SIONIX CORP - FORM 10-K - January 13, 2010

Attached files

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EX-31.1 - EXHIBIT 31.1 - SIONIX CORP	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - SIONIX CORP	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - SIONIX CORP	ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - SIONIX CORP	ex32_2.htm
EX-10.41 - EXHIBIT 10.41 - SIONIX CORP	sinx_1041.htm
EX-10.39 - EXHIBIT 10.39 - SIONIX CORP	sinx_1039.htm
EX-10.37 - EXHIBIT 10.37 - SIONIX CORP	sinx_1037.htm
EX-10.40 - EXHIBIT 10.40 - SIONIX CORP	sinx_1040.htm
EX-10.38 - EXHIBIT 10.38 - SIONIX CORP	sinx_1038.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2009

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission File Number 002-95626-D

SIONIX CORPORATION

(Exact name of registrant as specified in its charter)

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

2801 Ocean Park Boulevard, Suite 339

Santa Monica, California 90405

(Address of principal executive offices)

Registrant’s telephone number, including area code: (847) 235-4566

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which each is registered
N/A

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 o

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 o No o The registrant is not yet subject to this requirement.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o	Accelerated filer o

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of March 31, 2009, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold was $11,345,760.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of January 6, 2010 was 148,795,947.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS

			Page
PART I
	ITEM 1.	DESCRIPTION OF BUSINESS	4
	ITEM 1A.	RISK FACTORS	10
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	14
	ITEM 2.	PROPERTIES	14
	ITEM 3.	LEGAL PROCEEDINGS	14
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	14

PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	14
	ITEM 6.	SELECTED FINANCIAL DATA	15
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	F-1
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	20
	ITEM 9A(T).	CONTROLS AND PROCEDURES	20
	ITEM 9B.	OTHER INFORMATION	21

PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	22
	ITEM 11.	EXECUTIVE COMPENSATION	23
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	25
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	26
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	29
	ITEM 15.	EXHIBITS	30

Note Regarding Forward Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements”. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section of this Annual Report titled “Risk Factors” as well as the following:

·	The current economic crisis in the United States, which may reduce the funds available to businesses and government entities to purchase our system;

·	whether we will be able to raise capital as and when we need it;

·	whether our water purification system will generate significant sales;

·	our overall ability to successfully compete in our market and our industry; and

·	unanticipated increases in development, production or marketing expenses related to our product and our business activities,

and other factors, some of which will be outside our control. You are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

PART I

ITEM 1.

DESCRIPTION OF BUSINESS

We design and develop turnkey stand-alone water treatment systems intended for municipalities (both potable and wastewater), industry (both make-up water and wastewater), mining, energy production, emergency response, military and small residential communities. We were initially incorporated in Utah in 1996 and reincorporated in Nevada in 2003. As of December 21, 2009, our executive offices are located at 2801 Ocean Park Blvd., Suite 339, Santa Monica, California 90405. Our telephone number is (714) 678-1000, and our website is www.sionix.com.

The Water Purification Industry

INDUSTRY BACKGROUND. The water purification industry is highly fragmented, consisting of many companies involved in various capacities, including companies that design fully integrated systems for processing millions of gallons of water for municipal, industrial, and commercial applications. Demand for water purification has continued to grow due to economic expansion, population growth, scarcity of usable water, concerns about water quality and regulatory requirements. Drinking water, regardless of its source, may contain impurities that can affect the health of consumers. Although municipal agencies and water utilities in the United States are required to provide drinking water that complies with the U.S. Safe Drinking Water Act, the water supplied to homes and businesses from municipalities and utilities may contain high levels of bacteria, toxins, parasites and human and animal-health pharmaceuticals, as well as high levels of chlorine used to eliminate contaminants. The quality of drinking water outside the United States and other industrialized countries is generally much worse, with high levels of contaminants and often only rudimentary purification systems. In the industrialized world, water quality is often compromised by pollution, aging municipal water systems, and contaminated wells and surface water. In addition, the specter of terrorism directed at intentional contamination of water supplies has heightened awareness of the importance of reliable and secure water purification. The importance of effective water treatment is also critical from an economic standpoint, as health concerns and impure water can impair consumer confidence in food products. Discharge of impaired waters to the environment can further degrade the earth's water and violate environmental laws, with the possibility of significant fines and penalties from regulatory agencies.

There are over 200,000 public rural water districts in the United States. The great majority of these are considered small to medium-sized public water systems, which support populations of fewer than 10,000 people. A substantial portion of these are in violation of the Safe Drinking Water Act at any given time. This problem is expected to worsen as more stringent EPA rules are implemented for small public water systems. Substantial expenditures will be needed in coming years for repair, rehabilitation, operation, and maintenance of the water and wastewater treatment infrastructure. We believe that water districts using conventional sand-anthracite filters will be unable to comply with the Clean Water Act without massive installations of on-site chemical filter aids and disinfection equipment, such as ozone or ultraviolet. On a worldwide level, water supply issues are viewed by many as the next global crisis; while the quantity of available fresh water is relatively fixed, the world population and demand for clean water is rapidly increasing.

The market for the treatment and purification of drinking water and the treatment, recycling and reuse of wastewater has shown significant growth as world demand for water of specified quality continues to increase and as regulations limiting waste discharges to the environment continue to mount. In addition, urbanization in the third world and the spread of agricultural activities has increased the demand for public water systems.

EXISTING PURIFICATION SYSTEMS. Until the early twentieth century, municipal water supplies consisted of flowing water directly from the source to the end user with little or no processing. In the late 19th and early 20th century, most large municipal water systems instituted a form of filtration called “slow sand filtration” to enhance the clarity and esthetics of delivered waters. These municipal water filtration systems however were extremely large plants that are typically excavated into the landscape of the facility. The surface area required for these filters could vary widely depending on the input quality of the water, but generally they require extremely large areas, which are referred to as “footprints”.

In a typical treatment facility, the first step adds to the raw incoming water a substance which causes tiny, sticky particles (called “floc”) to form. Floc attracts dirt and other particles suspended in the water. This process of coagulation results in the heavy particles of dirt and floc clumping together and falling to the bottom. These heavier particles form sediment which is siphoned off, leaving the clearer water, which passes on to filtration. The most common filtration method is known as “slow sand” or sand-anthracite, in which the water flows into large shallow beds and passes down through layers of sand, gravel and charcoal. The final process is disinfection, which is intended to kill bacteria or other microorganisms left in the water and leave a residual to keep the water safe through the delivery pipes to the customer. Chlorine is the most commonly employed disinfectant, although chloramine, ozone, and ultraviolet (UV) are also used.

The current trend in water filtration, due to the higher demands for water and the reduction in clean or relatively clean source waters, is to clarify and heavily filter all municipal water supplies. Smaller municipalities and water districts will also be required to meet the added water quality goals of the larger systems and will require the infrastructure to do so.

While “slow sand” filtration is by far the most common treatment method used in the United States, it has serious drawbacks. The treatment facilities occupy large tracts of land. The filtration beds are large, shallow in-ground concrete structures, often hundreds of feet long to accommodate large volumes of water. The water being filtered must remain in these beds for a comparatively long-time (known as “residence time”) in order for low-density materials to settle out. The sand and charcoal filtering medium rapidly becomes plugged and clogged. The bed must then be taken off-line and back-flushed, which uses large amounts of water - water which becomes contaminated and is therefore wasted. Additional settling ponds are necessary to “de-water” this waste by evaporation so that the dried solids may be disposed of in an environmentally safe (but costly) method.

The average life expectancy of a treatment plant is about 20 years, after which the plant must be extensively renovated. Population growth necessitates enlarging old facilities or building new ones, occupying still more valuable land. This process requires lengthy environmental impact studies, long design periods, and complex financing programs to fund costly construction budgets, as lead times usually stretch out for years.

