45 days following the closing of the offering, or if the registration statement was not declared effective by the Securities and Exchange Commission within 90 days, then the Company was required to pay to each purchaser damages equal to 1.5% of the purchase price paid by the purchaser for Convertible Notes 3 for each 30 day period that followed these deadlines. The aggregate amount of damages payable by the Company is limited to 15% of the purchase price. The Company had until August 31, 2007 to file the registration statement and has accrued $153,750 of expenses as liquidated damages as of September 30, 2008. During the nine months ended June 30, 2009, $75,000 of the liquidated damages were converted into 937,500 shares of Common Stock. As of June 30, 2009, the Company has accrued $78,750 as liquidated damages. No derivative liability is recorded as the amount of liquidated damage is fixed with a maximum ceiling.

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

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

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

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

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

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

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

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

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

12% SUBORDINATED CONVERTIBLE NOTES

On July 29, 2008, the Company completed an offering of $1,000,000 in principal amount of Subordinated Debentures to a group of institutional and accredited investors. The 12% Subordinated Convertible Notes mature on July 29, 2009 or sooner if declared due and payable by the holder upon the occurrence of an event of default, and bear interest at the rate of 12% per annum. The Debentures

will be convertible into Common Stock at a conversion price of $0.25 per share (the “Conversion Price”) from and after such time as the authorized Common Stock is increased in accordance with applicable federal and state laws. In the event of an offering of Common Stock, or securities convertible into Common Stock, at a price, conversion price or exercise price less than the conversion price (a “dilutive issuance”), then the conversion price of any then outstanding subordinated convertible notes will be reduced to equal such lower price, except in connection with certain exempt issuances. In an event of default, the conversion price will be reduced to $0.15 per share. As part of the above offering, the Company issued warrants to purchase 3,333,333 shares of Common Stock, which expire five years from the date of grant, are exercisable at an exercise price of $0.30 per share from and after such time as the authorized Common Stock is increased in accordance with applicable federal and state laws, and may be exercised on a cashless basis at the election of the holder. In the event of a dilutive issuance, the exercise price of the warrants will be reduced to equal the price of the securities issued in the dilutive issuance, except in connection with certain exempt issuances.

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

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

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

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

Note 9 10% SUBORDINATED NOTES PAYABLE (RESTATED)

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

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

The grant date fair value of the warrants was determined to be $125,462 which was calculated using the Black-Sholes valuation model, using the following assumptions: risk free rate of return of 2.64% to 3.26%, volatility of 97.08% to 98.27%, dividend yield of 0% and expected life of 6 years. As a result, the relative fair value of the warrants was determined to be $96,814.

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

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

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

For the three and nine months ended June 30, 2009, interest expense was $11,170 and $32,370, respectively.

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

NOTE 10 WARRANT LIABILITY (RESTATED)

2001 Executive Officers Stock Option Plan

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

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

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

Warrants Related to Convertible Notes 3

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

The fair value of the warrants was $554,249 ($430,189 attributable to the holders of the Convertible Notes 3 and $124,060 attributable to the placement fee) at the date of issuance calculated using the Black-Scholes valuation model with the following assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0% and expected term of 5 years.

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

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

Warrant Issued to Legal Counsel

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

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

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

Warrants Issued to Advisory Board Members

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

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

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

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

Option Issued to Director

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

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

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

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

Option Issued to Former Chief Financial Officer

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

Option Issued to Former Chief Executive Officer

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

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

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

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

Warrant Issued to Consultant

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

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

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

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

Warrants Related to 10% Subordinated Debentures

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

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

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

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

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

Warrants Related to $750,000 Stock Issuance

On May 28, 2008 the Company completed an offering of units consisting of Common Stock and warrants to purchase shares of its Common Stock to a group of institutional and accredited investors. The Company raised a total of $750,000 through this offering. The Company issued warrants to purchase 15,000,000 shares of Common Stock at an exercise price of $0.10 per share. The warrants expire three years from the date of issuance.