Aside from cost and logistics there are many pathogens resistant to chlorine or small enough to pass through the existing methods of filtration. Illnesses such as hepatitis, gastroenteritis and Legionnaire's Disease, as well as increasingly pervasive chemical contaminants, have become more common. One of the more difficult of these problems is monitoring and providing a barrier against microscopic protozoan parasites such as cryptosporidium (3-4 microns in size) and giardia lamblia oocysts (5-7 microns). These common organisms exist naturally in the digestive systems of livestock and wild animals, and end up in lakes and streams. They have caused severe illness in millions of people in the United States. Conventional “slow sand” water filtration beds, used in most of the nation's public water districts, will not filter out these parasites - the best treatment facilities are only able to remove particles larger than 10-15 microns.

In recent years, there have been several serious public health emergencies caused by microbes breaking through the filtration barrier in treatment facilities. When ingested, they can cause diarrhea, flu-like symptoms and dehydration. In persons with immune system impairment, the illness can be life-threatening. In 1993, over 400,000 people in Milwaukee, Wisconsin became ill and about 100 people died during a failure in the drinking water filtration system.

Most surface water bodies in the United States, many of which supply drinking water, are contaminated with these organisms. They are extremely resistant to disinfection, and increasing disinfectant levels in the attempt to kill them creates a new set of problems. Disinfectants such as chlorine can react with organic matter in the water to form new chemicals known as “disinfection byproducts”. These byproducts, of which trihalomethanes (THM) are the most common, are thought to be health-threatening and possibly cancer-causing. The Safe Drinking Water Act regulations address minimum acceptable levels of these byproducts, including THMs. Therefore, physical removal of the organisms from the water is vitally important to their control.

The challenge of removing organic matter from water has been at the crux of water treatment since antiquity. Organic matter causes water to be cloudy, or turbid. High levels of turbidity can indicate the presence of pathogens and signal that the filtration process is not working effectively. The presence of high levels of organic matter makes disinfection more difficult and clogs filter media, causing long back-flush cycles, which in turn increases the volume of back-flush waste-water. In a typical treatment plant, this back-flush water can account for up to 20 percent of the raw water volume flowing through the facility.

Other filtration methods, such as reverse osmosis and activated charcoal, may be required to remove contaminants such as organic and inorganic chemicals, salts, color, odors, and viruses. However, they too are clogged quickly by organic particles in the water. These filter media are comparatively expensive, and frequent back-flush cycles drastically shorten filter life, thereby increasing the cost of treatment.

Products and Technology

OUR BUSINESS STRATEGY. Our business is to develop advanced water treatment technology for public and private potable drinking water systems and wastewater treatment systems, as well as industrial systems, in order to address these issues. We have initially targeted (1) small to medium public and private water districts that provide communities with drinking water or sewage treatment service and (2) water reclamation systems of commercial-industrial clients that create and dispose of contaminated wastewater.

DISSOLVED AIR FLOTATION. Dissolved air flotation, or DAF, has been used in water and wastewater treatment for more than eighty years, primarily in Europe. Some of the first systems installed in the 1920s are still in operation in Scandinavia. The DAF method involves injecting microscopic bubbles of air under pressure into the water being treated. The air molecules bond with organic matter in the water, and because of their lightness, the clumps float to the surface, where they are skimmed away. Over the eight decades this technology has been utilized, various improvements have been made in the technology. Until recently, it has not been utilized widely in the United States, and is used primarily for wastewater treatment.

SIONIX “ELIXIR” WATER TREATMENT SYSTEMS. The dissolved air flotation system we developed, which employs patented technology, removes more than 99.95+ percent of the organic particles in water, and provides a barrier against microbial contaminants such as cryptosporidium and giardia lamblia. Each ELIXIR Water Treatment System is a self-contained water treatment system or pre-treatment process using ordinary air, with minimal chemical flocculent aids. Our goal is to provide effective, practical and economic solutions to problems caused by pollution and toxic chemicals that seriously threaten public health and our environment. Our systems significantly reduce the risk of bacterial or parasitic contamination, particularly cryptosporidium, giardia, and e-coli, with minimal disinfectant by-products. Our systems are designed for quick installation, easy access for simple maintenance and are cost-effective for even the smallest water utilities or commercial applications. This technology is designed to support public water treatment plants, sewage treatment plants, water reclamation facilities, commercial air conditioning cooling towers, and emergency water systems for floods, earthquakes and other natural disasters. Our system occupies a small footprint, is modular, self-contained and portable.

Our ELIXIR system utilizes and refines DAF technology to provide a pre-treatment process using ordinary oxygen that we believe is highly efficient. The water is treated by saturating recirculated post-filter water with excess dissolved air, and injecting this excess air in the form of microscopic bubbles in a DAF particle separator. Pressurized water can hold an excess amount of dissolved air and forms microscopic bubbles when injected into water, which has a lower pressure. A booster pump recirculates a small amount (approximately 10%) of the post-filtered water through the dissolved air-saturation system. Oxygen and nitrogen molecules are transferred directly into the recirculated high-pressure water without forming air bubbles. This method of transferring air into water is 100% efficient, and reduces the amount of energy required to saturate recirculated water with excess dissolved air. The ELIXIR provides a denser concentration of white water bubbles. This process requires less energy than a conventional system, and uses a fraction of the floor space.

Our system can help ordinary filters meet Safe Drinking Water Act regulations and we believe that our system is effective in eliminating potentially cancer-causing disinfection by-product precursors while reducing the risk of bacterial or parasitic contamination, particularly THM, cryptosporidium and giardia.

By significantly reducing turbidity, the ELIXIR system remediates against disinfection byproducts such as THM. Used in conjunction with filtration or disinfection technology which may be required by specific raw water conditions, it reduces back-flushing cycle times, thereby lengthening the life of post-DAF equipment.

Each of our systems is completely modular. We customize each system installation with filtration and disinfection options appropriate for the user. The entire unit is built into a standard thirty-foot or forty-foot ISO transportable container, making it easy to move by truck, train, plane, helicopter, or ship. Standard configuration includes a small control and testing laboratory located in the front of the container. The addition of a generator module makes the system self-powered. The customer can operate and control the entire system from a remote site via hardwired or wireless communications. A comprehensive service and maintenance program (which will be part of all equipment leases) includes a standard upgrade path.

A single unit should produce a minimum of 225 gallons of post-DAF treated water per minute (about 325,000 gallons, or one acre-foot, per day). If additional reverse osmosis treatment is required to produce potable water, output is generally 50% less. Per capita usage of water in the United States is among the highest in the world. Two or more units can be ganged together for increased capacity.

Our systems are ideal for small to medium-sized potable water treatment utilities. They serve equally well in commercial/industrial uses where incoming process water must be treated to high levels of purity, or wastewater must be decontaminated before discharge to the environment. The products can also address water quality issues faced by commercial and industrial facilities that process water or produce toxic wastewater, such as food and beverage processing plants, dairy product facilities, and fresh water aquaculture installations, such as fish farms.

In general, water districts using sand-anthracite filters cannot meet the EPA Surface Water Treatment rules without a massive increase in on-site chemical filter-aids, additional filtering and the installation of ozone or other disinfection equipment. Plant operators must continually test raw influent water to adjust chemical filter aid dosage properly. Chemical and metal (alum) filter-aids increase sludge volume and landfill disposal problems.

Our systems include automatic computer controls to optimize ozone concentration levels and reduce monthly energy costs. Higher ozone contact concentration levels using smaller sized generators are possible if most of the algae are removed first by DAF. Extended contact time increases collision rate of ionized ozone molecules with negatively charged organic suspended particles. By utilizing the ELIXIR to pre-treat the feedwater, less energy is required to create the appropriate amount of ozone. By creating a turbulent flow of water and gas within the mixing chamber, we have achieved a much higher saturation with less ozone (and a minimum of excess ozone) than in other mixing methods.

The ELIXIR system is assembled in a steel container which is sealed, thus preventing tampering or incursion by bio-terrorism or airborne contaminants. Should catastrophic damage be incurred, a replacement unit may be installed within a few days rather than many months or years with in-ground systems.

Pilot Program-Villa Park Dam

In November 2006 we entered into an oral agreement with the Serrano Water District ("SWD") in Orange County, California to install an ELIXIR system at the Villa Park Dam (near Anaheim, California) for testing of the system by processing flood water residue behind the dam. Under our arrangement, scientists and engineers from California State University at Fullerton are coordinating with the SWD to trace and record the cleaning efficiency for the various contaminants in the water (thought to be iron, manganese and algae) against the flow rate capacity of the ELIXIR system. We designed the system placed at the dam site for research purposes. It contains a variety of sampling sites within the system to extract and test water outside the system, as well as a suite of internal water quality measurement instruments to monitor the cleaning process.

Villa Park Dam is operated by Orange County Flood Control and is designed to check the flow of flood waters from several small watersheds in the northern Santa Ana Mountains. The dam is capable of impounding up to 15,000 acre-feet of water (4.9 billion gallons), although its purpose is to check and safely release the waters during periods of heavy rainfall into Santiago Creek, where it is diverted to groundwater recharge ponds or allowed to discharge to the ocean. Serrano Water District has rights to 3,000 acre-feet of water from the impoundment pool. Until now, impounded waters have been released to flow downstream during storms. However, under the project, rain and other water will flow down creeks and collect to form a useable pool of water behind the dam. This water slowly degrades during the summer and has been shown to be very septic and has exceptionally high values of iron and manganese. This water has been prohibitively expensive to treat for drinking water.

In May 2007 we placed an ELIXIR system at the dam and began processing runoff water. We began a thorough evaluation of every component in the system during this testing period. Data are being used to evaluate the baseline water quality to be treated, as part of an ongoing water collection and analysis study of the ELIXIR water treatment system. Several testing and research programs to evaluate the treatment system were implemented.

The SWD pilot project was terminated in October 2008 once the retention reservoir behind Villa Park Dam was drained for periodic cleaning. With the exception of testing for Total Dissolved Solids ("TDS"), all other testing was completed in compliance with California's Title 22 certification program. TDS levels could not be properly tested since the reservoir was being drained and the dynamics of the forced water flow agitated sediment normally deposited on the bottom to mix with the draining water, producing readings above the testing thresholds.

Pilot Program-Arkansas

On June 6, 2008 we were awarded a contract from Innovated Water Equipment, Inc. ("IWE") of Little Rock, Arkansas for the delivery of an ELIXIR system to treat production water from gas and oil wells in the Arkansas vicinity. The unit was delivered during the 1st week of July 2009, commenced testing operations on August 25, 2009 and concluded testing operations on November 3, 2009. The purpose of the pilot program was to clean all impurities so that the treated water could be returned to ground water as well as to treat contaminated production water from oil and gas producers for recirculation in the fracturing process commonly utilized in the drilling industry to free up captured gas and oil reserves unavailable for normal drilling operations. Water conditions at the testing site were extremely difficult as each truckload of production water varied substantially which made extremely difficult treatment conditions requiring radically different chemical mixtures to produce consistent results. With the exception of permeate to return ratios for purposes of returning treated water to the ground water caused by outputs through the reverse osmosis system that were not originally specified and scaling indices caused by improper chemical mixtures that were outside of the purview of our testing parameters, testing results confirmed the efficacy of the Sionix ELIXIR system.

We have has been advised by IWE that the system has been disabled at the initial testing site and is being removed to a new "land farm" with substantially more stable production water where testing conditions will be more stable.

With the results from these two pilot studies, management expects to launch an aggressive marketing and sales program to promote the turnkey Sionix products and water treatment solutions to all potential market sources and distribution channels throughout the world.

Marketing and Customers

THE MARKET. The potable water market includes residential, commercial, and food service customers. Demand is driven both by consumer desire to improve the taste and quality of drinking water and by the expanded concern of regulatory agencies. According to industry analysts, water safety concerns not only contributed to growth in the water filtration market, but also helped drive the growth of consumer bottled water per capital consumption from 1.6 gallons in 1976 to 28.5gallons in 2009 (www.washingtonpost.com/sp-dyn/content/article/2009/09/AR2009081203074.html), representing sales of approximately $11 billion (www.ewg.org/node/27730).

According to industry data, it is estimated that 1.1 billion people in the world do not have safe drinking water (www.globalissues.org/article/26/poverty-facts-and-stats). There is significant market potential in Asian, Africa, and Latin American countries, where the quality of drinking water has been found to be severely deficient in several regions.

In the United States, we plan to target the established base of small to medium water providers, as well as industrial users (such as the dairy industry, meat and poultry producers, cruise ship operators, food and beverage processors, pharmaceuticals, cooling tower manufacturers and oil and gas producers) and disaster relief agencies with a need for a clean and consistent water supply. Outside the United States, we plan to market principally to local water systems and international relief organizations.

Our marketing efforts emphasize that our products are easily expandable and upgradable; for example, adding ozone and microfiltration equipment to a DAF unit is similar to adding a new hard drive to a personal computer. Each piece of equipment comes with state-of-the-art telemetry and wet-chemistry monitoring that expands as the system does. We plan to provide lease financing for all of our products, not only making it easy for a customer to acquire the equipment, but also guaranteeing that the customer will always have access to any refinements and improvements made to the product.

Pilot study requirements and potential adverse environmental effects can generally be more easily addressed with our prepackaged plant approach. Our initial approach to the market place is to supply the best of practice process for the largest number of water types encountered. The following is a brief description of the types of customers we intend to market to:

DOMESTIC WATER UTILITIES. There are over 200,000 public water systems (www.agwt.org/info/privateorpublic.htm) in the United States. The great majority of these are considered small to medium-sized public water systems, which support populations of fewer than 10,000 people. We believe that the ELIXIR system can provide a comprehensive solution for these utilities. It occupies a small footprint and is self-contained and portable. Equally important, in most cases, it does not require costly and time-consuming environmental studies.

INDUSTRIAL WASTEWATER PURIFICATION. Many industries use water in their manufacturing processes that results in contamination. This wastewater must be treated and purified before it can be reused or released into the ocean or streams. Principal markets are pharmaceutical manufacturers, producers of paper products, the dairy industry, and silicon chip manufacturers. The small footprint, low cost, and predictably efficient output of the ELIXIR system make it an excellent choice for customers in these markets.

FOOD AND BEVERAGE INDUSTRY. The production of beer and wine, soft drinks, and food products require water of a specific purity that must be controlled and monitored as part of the production process. The food service industry has an increasing need for consistent global product quality. Food service includes water used for fountain beverages, steam ovens, coffee and tea.

HEALTHCARE INDUSTRY. Hospitals require clean, uncontaminated water for their normal day-to-day operations. They also produce contaminated water that may require treatment before being reused or released. The ELIXIR system will process waste-water to a specific and controlled purity. The systems can be used to filter water going into or coming out of use. In such exacting situations, the customer may be able to reuse contaminated water or ensure decontamination before discharge.

WASTEWATER UTILITIES (SEWAGE TREATMENT). Sewage overflows are a major problem in many communities. The unit can function as a cost-effective emergency alternative to mitigate the problem of overflows and/or as a supplement to existing fixed treatment systems during emergency conditions.

THIRD-WORLD MARKETS. In addition to the domestic market, fast spreading urbanization in third-world countries has created a growing demand for public water systems. Most of the fatal waterborne illnesses occur in these countries. Industrial and agricultural contamination of water supplies is epidemic because environmental controls are neither adequate nor well enforced. Moreover, in the smaller villages and tribal regions of certain third world countries where water supplies are frequently contaminated by raw sewage, the Sionix modular, mobile units are a low cost alternative to fixed systems where water output is less than 400,000 gallons a day.

EMERGENCIES AND NATURAL DISASTERS. During natural disasters such as earthquakes, floods, hurricanes, and tornadoes, it is the role of the National Guard and the Federal Emergency Management Agency (FEMA) to assist local authorities with emergency services. Damage to local utilities can disrupt the drinking water supply and cause the failure of wastewater (sewage) treatment plants. The ELIXIR system can help address both of these problems. The system is completely self-contained, can be easily transported from place to place, is highly efficient, and can be equipped with its own power package.

DESALINIZATION. Reverse osmosis (RO) is among the most efficient desalinization processes available today. A RO desalinization system requires prefiltration to reduce clogging of the filter membrane by organic matter. Placed in front of an RO filter unit in a desalinization system, the ELIXIR unit will greatly lengthen the time between costly back-flushes and prolong the life of the RO filters.