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

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

Warrant Issued to Legal Counsel

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

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

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

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

Warrant Issued to Director (John Pavia)

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

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

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

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

Warrant Issued to Director (Marcus Woods)

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

Warrant Issued to Legal Counsel

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

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

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

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

Warrant Issued to Advisory Board Member

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

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

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

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

Option Issued to Former Chief Executive Officer

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

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

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

Option Issued to Director (Rodney Anderson)

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

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

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

Option Issued to interim Chief Financial Officer (Robert Hasson)

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

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

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

Option Issued to Employee

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

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

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

NOTE 10 BENEFICIAL CONVERSION FEATURES LIABILITY

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

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

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

NOTE 11 STOCKHOLDERS’ EQUITY (RESTATED)

COMMON STOCK

The Company has 150,000,000 authorized shares of Common Stock, par value $0.001 per share. As of June 30, 2009 the Company had 144,459,104 and 143,977,204 shares issued and outstanding, respectively. At September 30, 2008, the Company had 134,756,213 and 134,274,313 shares issued and outstanding, respectively. As of June 30, 2009 and September 30, 2009, there are 481,900 shares of Common Stock subject to cancellation. Subsequent to cancellation, the total issued and outstanding shares of Common Stock would be 143,977,204 and 134,274,313 as of June 30, 2009 and September 30, 2008, respectively.

During the nine months ended June 30, 2009 the Company issued 7,169,419 shares of Common Stock for the payment of $283,000 of debt, $67,942 of accrued interest, $28,400 of late fees and penalties and $75,000 of liquidated damages at conversion prices between $0.04 and $0.15. The Company received $5,000 in cash from a related party note holder and also settled his debt of $7,000 and accrued interest of $1,816 by issuing him 500,000 shares. Additionally, the Company issued 833,333 shares of common stock for $125,000 for machinery and equipment from RJ Metal Co. Lastly, the Company issued 1,200,139 shares of Common Stock to legal counsel for services having a value of $180,014. The fair value of the Common Stock on the date of issuance was $226,229.

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

STOCK OPTIONS

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

	Weighted
	Average				Aggregate
	Exercise		Number		Intrinsic
	Price		of Options		Value
Outstanding at October 1, 2008	$	0.19		17,573,452	$	-
Granted		0.15		7,333,650		-
Expired		0.25		(5,605,786)		-
Forfeited		-		-		-
Exercised		-		-		-
Outstanding at June 30, 2009	$	0.19		19,301,316	$	271,695

Options outstanding as of June 30, 2009:

			Weighted
			Average
			Remaining	Weighted Average
Exercise	Options	Options	Contractual	Exercise Price
Price	Outstanding	Exercisable	Life	Outstanding Exercisable
$0.15 - $0.25	19,301,316	17,863,698	3.85	$0.18	$0.18

STOCK WARRANTS

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

	Weighted
	Average				Aggregate
	Exercise		Number		Intrinsic
	Price		of Options		Value
Outstanding at October 1, 2008	$	0.20		42,849,099	$	-
Granted		-		-		-
Expired		-		-		-
Forfeited		-		-		-
Exercised		-		-		-
Outstanding at June 30, 2009	$	0.20		42,849,099	$	-

Warrants outstanding as of June 30, 2009:

			Weighted
			Average
			Remaining	Weighted Average
Exercise	Warrants	Options	Contractual	Exercise Price
Price	Outstanding	Exercisable	Life	Outstanding Exercisable
$0.10 - $0.30	42,849,099	39,515,766	3.78	$0.20	$0.19

NOTE 12 GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2009, the Company has incurred cumulative losses of $39,526,666 including net loss for the nine months ended June 30, 2009 of $5,611,931. As the Company has no cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements which may significantly reduce the amount of cash we will have for our operations. Accordingly, there is no assurance that the Company will be able to implement its plans.

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

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

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

NOTE 13 COMMITMENTS

Operating Lease

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

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

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

Issuance of Shares of Common Stock for Services

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

NOTE 14 SUPPLEMENTAL CASH FLOW INFORMATION

The Company had the following noncash transactions.

The Company issued 7,169,419 shares of Common Stock for the payment of $283,000 of debt, $67,942 of accrued interest, $28,400 of late fees and penalties and $75,000 of liquidated damages at conversion prices between $0.04 and $0.15.

The Company issued 500,000 shares for the settlement of outstanding debt due to a related party of $7,000 in principal and accrued interest of $1,816 and received $5,000 in cash.