MARKETING METHODS. We plan to market our products through participation in industry groups, selected advertising in specialized publications, trade shows, and direct mail. Initially we intend to utilize in-house marketing in conjunction with outsourced marketing consultants and national and international distributorships.

Patents

We hold 8 U.S. patents on technology related to or incorporated into the ELIXIR system and related components, however, as of the date of this filing, only 2 are actively used in the ELIXIR system. An additional patent application is pending. Our patents cover process, system and waste handling, an automatic backflushing system using air pressure to activate the valves, the ozone mixing system, and the inline wet-chemistry water quality monitoring system. The extent to which patents provide a commercial advantage, or inhibit the development of competing products, varies. We also rely on common law concepts of confidentiality and trade secrets.

Competition

Due to the economic barriers created by the investment necessary to tool a manufacturing facility and employ the personnel necessary to develop and sell the equipment, competition in the water purification and filtration industry may grow slowly. However, our products must compete with water filtration and purification equipment produced by companies that are more established than we are and have significantly greater resources than we have, such as General Electric Co., Siemens Water Technologies and Cuno Incorporated. We also compete with large architectural/engineering firms that design and build water treatment plants and wastewater facilities and with producers of new technologies for water filtration. Competitive factors include system effectiveness, operational cost and practicality of application, pilot study requirements and potential adverse environmental effects. In competing in this marketplace, we have to address the conservative nature of public water agencies and fiscal constraints on the installation of new systems and technologies. We do not represent a significant presence in the water treatment industry.

Regulatory Matters

Process water treatment plants and wastewater plants must comply with clean water standards set by the Environmental Protection Agency under the authority of the Clean Water Act and standards set by states and local communities. In many jurisdictions, including the United States, because process water treatment facilities and wastewater treatment systems require permits from environmental regulatory agencies, delays in permitting could cause delays in construction or usage of the systems by prospective customers.

In 1974, the Safe Drinking Water Act (SDWA) was passed. It empowered the EPA to set maximum levels of contamination allowable for health-threatening microbes, chemicals, and other substances which could find their way into drinking water systems, and gave the agency the power to delegate enforcement.

By 1986, Congress was dissatisfied with the speed with which the EPA was regulating and enforcing contaminant limits. The SDWA revision that year set rigid timetables for establishing new standards and ordered water systems to monitor their supplies for many substances not yet regulated by EPA standards.

Additionally, it limited polluting activities near public groundwater wells used as drinking water sources - an acknowledgment of the growing threat to underground water supplies. It named 83 contaminants and set out a program for adding 25 more every 3 years, as well as specifying the “best available technology” for treating each contaminant.

The timetable for imposing these regulations was rigid and tended to treat all contaminants as equally dangerous, regardless of relative risk. The cost to water districts for monitoring compliance became a significant burden, especially to small or medium-sized districts. The 1986 law authorized the EPA to cover 75 percent of state administrative costs, but in actuality, only about 35 percent was funded.

Congress updated the SDWA again in 1996, improving on the existing regulations in two significant ways. First, they changed the focus of contaminant regulations to reflect the risk of adverse health effects, the rate of occurrence of the contaminant in public water systems, and the estimated reduction in health risk resulting from regulation. Along with this, a thorough cost-benefit analysis must be performed by the EPA, with public health protection the primary basis for determining the level at which drinking water standards are set. Second, states were given greater flexibility to implement the standards while arriving at the same level of public health protection. In addition, a revolving loan fund was established to help districts build necessary improvements to their systems.

Research and Development

Research and development expenses for the year ended September 30, 2009 were $761,440 while research and development expenses for the year ended September 30, 2008 were $1,060,933. Research and development consists of additional modifications to the ELIXIR system based on the varying water conditions experienced by the Company’s customer and prospects, and adjustments to unit functionality based on testing results. We capitalize development costs in accordance with GAAP. All other costs, including salaries and wages of employees included in research and development, have been expensed as incurred.

Manufacturing and Raw Materials

The Company terminated manufacturing operations in the Anaheim, CA facility as of December 21, 2009. Overhead costs of maintaining an in-house manufacturing facility could not be justified for the low volume production and assembly operations that sales were generating or expected to generate over the foreseeable future. Accordingly, the Company is in discussions with several sub-contract manufacturing organizations to manufacture and assemble the Sionix products in accordance with its specifications and design requirements. These arrangements are anticipated to cover various international geographic regions, with a single contract manufacturer for the North American continent. It is expected that international arrangements will be completed as distribution channels in those international territories are established and sales growth occurs. The materials used in the production of the Sionix products are easily obtainable from a variety of suppliers.

Employees

We have four full-time employees as of the date of this report, none of whom are covered by any collective bargaining agreement. The Company considers its relationship with its employees to be good.

ITEM 1A.

RISK FACTORS

In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially adversely affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition.

We have never reported any revenues.

We have been in business for more than ten years and never reported any revenues from operations. We have been in the development stage since inception, and although we have delivered on an order for one water treatment system, revenue from this system has not yet been recognized. Except for the deposit we received for this one order, all of our working capital has been generated by sales of securities and loans.

We have a history of operating losses, which may continue.

We have a history of losses and may continue to incur operating and net losses for the foreseeable future. Although we had net income of $5,024,198 for the year ended September 30, 2009, as of September 30, 2009 our accumulated deficit was $28,890,537. We have not achieved profitability on a quarterly or on an annual basis from normal operations. We may not be able to generate revenues or reach a level of revenue to achieve profitability.

We do not have sufficient cash to support our operations and we will need to find capital to operate. If we are unable to raise capital as we need it, we may have to curtail, or even cease, our operations.

We have not recognized any revenues since the inception of our business and we do not have enough cash to support our operations. Our capital requirements have been and will continue to be significant. In order to fund shortages of capital, we have borrowed money from our major stockholders and sold our securities. Our major stockholders are not under any obligation to continue providing loans to us.

We will need to raise additional capital to continue our operations. If we are unsuccessful in finding financing, we may be required to severely curtail, or even to cease, our operations.

During the 2010 fiscal year, approximately $2.7 million in debt will need to be repaid. We are not certain that we will have the funds to repay this debt, which could subject us to legal action. Any such actions would adversely affect our business and financial condition.

During 2010 approximately $2.7 million of debt securities that we issued will need to be repaid. We do not currently have the funds to repay this debt and we cannot assure you that we will be able to raise the funds or to renegotiate the terms of the loans. If we default on these obligations and if our investors refuse to renegotiate the terms of the loans, we may be subjected to lawsuits which would further strain our finances and disrupt our business and would adversely affect our business and financial condition.

Our auditors have indicated that our inability to generate sufficient revenue raises substantial doubt as to our ability to continue as a going concern.

Our audited financial statements for the period ended September 30, 2009 were prepared on a going concern basis. Our auditors have indicated that our inability to generate revenue raises substantial doubt as to our ability to continue as a going concern. Through September 30, 2009, we incurred cumulative losses of $28,890,537 including net income for the year ended September 30, 2009 of $5,024,198. We have negligible cash flow from operations and our ability to maintain our status as an operating company is entirely dependent upon obtaining adequate cash to finance our overhead, research and development activities, and acquisition of production equipment. We do not know if we will achieve a level of revenues adequate to support our cost and expenses. In order to meet our basic financial obligations, including rent, salaries, debt service and operations, we plan to seek additional equity or debt financing. Because of our history and current debt levels, there is considerable doubt that we will be able to obtain financing. Our ability to meet our cash requirements for the next twelve months depends on our ability to obtain financing. There is no assurance that we will be able to implement our business plan or continue our operations.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 may result in actions filed against us by regulatory agencies or in a reduction in the price of our common stock.

We are required to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 and related regulations. Any material weakness in our internal control over financial reporting that needs to be addressed, or disclosure of a material weakness in management’s assessment of internal control over financial reporting, may reduce the price of our common shares because investors may lose confidence in our financial reporting. Our failure to maintain effective internal control over financial reporting could also lead to actions being filed against us by regulatory agencies.

In connection with the restatement of our consolidated financial statements for the years ended September 30, 2007 and 2008, we identified weaknesses in internal control over financial reporting that were material weaknesses as defined by standards established by the Public Company Accounting Oversight Board. The deficiencies related to our lack of a sufficient number of internal personnel possessing the appropriate knowledge, experience and training in applying US GAAP and in reporting financial information in accordance with the requirements of the SEC and our lack of an audit committee to oversee our accounting and financial reporting processes, as well as other matters. (See the discussion of our Controls and Procedures at Item 8A of this Amendment No. 1.) We cannot assure you that our remediation of our internal control over financial reporting relating to the identified material weaknesses will establish the effectiveness of our internal control over financial reporting or that we will not be subject to material weaknesses in the future.

We may be unable to compete successfully in our industry.

Many of our competitors, such as General Electric Co., Cuno Incorporated and Siemens Water Technologies, are large, diversified manufacturing companies with significant expertise in the water quality business and contacts with water utilities and industrial water consumers. These competitors have significantly greater name recognition and financial and other resources. We may not be able to compete successfully against them. We do not represent a significant presence in the water treatment industry.

Our industry is subject to government regulation, which may increase our costs of doing business.

Treatment of domestic drinking water and wastewater is regulated by a number of federal, state and local agencies, including the U.S. Environmental Protection Agency. The changing regulatory environment, including changes in water quality standards, could adversely affect our business by requiring us to re-engineer our products or invest in new technologies. This could have a material adverse effect on our business by increasing our costs of doing business.

We may be subject to product liability claims for which we do not have insurance. If we were required to pay a substantial product liability claim, our business and financial condition would be materially adversely affected.

We, like any other manufacturer of products that are designed to treat food or water that will be ingested, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among others, that our products fail to remove harmful contaminants or bacteria, or that our products introduce other contaminants into the water. While we intend to obtain and maintain product liability insurance, there can be no assurance that such insurance will continue to be available at a reasonable cost, or, if available, will be adequate to cover liabilities. In the event that we do not have adequate insurance, product liability claims relating to defective products could have a material adverse effect on our business and financial condition.

Our water treatment system and the related technology are unproven and may not achieve widespread market acceptance among our prospective customers. If we are unable to sell our water treatment systems, our business will suffer.

Although we have installed a water treatment system in one customer location, our products have not been proven in a commercial context over any significant period of time. We have developed our proprietary technology and processes for water treatment based on dissolved air flotation technology, which competes with other forms of water treatment technologies that currently are in operation throughout the United States. Our water treatment system and the technology on which it is based may not achieve widespread market acceptance. Our success will depend on our ability to market our system and services to businesses and water providers on terms and conditions acceptable to us and to establish and maintain successful relationships with various water providers and state regulatory agencies.

We believe that market acceptance of our system will depend on many factors including:

●	the perceived advantages of our system over competing water treatment solutions;

●	the safety and efficacy of our system;

●	the availability of alternative water treatment solutions;

●	the pricing and cost effectiveness of our system;

●	our ability to access businesses and water providers that may use our system;

●	the effectiveness of our sales and marketing efforts;

●	publicity concerning our system and technology or competitive solutions;

●	timeliness in assembling and installing our system on customer sites;

●	our ability to respond to changes in regulations; and

●	our ability to provide effective service and maintenance of our systems to our customers’ satisfaction.

If our system or our technology fails to achieve or maintain market acceptance or if new technologies are introduced by others that are more favorably received than our technology, are more cost effective or otherwise render our technology obsolete, we may not be able to sell our systems. If we are unable to sell our systems, our business and prospects would suffer.

We must meet evolving customer requirements for water treatment and invest in the development of our water treatment technologies. If we fail to do this, our business and operations will be adversely affected.

If we are unable to develop or enhance our systems and services to satisfy evolving customer demands, our business, operating results, financial condition and prospects will be harmed significantly.

Failure to protect our intellectual property rights could impair our competitive position.

Our water treatment systems utilize a variety of proprietary rights that are important to our competitive position and success. Because the intellectual property associated with our technology is evolving and rapidly changing, our current intellectual property rights may not protect us adequately. We rely on a combination of patents, trademarks, trade secrets and contractual restrictions to protect the intellectual property we use in our business. In addition, we generally enter into confidentiality or license agreements or have confidentiality provisions in agreements with our employees, consultants, strategic partners and customers and control access to, and distribution of, our technology, documentation and other proprietary information.

Because legal standards relating to the validity, enforceability and scope of protection of patent and intellectual property rights in new technologies are uncertain and still evolving, the future viability or value of our intellectual property rights is uncertain. Furthermore, our competitors independently may develop similar technologies that limit the value of our intellectual property or design around patents issued to us. If competitors or third parties are able to use our intellectual property or are able to successfully challenge, circumvent, invalidate or render unenforceable our intellectual property, we likely would lose any competitive advantage we might develop. We may not be successful in securing or maintaining proprietary or patent protection for the technology used in our system or services, and protection that is secured may be challenged and possibly lost.

Demand for our products could be adversely affected by a downturn in government spending related to water treatment, or in the cyclical residential or non-residential building markets.

Our business will be dependent upon spending on water treatment systems by utilities, municipalities and other organizations that supply water which, in turn, is often dependent upon residential construction, population growth, continued contamination of water sources and regulatory responses to this contamination. As a result, demand for our water treatment systems could be impacted adversely by general budgetary constraints on governmental or regulated customers, including government spending cuts, the inability of government entities to issue debt to finance any necessary water treatment projects, difficulty of customers in obtaining necessary permits or changes in regulatory limits associated with the contaminants we seek to address with our water treatment system. A slowdown of growth in residential and non-residential building would reduce demand for drinking water and for water treatment systems. The residential and non-residential building markets are generally cyclical, and, historically, down cycles have typically lasted a number of years. Any significant decline in the governmental spending on water treatment systems or residential or non-residential building markets could weaken demand for our systems.

You may have difficulty trading our common stock as there is a limited public market for our shares.

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “SINX.” Our common stock is not actively traded and there is a limited public market for our shares. As a result, a shareholder may find it difficult to dispose of, or to obtain accurate quotations of the price of, our common stock. This severely limits the liquidity of our common stock, and would likely have a material adverse effect on the market price for our common stock and on our ability to raise additional capital. An active public market for shares of our common stock may not develop, or if one should develop, it may not be sustained.

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.

Our common stock is considered to be a “penny stock” under federal securities laws. Penny stocks are subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

We do not anticipate that we will pay dividends on our common stock any time in the near future.

We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends in the foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business. Our board of directors will determine future dividend policy based upon conditions at that time, including our earnings and financial condition, capital requirements and other relevant factors.

You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock.

As of September 30, 2009, there were 148,314,046 shares of our common stock outstanding. In the future, we may be required to issue a total of 79,880,561shares of common stock if all of our outstanding options, warrants and convertible promissory notes are exercised or converted. Many of these shares may be issued below the market value of our shares on the date the securities are exercised or converted. The future issuance of any such additional shares of our common stock or other securities we may issue for raising capital or paying for services may create downward pressure on the trading price of our common stock. Holders of our common stock will have their holdings diluted as a result of the issuance of additional shares of our common stock.

We have failed to file annual or quarterly reports on a timely basis two times during the past two years. If we fail to file one more report on a timely basis, the OTCBB will no longer allow our common stock to be quoted.

Section 6530(e)(1) of the FINRA Manual states,

Notwithstanding the foregoing paragraphs, a member shall not be permitted to quote a security if: (A) while quoted on the OTCBB, the issuer of the security has failed to file a complete required annual or quarterly report by the due date for such report (including, if applicable, any extensions permitted by SEC Rule 12b-25) three times in the prior two-year period . . . .

If we fail to file an annual or quarterly report on a timely basis, the OTCBB will no longer allow our common stock to be quoted. We cannot assure you that we will be able to file our reports in accordance with the requirements of the OTCBB.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

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.

On December 21, 2009, we vacated these premises and are currently in discussions with the landlord regarding the termination of our future obligations under this lease. We are currently renting on a month-to-month basis a single office for administrative purposes, and our monthly obligation under this rental agreement is $1,200.