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

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

NOTE 15 SUBSEQUENT EVENT

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

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

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

NOTE 16 RESTATEMENT

The Company restated its September 30, 2007 financial statements in response to a comment letter from the Securities and Exchange Commission. However, the restatement did not properly account for certain derivative transactions and, as discussed below, the Company restated its September 30, 2007 financial statements for a third time, restated its September 30, 2008 financial statements, and restated financial statements for the interim periods that followed September 30, 2007 and September 30, 2008, through June 30, 2009.

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

On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on June 30, 2009, and are convertible into common stock at $0.01 per share.

·	Warrants and Options

·	Beneficial Conversion Features

The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2009. The analysis and results were as follows:

Warrants and Options Liability

As of June 30, 2009, the Company had 39,515,766 warrants and 17,863,698 options outstanding that vested at that date.

Balance Sheet

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

At June 30, 2009, the Company determined the fair value of all warrants and options to be $5,945,787 and $2,654,619, respectively, using the Black-Scholes model with the following assumptions:

·	risk free rate of return between 0.56% and 2.54%;

·	volatility between 154% and 240%;

·	dividend yield of 0%; and

·	expected term between 1.81 years and 4.99 years.

Statement of Operations

For the three months ended June 30, 2009, the Company recorded a loss on change in fair value of warrant and option liability of $809,220 and for the nine months ended June 30, 2009, the Company recorded $680,973 as a gain on change in fair value of warrant and option liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the decrease in fair value of the warrant and option liability of $680,973.

Beneficial Conversion Liability

As of September 30, 2007, the Company had $761,333 in convertible notes that could be converted into 65,905,310 shares. During the period ended June 30, 2009, certain investors converted $35,429 of convertibles note into 885,728 common shares at $0.04 per share; however, the conversion rate should have been $0.01. At June 30, 2009, the Company owes an additional 14,020,575 shares to the investors related to the $35,429 converted during the period ended June 30, 2009 and the $151,512 converted during the period ended September 30, 2008. The Company recorded a liability of $2,383,498, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares was recorded as a change in fair value of beneficial conversion liability.

Balance Sheet

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

At June 30, 2009, the Company determined the fair value of the embedded conversion options to be $10,437,445 using the Black-Scholes model with the following assumptions:

·	risk free rate of return of 0.35%;

·	volatility between of 168%;

·	dividend yield of 0%; and

·	expected term of 0.50 years.

Statement of Operations

For the three and six months ended June 30, 2009, the Company recorded $7,110,677 and $2,358,055, respectively, as a loss on change in fair value of warrant and option liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the $2,358,055 change in fair value of the beneficial conversion liability.

The following table shows the effect of each of the changes discussed above on the Company’s balance sheet, statement of operation, and statement of cash flows for the three and nine months ended June 30, 2009.

	As Previously Stated			Beneficial Conversion Feature			Warrants and Options			Reclassifications		As Restated June 30, 2009
Balance Sheet
Other assets	$	28,665		$	-		$	-		$	155,000	$	183,665
Accrued expenses		2,739,329			2,383,498			-			155,000		5,277,827
Warrant and option liability		5,875,700			-			2,724,706			-		8,600,406
Beneficial conversion liability		-			10,437,445			-			-		10,437,445
Additional paid-in capital		13,514,364			-			(1,847,488	)		-		11,666,876
Deficit accumulated during developmental stage		(25,828,505	)		(12,820,943	)		(877,218	)		-		(39,526,666	)

Statement of Operations (for the three months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(3,623,669	)	$	-		$	(809,220	)	$	-	$	(4,432,889	)
Gain (loss) on change in fair value of beneficial conversion liability		-			(7,100,677	)		-			-		(7,100,677	)

Statement of Operations (for the nine months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(1,992,282	)	$	-		$	680,973		$	-	$	(1,311,309	)
Gain (loss) on change in fair value of beneficial conversion liability		26,000			(2,358,055	)		-			-		(2,332,055	)