ITEM 3.

LEGAL PROCEEDINGS

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the 2009 fiscal year, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the OTC Bulletin Board under the symbol “SINX”. The table below sets forth the range of high and low bid quotes of our common stock for each quarter for the last two fiscal years as reported by the OTC Bulletin Board. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.

	High		Low
Fiscal Year Ended September 30, 2009:
First Quarter		0.140		0.090
Second Quarter		0.120		0.050
Third Quarter		0.200		0.070
Fourth Quarter		0.230		0.160

Fiscal Year Ended September 30, 2008:
First Quarter		0.300		0.220
Second Quarter		0.245		0.120
Third Quarter		0.355		0.100
Fourth Quarter		0.220		0.130

As of January 6, 2010, we had approximately 814 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

Dividends

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information regarding our equity compensation plans as of September 30, 2009.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans

Equity Compensation Plan Approved by Stockholders

None	-	-		-

Equity Compensation Plan Not Approved by Stockholders

2001 Executive Officers Stock Option Plan	7,034,140	$	0.15	542,540

Recent Issuances of Unregistered Securities

During the fourth quarter of the last fiscal year, we issued the following unregistered securities. We relied on Section 4(2) of the Securities Act of 1933, as amended, to make the offering inasmuch as the securities were issued to accredited investors only without any form of general solicitation.

On July 15, 2009 and August 11, 2009, we borrowed a total $150,000 from Trillium Partner LP and MKM Capital. The loans are evidenced by two promissory notes and mature 90 days from the date of the notes. As consideration for the loans, we issued a total of 300,000 shares of common stock to these lenders. 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.

ITEM 6.

SELECTED FINANCIAL DATA

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

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General.

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto, included elsewhere in this report. Except for the historical information contained in this report, the following discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in the section of this report titled “Risk Factors”, as well as other factors, some of which will be outside of our control. You are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

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 2009 fiscal year.

Management believes the following critical accounting policies reflect its more significant estimates and assumptions.

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.

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

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

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

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

Goodwill and other Intangibles. Goodwill and intangible assets with indefinite lives will be tested annually for impairment in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 350, “Intangibles, Goodwill and Other”. We will use our judgment in assessing whether assets may have become impaired between annual impairment tests. We perform our annual test for indicators of goodwill and non-amortizable intangible assets impairment in the fourth quarter of our fiscal year or sooner if indicators of impairment exist.

Legal Contingencies. From time to time we may be a defendant in litigation. As required by ASC Topic 450, “Contingencies”, 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 to fully resolve this litigation cannot be predicted with any assurance of accuracy. Final settlement of these matters could possibly result in significant effects on our results of operations, cash flows and financial position.

Warrant Liability. The Company calculates the fair value of warrants and options using the Black Sholes 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 Liabilities. The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides 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 (loss) on change in fair value of warrant and option liability” and “gain (loss) on change in fair value of beneficial conversion liability.”

Plan of Operation

During the next fiscal year we plan to continue marketing and selling our existing ELIXIR water treatment system to potential domestic and international customers. We believe that the operation of the unit at this facility will position us to aggressively market the ELIXIR to public water utilities, private companies and other potential customers. These demonstrations will serve as a sales tool and a model for possible applications and installations. Once we obtain sufficient financing, we plan to engage in substantial promotional activities in connection with the operation of the unit, including media exposure and access to other public agencies and potential private customers. If the unit continues to operate successfully, we believe we can receive orders for operating units. We have demonstrated the unit at the Villa Park Dam to numerous prospective clients over several years and are considering different alternative uses for this unit.

We intend to contract with outside manufacturers to begin production of the units. Once we have obtained financing we will begin to recruit and hire employees to serve at the facility. We anticipate that most of our capital needs will need to be funded by equity financing until such time that we have received orders for, and deposits with respect to, our products.

Restatement of 2008 Financial Statements

Between October 17, 2006 and February 27, 2007, the Company issued 25 Convertible Notes 1 for total proceeds to the Company of $750,000. 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 Notes 2 for total proceeds to the Company of $86,000. 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 were 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

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


	As Previously Stated September 30, 2008			Beneficial Conversion Options			Warrants and Options			As Restated September 30, 2008
Balance Sheet (as of September 30, 2008)
Accrued expenses	$	2,721,970		$	1,590,874		$	-		$	4,312,844
Warrant and option liability		3,446,823			-			3,422,421			6,869,244
Beneficial conversion feature liability		26,000			8,855,272			-			8,881,272
Additional paid-in capital		12,688,495			-			(1,847,488	)		10,841,007
Deficit accumulated during developmental stage		(21,893,656	)		(10,446,146	)		(1,574,933	)		(33,914,735	)

Statement of Operations (for the year ended September 30, 2008)
Gain (loss) on change in fair value of warrant and option liability	$	4,748,929		$	-		$	(832,889	)	$	3,916,040
Gain (loss) on change in fair value of beneficial conversion liability		1,404,811			20,339,955			-			21,744,766
General and administrative expenses		7,445,775			-			83,855			7,529,630

Statement of Operations (since inception)
Gain (loss) on change in fair value of warrant and option liability	$	5,218,240		$	-		$	(973,727	)	$	4,244,513
Gain on change in fair value of beneficial conversion liability		1,400,767			24,258,030			-			25,658,797
General and administrative expenses		20,775,280			3,787,032			83,855			24,646,167
Financing costs		(2,299,117	)		(30,536,702	)		(897,793	)		(33,733,612	)

Statement of Cash Flows (for the year ended September 30, 2008)
Net loss	$	(3,872,820	)	$	20,339,955		$	(916,744	)	$	15,550,391
(Gain) loss on change in fair value of warrant and option liability		(4,748,929	)		-			832,889			(3,916,040	)
(Gain) loss on change in fair value of beneficial conversion liability		(1,404,812	)		(20,339,955	)		-			(21,744,767	)
Non-cash compensation expense		-			-			83,855			83,855

Statement of Cash Flows (since inception)
Net loss	$	(21,893,656	)	$	(10,065,704	)	$	(1,955,375	)	$	(33,914,735	)
(Gain) loss on change in fair value of warrant and option liability		(5,218,240	)		-			973,727			(4,244,513	)
Gain on change in fair value of beneficial conversion liability		(1,400,768	)		(24,258,030	)		-			(25,658,798	)
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

Year Ended September 30, 2009 Compared To Year Ended September 30, 2008

The Company had no revenue for the fiscal years ended September 30, 2009 or 2008. The Company received an order and deposit for one water treatment system during the 2008 fiscal year, revenue from this order has not been recognized because the installation of the units was not completed as of September 30, 2009.

The Company incurred operating expenses of $2,526,243 during the fiscal year ended September 30, 2009, a decrease of $6,089,590 as compared to $8,615,833 for the fiscal year ended September 30, 2008. General and administrative expenses were $1,736,359 for the period ended September 30, 2009, a decrease of $5,793,271 over the prior period. The decrease in general and administrative expenses resulted primarily from options and warrants issued to employees and consultants which in fiscal 2008 represented a charge of approximately $5,0000,000; however, in fiscal 2009, the charge was approximately $100,000. Research and development expenses of $761,440 during the fiscal year ended September 30, 2009, a decrease of $299,493, as compared to $1,060,933 for the fiscal year ended September 30, 2008, also contributed to the decrease in operating expenses.

The decrease in research and development expenses resulted primarily from a reduction of personnel costs. We reduced the number of our employees due to limited cash resources.

Other income (expense) totaled $7,555,241 during the fiscal year ended September 30, 2009. This was a substantial decrease from the prior period where the Company reported income of $24,167,124. This difference is due mainly to to the decrease in the amount of $17,821,584 in the fair value of the option and warrant liability and beneficial conversion liability in fiscal 2009. The Company earned interest income of $3,962 during the fiscal year ended September 30, 2009, as compared to $7,830 during the fiscal year ended September 30, 2008. The decrease of $3,868 is due to reduced cash deposits. The Company incurred interest expense of $292,694 during the fiscal year ended September 30, 2009, a decrease of $829,494 as compared to $1,122,188 for the fiscal year ended September 30, 2008. The decrease in interest expense was due primarily to the conversion of certain debt securities to common stock, and the amortization of the beneficial conversion features discount and warrant discount of the convertible debt securities during the fiscal year ended September 30, 2008.

During the fiscal year ended September 30, 2008, the Company recorded a loss on settlement of debt and loss on lease termination of $254,309 and $125,015, respectively. There was a gain of $3,616 on settlements during the fiscal year ended September 30, 2009.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $22,982 and $1,220,588 at September 30, 2009 and 2008, respectively. The Company’s source of liquidity has been the sale of its securities and deposits received from orders for one water treatment system. 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. The Company has no binding commitments for financing and, with the exception of the orders it received during the 2008 fiscal year, no additional orders for the sale of water treatment systems. There can be no assurance that sales of the Company’s securities or 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. As of September 30, 2009, a total of approximately $2,235,000 in principal amount of certain promissory notes issued by the Company, plus accrued interest, were due. The Company has not yet paid the notes and no demand for payment has been made.

Operating Activities

During the fiscal year ended September 30, 2009, the Company used $1,852,060 of cash in operating activities. Non-cash adjustments included $28,444 for depreciation, $187,844 for employee stock-based compensation, $238,244 for consultant stock-based compensation, $631,781 in loss on change in fair value of warrant and option liability, $(8,471,003) in gain on gain on change in fair value of beneficial conversion liability, $135,625 in non-cash based financing costs, and $125,000 for the impairment of fixed assets. The Company also recorded an increase of $1,069,460 in inventory. Cash provided by operating activities included $475,954 in accounts payable, $510,038 in accrued liabilities, and $360,000 in customer deposits.

Investing Activities

During the fiscal year ended September 30, 2009, the Company acquired property and equipment totaling $5,546, as compared to $96,552 during the fiscal year ended September 30, 2008.

Financing Activities

Financing activities provided $660,000 to the Company during the fiscal year ended September 30, 2009. The Company received $390,000 in short-term notes payable and $270,000 through proceeds from the sale of common stock.

Financing activities provided $2,251,779 to the Company during the fiscal year ended September 30, 2008. The Company received $1,425,000 in notes payable, and $750,000 from the issuance of stock. The Company made payments of $19,260 to an officer for a loan payable, $15,000 to a related party for loan payable, and $27,336 on an equity line of credit.

As of September 30, 2009, the Company had an accumulated deficit of $28,890,537. Management anticipates that future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a developmental business enterprise, many of which the Company cannot control.

Going Concern Opinion

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through September 30, 2009, the Company has incurred cumulative losses of $28,890,537 including net income for year ended September 30, 2009 of $5,024,198. 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.

Contractual Obligations

At September 30, 2009, our significant contractual obligations, were as follows:

	Payments due by Period
	Less than		One to		Three to		More Than
	One Year		Three Years		Five Years		Five Years		Total
Notes payable, related parties	$	107,000	$	-	$	-	$	-	$	107,000
Short-term promissory notes payable		390,000		-		-		-		390,000
Convertible notes		2,220,686		-		-		-		2,220,686
Operating lease obligations		108,660		93,550		-		-		202,210
Total	$	2,826,346	$	93,550	$	-	$	-	$	2,919,896

Off-Balance Sheet Arrangements

Our Company has no outstanding off-balance sheet arrangements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SIONIX CORPORATION

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm			F-2

Balance Sheets as of September 30, 2009 and 2008			F-3

Statements of Operations for the years ended September 30, 2009 and September 30, 2008 and Cumulative from Inception (October 3, 1994) to September 30, 2009			F-4

Statements of Stockholders’ (Deficit) from Inception (October 3, 1994) to September 30, 2009			F-5

Statements of Cash Flows for the years ended September 30, 2009 and September 30, 2008 and Cumulative From Inception (October 3, 1994) to September 30, 2009			F-7

Notes to Financial Statements			F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Sionix Corporation

We have audited the accompanying balance sheets of Sionix Corporation (a development stage entity) (a Nevada corporation) as of September 30, 2009 and 2008 and the related statements of operations, stockholders' (deficit), and cash flows for the years ended September 30, 2009 and 2008 and for the period from October 3, 1994 (inception) to September 30, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sionix Corporation as of September 30, 2009 and 2008 and the results of its operations and its cash flows for the years ended September 30, 2009 and 2008 and for the period from October 3, 1994 (inception) to September 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has deficit accumulated from inception amounting $28,890,537 at September 30, 2009 including a net income of $5,024,198 incurred in the year ended September 30, 2009. These factors as discussed in Note 14 to the financial statements, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 18, the financial statements for the year ended September 30, 2008 have been restated.

Kabani & Company, Inc.

Certified Public Accountants

Los Angeles, California.

January 13, 2010

F-2

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
BALANCE SHEETS

	As of September 30,			As of September 30,
	2009			2008
ASSETS				(As Restated)
CURRENT ASSETS
Cash and cash equivalents	$	22,982		$	1,220,588
Inventory		1,069,460			-
Other current assets		195,698			138,895
TOTAL CURRENT ASSETS		1,288,140			1,359,483

PROPERTY AND EQUIPMENT, net		64,203			87,101

DEPOSITS		28,495			33,095
TOTAL ASSETS		1,380,838			1,479,679

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	611,693		$	259,355
Accrued expenses		3,066,106			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		390,000			-
Convertible notes, net of debt discounts of $0 and $2,890, respectively		1,738,194			2,041,443
10% subordinated convertible notes, net of debt discounts of $0 and $24,204, respectively		482,492			400,796
Warrant and option liability		7,937,620			6,869,244
Beneficial conversion liability		2,001,143			8,881,272
TOTAL CURRENT LIABILITIES		18,032,998			24,292,704

STOCKHOLDERS' DEFICIT
Common stock (150,000,000 shares authorized; 148,795,946 shares issued and 148,314,046 outstanding at September 30, 2009, and 134,756,213 shares issued and 134,274,313 outstanding at September 30, 2008, Par Value $.001)		148,313			134,274
Additional paid-in capital		12,089,664			10,841,007
Shares to be issued		400			126,429
Deficit accumulated during development stage		(28,890,537	)		(33,914,735	)
TOTAL STOCKHOLDERS' DEFICIT		(16,652,160	)		(22,813,025	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	1,380,838		$	1,479,679

The accompanying notes form an integral part of these financial statements

F-3

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF OPERATIONS
							Cumulative from
	For the Years						Inception
	Ended September 30,						(October 3, 1994) to
	2009			2008			September 30, 2009
				(As Restated)

Revenues	$	-		$	-		$	-

Operating expenses
General and administrative		1,736,359			7,529,630			26,382,526
Research and development		761,440			1,060,933			3,798,313
Depreciation and amortization		28,444			25,270			585,819
Total operating expenses		2,526,243			8,615,833			30,766,658
Loss from operations		(2,526,243	)		(8,615,833	)		(30,766,658	)

Other income (expense)
Interest income		3,962			7,830			70,335
Interest expense and financing costs		(292,694	)		(1,122,188	)		(34,026,306	)
Gain (loss) on change in fair value of warrant and option liability		(631,781	)		3,916,040			3,612,732
Gain on change in fair value of beneficial conversion liability		8,471,003			21,744,766			34,129,800
Impairment of intangibles		-			-			(1,267,278	)
Inventory obsolescence		-			-			(365,078	)
Legal settlement		1,135			-			346,084
Gain (loss) on settlement of debt		3,616			(254,309	)		(480,961	)
Loss on lease termination		-			(125,015	)		(125,015	)
Total other income (expense)		7,555,241			24,167,124			1,894,313
Income (loss) before income taxes		5,028,998			15,551,291			(28,872,345	)
Income taxes		4,800			900			18,192
Net income (loss)	$	5,024,198		$	15,550,391		$	(28,890,537	)

Basic income per share	$	0.04		$	0.14
Dilutive income per share	$	0.04		$	0.14

Basic weighted average number of
shares of common stock outstanding		140,156,647			112,419,861
Dilutive weighted average number of
shares of common stock outstanding		140,156,647			112,419,861