Statement of Operations (since inception)
Gain on change in fair value of warrant and option liability	$	3,225,958		$	-		$	(292,754	)	$	-	$	2,933,204
Gain on change in fair value of beneficial conversion liability		1,426,767			21,899,975			-			-		23,326,742
General and administrative expense		21,919,482			3,787,032			83,855			-		25,790,369
Interest expense and financing costs		(2,521,065	)		(30,536,702	)		(897,793	)		-		(33,955,560	)

Statement of Cash Flows (for the nine months ended June 30, 2009)
Net income (loss)	$	(3,934,849	)	$	(2,358,055	)	$	680,973		$	-	$	(5,611,931	)
(Gain) loss on change in fair value of warrant and option liability		2,000,811			-			(680,973	)		-		1,319,838
(Gain) loss on change in fair value of beneficial conversion liability		(26,000	)		2,358,055			-					2,332,055

Statement of Cash Flows (since inception)
Net income (loss)	$	(25,828,505	)	$	(12,423,759	)	$	(1,274,402	)	$	-	$	(39,526,666	)
(Gain) loss on change in fair value of warrant and option liability		(3,217,429	)		-			292,754			-		(2,924,675	)
Gain on change in fair value of beneficial conversion liability		(1,426,768	)		(21,899,975	)		-			-		(23,326,743	)
Non-cash compensation expense		-			3,787,032			83,855			-		3,870,887
Non-cash financing costs		-			30,536,702			897,793			-		31,434,495

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

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

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

·	changes in regulatory requirements that adversely affect our business;

·	loss of our key personnel; and

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

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

Overview

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

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

Application of Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used or a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no changes in accounting policies or significant changes in accounting estimates during the three and nine months ended June 30 2009. Management believes the following critical accounting policies reflect its more significant estimates and assumptions.

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

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

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

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

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

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

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

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

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

Restatement for the Three and Nine Months Ended June 30, 2009

The Company restated its September 30, 2007 financial statements in response to a comment letter from the Securities and Exchange Commission. However, the restatement did not properly account for certain derivative transactions and, as discussed below, the Company restated its September 30, 2007 financial statements for a third time, restated its September 30, 2008 financial statements and restated the interim periods following September 30, 2007 and September 30, 2008, through June 30, 2009.

On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on June 30, 2009, and are convertible into common stock at $0.01 per share.

·	Warrants and Options

·	Beneficial Conversion Features

The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2009. The analysis and results were as follows:

Warrants and Options Liability

As of June 30, 2009, the Company had 39,515,766 warrants and 17,863,698 options outstanding that vested at that date.

Balance Sheet

At June 30, 2009, the Company determined the fair value of all warrants and options to be $5,945,787 and $2,654,619, respectively, using the Black-Scholes model with the following assumptions:

·	risk free rate of return between 0.56% and 2.54%;

·	volatility between 154% and 240%;

·	dividend yield of 0%; and

·	expected term between 1.81 years and 4.99 years.

Statement of Operations

Statement of Cash Flows

Changes in the statement of cash flows were the result of the decrease in fair value of the warrant and option liability of $680,973.

Beneficial Conversion Liability

As of September 30, 2007, the Company had $761,333 in convertible notes that could be converted into 65,905,310 shares. During the period ended June 30, 2009, certain investors converted $35,429 of convertibles note into 885,728 common shares at $0.04 per share; however, the conversion rate should have been $0.01. At June 30, 2009, the Company owes an additional 14,020,575 shares to the investors related to the $35,429 converted during the period ended June 30, 2009 and the $151,512 converted during the period ended September 30, 2008. The Company recorded a liability of $2,383,498, which is recorded in accrued expenses in the accompanying financial statements. The change in the fair value of the shares will be recorded as a change in fair value of beneficial conversion liability.

Balance Sheet

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

At June 30, 2009, the Company determined the fair value of the embedded conversion options to be $10,437,445 using the Black-Scholes model with the following assumptions:

·	risk free rate of return of 0.35%;

·	volatility between of 168%;

·	dividend yield of 0%; and

·	expected term of 0.50 years.

Statement of Operations

For the three and six months ended June 30, 2009, the Company recorded $7,110,677 and $2,358,055, respectively, as a loss on change in fair value of warrant and option liability.

Statement of Cash Flows

Changes in the statement of cash flows were the result of the $2,358,055 change in fair value of the beneficial conversion liability.

	As Previously Stated			Beneficial Conversion Feature			Warrants and Options			Reclassifications		As Restated June 30, 2009
Balance Sheet
Other assets	$	28,665		$	-		$	-		$	155,000	$	183,665
Accrued expenses		2,739,329			2,383,498			-			155,000		5,277,827
Warrant and option liability		5,875,700			-			2,724,706			-		8,600,406
Beneficial conversion liability		-			10,437,445			-			-		10,437,445
Additional paid-in capital		13,514,364			-			(1,847,488	)		-		11,666,876
Deficit accumulated during developmental stage		(25,828,505	)		(12,820,943	)		(877,218	)		-		(39,526,666	)

Statement of Operations (for the three months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(3,623,669	)	$	-		$	(809,220	)	$	-	$	(4,432,889	)
Gain (loss) on change in fair value of beneficial conversion liability		-			(7,100,677	)		-			-		(7,100,677	)

Statement of Operations (for the nine months ended June 30, 2009)
Gain (loss) on change in fair value of warrant and option liability	$	(1,992,282	)	$	-		$	680,973		$	-	$	(1,311,309	)
Gain (loss) on change in fair value of beneficial conversion liability		26,000			(2,358,055	)		-			-		(2,332,055	)

Statement of Operations (since inception)
Gain on change in fair value of warrant and option liability	$	3,225,958		$	-		$	(292,754	)	$	-	$	2,933,204
Gain on change in fair value of beneficial conversion liability		1,426,767			21,899,975			-			-		23,326,742
General and administrative expense		21,919,482			3,787,032			83,855			-		25,790,369
Interest expense and financing costs		(2,521,065	)		(30,536,702	)		(897,793	)		-		(33,955,560	)

Statement of Cash Flows (for the nine months ended June 30, 2009)
Net income (loss)	$	(3,934,849	)	$	(2,358,055	)	$	680,973		$	-	$	(5,611,931	)
(Gain) loss on change in fair value of warrant and option liability		2,000,811			-			(680,973	)		-		1,319,838
(Gain) loss on change in fair value of beneficial conversion liability		(26,000	)		2,358,055			-					2,332,055

Statement of Cash Flows (since inception)
Net income (loss)	$	(25,828,505	)	$	(12,423,759	)	$	(1,274,402	)	$	-	$	(39,526,666	)
(Gain) loss on change in fair value of warrant and option liability		(3,217,429	)		-			292,754			-		(2,924,675	)
Gain on change in fair value of beneficial conversion liability		(1,426,768	)		(21,899,975	)		-			-		(23,326,743	)
Non-cash compensation expense		-			3,787,032			83,855			-		3,870,887
Non-cash financing costs		-			30,536,702			897,793			-		31,434,495

Results of Operations

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

Revenues for the three months ended June 30, 2009 and 2008 were zero. Although we received an order and deposit for two water treatment systems during the 2009 fiscal year, revenue from this order has not been recognized because the units have not been completed and delivered. The Company incurred operating expenses of $412,080 during the three months ended June 30, 2009, a decrease of $595,606 or approximately 59%, as compared to $1,007,686 for the three months ended June 30, 2008. General and administrative expenses were $179,219 during the three months ended June 30, 2009, a decrease of $539,338 or approximately 75%, as compared to $718,557 for the three months ended June 30, 2008. The decrease in general and administrative expenses contributed to the significant decrease in operating expenses. Research and development expenses were $210,561 during the three months ended June 30, 2009, a decrease of $70,411 or approximately 25%, as compared to $280,972 for the three months ended June 30, 2008. The decrease in research and development expenses resulted primarily from the reallocation of personnel for the design of the two water treatment systems ordered during the 2009 fiscal year.

Other income (expense) totaled ($11,577,187) during the three months ended June 30, 2009, an increase of $4,050,438 or approximately 54%, as compared to $7,526,749 for the three months ended June 30, 2008. The Company earned interest income of $2 during the three months ended June 30, 2009, a decrease of $1,562 or 100%, as compared to $1,564 during the three months ended June 30, 2008. The Company incurred interest expense of $63,423 during the three months ended June 30, 2009, a decrease of $250,273 or approximately 80%, as compared to $313,696 for the three months ended June 30, 2008. The significant interest expense we incurred during the three months ended June 30, 2008 was due primarily to the amortization of the beneficial conversion features discount and warrant discount of the convertible debt securities, while during the three months ended June 30, 2009 there was a decrease in outstanding debt principal, which resulted in lower interest expenses. The gain (loss) in fair value of warrant and option liability was ($4,432,889) during the three months ended June 30, 2009, an increase of $2,000,946 or approximately 82%, as compared to ($2,431,943) during the three months ended June 30, 2008. The increase in the loss in fair value of warrant and option liability was due to the increase in the trading price of our Common Stock, resulting in a higher Black-Scholes valuation model valuation calculation of the warrant liability. The gain (loss) in fair value of beneficial conversion liability was ($7,100,677) during the three months ended June 30, 2009, an increase of $2,313,852 or approximately 48%, as compared to ($4,786,825) for the three months ended June 30, 2008. The increase in the loss in fair value of beneficial conversion liability was due to the increase in the trading price of our Common Stock, resulting in a higher Black-Scholes valuation model valuation calculation of the warrant liability.

As a result of these items, net loss for the three months ended June 30, 2009 was $11,994,067, an increase of $3,459,632 or approximately 41% over the net loss of $8,534,435 for the three months ended June 30, 2008.

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

Revenues for the nine months ended June 30, 2009 and 2008 were zero. Although we received an order and deposit for two water treatment systems during the 2008 fiscal year, revenue from this order has not been recognized because the units have not been completed and delivered. The Company incurred operating expenses of $1,749,306 during the nine months ended June 30, 2009, a decrease of $5,961,354 or approximately 77%, as compared to $7,710,660 for the nine months ended June 30, 2008. General and administrative expenses were $1,144,112 during the nine months ended June 30, 2009, a decrease of $5,695,172 or approximately 83%, as compared to $6,839,284 for the nine months ended June 30, 2008. The decrease in general and administrative expenses contributed to the significant decrease in operating expenses. The significant general and administrative expenses incurred during the nine months ended June 30, 2008 were primarily due to the issuance of options. Research and development expenses were $567,790 during the nine months ended June 30, 2009, a decrease of $279,114 or approximately 33%, as compared to $846,904 for the nine months ended June 30, 2008. The decrease in research and development expenses resulted primarily from the reallocation of personnel for the design of the two water treatment systems ordered during the 2009 fiscal year.

Other income (expense) totaled ($3,857,825) during the nine months ended June 30, 2009, an increase of $18,391,340 or approximately 127%, as compared to other income of $14,533,515 for the nine months ended June 30, 2008. The Company earned interest income of $3,870 during the nine months ended June 30, 2009, an increase of $1,027 or 36%, as compared to $2,843 during the nine months ended June 30, 2008. The Company incurred interest expense of $221,947 during the nine months ended June 30, 2009, a decrease of $755,965 or approximately 77%, as compared to $977,912 for the nine months ended June 30, 2008. The significant interest expense we incurred during the nine months ended June 30, 2008 was due primarily to the amortization of the beneficial conversion features discount and warrant discount of the convertible debt securities, while during the nine months ended June 30, 2009 there was a decrease in outstanding debt principal, which resulted in lower interest.

The gain (loss) in fair value of warrant and option liability was ($1,311,309) during the nine months ended June 30, 2009, an increase of $2,808,855 or approximately 188%, as compared to $1,497,546 during the nine months ended June 30, 2008. The increase in the loss in fair value of warrant and option liability was due to the increase in the trading price of our Common Stock, resulting in a higher Black-Scholes valuation model valuation calculation of the warrant liability. The gain (loss) in fair value of beneficial conversion liability was ($2,332,055) during the nine months ended June 30, 2009, an increase of $16,468,108, or approximately 116%, as compared to $14,136,053 for the nine months ended June 30, 2008. The increase in the loss in fair value of beneficial conversion liability was due to the increase in the trading price of our Common Stock, resulting in a higher Black-Scholes valuation model valuation calculation of the warrant liability. During the nine months ended June 30, 2009 the Company recorded a loss on settlement of debt of $3,616 related to the conversion of notes payable and accrued interest into Common Stock. During the nine months ended June 30, 2008 the Company recorded a loss on lease termination for $125,015 related to the termination of lease. During the nine months ended June 30, 2008 the Company recorded a write-off of beneficial conversion feature and discount of $380,440 related to the advisory board compensation. There were no comparable expenses recorded during the nine months ended June 30, 2009.

As a result of these items, net loss for the nine months ended June 30, 2009 was ($5,611,931), a decrease of $12,433,886 or approximately 182% over the net income of $6,821,955 for the nine months ended June 30, 2008.

Liquidity and Capital Resources

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

Operating Activities

During the nine months ended June 30, 2009, the Company used $1,451,460 of cash in operating activities. Non-cash adjustments included $37,404 for depreciation, $2,890 for amortization of warrant and beneficial conversion feature, $1,311,309 as an increase in fair value of warrant and option liability, $2,332,055 as an increase in fair value of beneficial conversion liability, and $19,800 for loss on settlement of debt. Cash provided by operating activities included $17,730 in other current assets, $197,604 in accounts payable, $451,603 in accrued liabilities, and $360,000 in customer deposits. Cash used in operating activities included $833,594 for inventory and $150,400 for other assets. Stock based compensation to employees and consultants was $187,844 and $238,244, respectively.

During the nine months ended June 30, 2008, the Company used $611,819 of cash in operating activities. Non-cash adjustments included $24,472 for depreciation, $1,073,445 for amortization of warrant and beneficial conversion feature, $126,111 for loss on termination of lease. Cash provided by operating activities included $409,406 in accounts payable. Cash used in operating activities included $77,269 for other current assets, $1,497,546 for warrant liability, and $14,136,054 for beneficial conversion features liability. Stock based compensation to nonemployees was $5,799,646.

Investing Activities

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

Financing Activities

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

During the nine months ended June 30, 2008 the Company received $1,261,779 in financing activities. Cash provided from financing activities for the nine months ended June30, 2008 consisted proceeds of $425,000 from the issuance of 10% subordinated notes payable and $330,000 for the purchase of Common Stock. Cash used in financing activities for the nine months ended June 30, 2008 included a payment of $5,000 toward a note payable, payments of $27,336 toward notes payable under an equity line of credit, and payments totaling $19,260 to officers for loans made to us.

On June 30, 2009, the Company had cash and cash equivalents of $8,582. The sole source of liquidity has been borrowings from affiliates and the sales of our securities. There is no certainty that the Company will be able to generate revenues from operations during the fiscal year. As of June 30, 2009, the Company had an accumulated deficit of $39,526,666. We expect that our future operating results will continue to be subject to many of the problems, expenses, delays and risks, which we often cannot control, inherent in the establishment of a developmental business enterprise.

Off-Balance Sheet Arrangements

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

Capital Expenditures

The Company currently has no commitments for capital expenditures.

Material Trends, Events or Uncertainties

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

Going Concern Opinion

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2009, the Company has incurred cumulative losses of $39,526,666 including net loss for the nine months ended June 30, 2009 of $5,611,931. As the Company has limited cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate financing to pay for its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to undertake additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements, which may significantly reduce the amount of cash the Company will have for its operations. Accordingly, there is no assurance that the Company will be able to implement its plans.

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

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

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

Part I, Item 4T. Controls and Procedures

(a) Disclosure Controls and Procedures

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

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

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

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

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

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

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

(b) Changes in internal control over financial reporting

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

Part II, Item 1. Legal Proceedings

Not applicable.

Part II, Item 1A. Risk Factors

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

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

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

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

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

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

Part II, Item 3. Defaults upon Senior Securities.

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

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

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

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

Part II, Item 5. Other Information

None.

Part II, Item 6. Exhibits

Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation (1)

3.2		Bylaws (1)

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

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

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

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

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

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

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

* Filed herewith.

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

SIGNATURES

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

	SIONIX CORPORATION

January 13, 2010	By:	/s/ David R. Wells
		David R. Wells
		President, Chief Financial Officer, and Principal Financial and Accounting Officer

Sionix (SINX) 10-Q/A2009 Q3 Quarterly report (amended)