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

F-4

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

																						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	)

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

F-5

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

																	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)

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	)
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		7,819,419		7,819		473,023			-			-		-		-		-			480,842
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
Common stock issued for stock warrant exercises		2,886,842		2,887		262,113			-			-		-		-		-			265,000
Common stock issued related to short-term notes		800,000		800		134,825			-			-		-		-		-			135,625
Net income		-		-		-			-			-		-		-	5,024,198			5,024,198
Balance at September 30, 2009		148,314,046	$	148,313	$	12,089,664		$	400		$	-	$	-	$	-	$ 28,890,537			$ 16,652,160

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

F-6

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY
STATEMENTS OF CASH FLOWS
							Cumulative
							from
	For the Year						Inception
	Ended September 30,						(October 3, 1994) to
	2009			2008			September 30, 2009
				(As Restated)			(As Restated)

OPERATING ACTIVITIES:
Net income (loss)	$	5,024,198		$	15,550,391		$	(28,890,537	)
Adjustments to reconcile net Income (loss) to net cash used in
operating activities:
Depreciation		28,444			25,270			672,736
Amortization of beneficial conversion features discount and
warrant discount		27,094			1,164,321			2,074,433
Stock based compensation expense - employee		187,444			1,842,945			3,866,746
Stock based compensation expense - consultant		238,244			3,685,722			6,512,757
(Gain) loss on change in fair value of warrant and option liability		631,781			(3,916,040	)		(3,612,732	)
(Gain) loss on change in fair value of beneficial conversion liability		(8,471,003	)		(21,744,767	)		(34,129,802	)
Non-cash compensation costs		-			83,855			3,870,887
Non-cash financing costs		135,625			-			31,570,120
Impairment of property and equipment		125,000			-			125,000
Impairment of assets		-			-			514,755
Write-down of obsolete assets		-			-			38,862
Impairment of intangible assets		-			-			1,117,601
(Gain) loss on settlement of debt		(3,616	)		254,309			480,961
Loss on termination of lease					125,015			125,015
Write-off of beneficial conversion features		-			(576,000	)		(576,000	)
Stock issued for services and rent		-			114,850			114,850
Other		-			-			(799,044	)
(Increase) decrease in assets:
Inventory		(1,069,460	)		-			(1,069,460	)
Other current assets		(56,803	)		(137,545	)		(195,698	)
Other assets		4,600			(28,495	)		(128,495	)
Increase (decrease) in liabilities:
Accounts payable		475,954			258,119			891,473
Accrued expenses		510,038			730,900			3,370,079
Customer deposits		360,000			1,260,000			1,620,000
Net cash used in operating activities		(1,852,060	)		(1,307,150	)		(12,435,493	)

INVESTING ACTIVITIES:
Acquisition of property and equipment		(5,546	)		(96,552	)		(473,553	)
Acquisition of patents		-			-			(154,061	)
Net cash used in investing activities		(5,546	)		(96,552	)		(627,614	)

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		-			(15,000	)		(15,000	)
Receipt from (payments to) equity line of credit		-			(27,336	)		428,664
Receipt of proceeds from short term notes		390,000			-			390,000
Proceeds from convertible notes payable		-			1,425,000			2,861,000
Proceeds from 10% subordinated notes payable		-			-			425,000
Issuance of common stock		270,000			750,000			8,603,344
Receipt of cash for stock to be issued		-			-			400
Net cash provided by financing activities		660,000			2,251,779			13,086,089

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,197,606	)		848,077			22,982

CASH AND CASH EQUIVALENTS, BEGINNING		1,220,588			372,511			-
CASH AND CASH EQUIVALENTS, ENDING	$	22,982		$	1,220,588		$	22,982

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

F-7

SIONIX CORPORATION
A DEVELOPMENT STAGE COMPANY NOTES TO FINANCIALS

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.

The Company is a development stage company as defined by Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 915, “Accounting and Reporting by Development Stage Enterprises”. The Company is in the development stage and its efforts have been principally devoted to research and development, organizational activities, and raising capital. All losses accumulated since inception have been considered as part of the Company’s development stage activities.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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 September 30, 2009, the Company believes that no reserve is required. Inventory at September 30, 2009 was $1,069,460 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 Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” which provides 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 (loss) on change in fair value of warrant and option liability” and “gain (loss) on change in fair value of beneficial conversion liability.”

F-8

Fair Value Measurements

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate fair value due to their short maturities. In addition, the Company has short-term debt with investors. The carrying amounts of the short-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

·	Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

·	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC Topic 815.

The Company’s warrant and option liability is carried at fair value totaling $7,937,620 and $6,869,244, as of September 30, 2009 and 2008, respectively. The Company’s beneficial conversion liability is carried at fair value totaling $2,001,143 and $8,881,272 as of September 30, 2009 and 2008, respectively. The Company used Level 2 inputs for its valuation methodology for the warrant liability, conversion option liability and option liability as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions.

	Fair Value as of September 30, 2009		Fair Value Measurements at September 30, 2009 Using Fair Value Hierarchy
Liabilities			Level 1	Level 2		Level 3
Warrant and option liability	$	7,937,620		$	7,937,620
Conversion option liability		2,001,143			2,001,143
Total accrued derivative liabilities	$	9,938,763		$	9,938,763

	Fair Value as of September 30, 2008		Fair Value Measurements at September 30, 2008 Using Fair Value Hierarchy
Liabilities			Level 1	Level 2		Level 3
Warrant and option liability	$	6,869,244		$	6,869,244
Conversion option liability		8,881,272			8,881,272
Total accrued derivative liabilities	$	15,750,516		$	15,750,516

The Company recognized a loss on change in fair value of warrant and option liability of $631,781 for the year ended September 30, 2009 and a gain on change in fair value of warrant and option liability of $3,916,040 for the year ended September 30, 2008. The Company recognized a gain on change in fair value of beneficial conversion liability of $8,471,003 and $21,744,766 for the years ended September 30, 2009 and 2008, respectively.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC Topic 825.

Advertising

The cost of advertising is expensed as incurred, and included in general and administrative expenses. There were no advertising costs for the year ended September 30, 2009. Total advertising costs were $105 for the year ended September 30, 2008.

Revenue Recognition

F-9

Revenues from products sales are recorded when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the Company's price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured. The Company's policy is to report its sales levels on a net revenue basis, with net revenues being computed by deducting from gross revenues the amount of actual sales returns and the amount of reserves established for anticipated sales returns.

The Company's policy for shipping and handling costs, billed to customers, is to include it in revenue in accordance with ASC Topic 605, “Revenue Recognition,” which requires 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 Development

The cost of research and development is expensed as incurred. Total research and development costs were $761,440 and $1,060,933 for the years ended September 30, 2009 and 2008, respectively.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.

Stock Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Earnings Per Share

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” 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 years ended September 30, 2009 and September 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 year ended September 30, 2009 and September 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.

F-10

Concentration of Credit Risk

During the year ended September 30, 2009, 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.

Reclassifications

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

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:


	September 30,			September 30,
	2009			2008
Machinery and equipment	$	271,972		$	266,425
Furniture and fixtures		41,176			41,176
Leasehold improvement		1,695			1,695
TOTAL		314,843			309,296
Less accumulated depreciation		(250,640	)		(222,195	)

Property and equipment, net	$	64,203		$	87,101

Depreciation expenses for the years ended September 30, 2009 and 2008 were $28,444 and $25,270, respectively.

NOTE 4 - ACCRUED EXPENSES

Accrued expenses consisted of the following:


	September 30,		September 30,
	2009		2008

Accrued salaries	$	1,652,174	$	1,493,444
Advisory board compensation		576,000		576,000
Auto allowance accruals		104,785		94,408
Interest payable		407,005		272,016
Fair value of stock to be issued		-		1,590,874
Other accruals		326,142		286,102
TOTAL ACCRUED EXPENSES	$	3,066,106	$	4,312,844

F-11

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 September 30, 2009 and 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 on-going operating expenses. These notes bear interest at rates up to 13% and are due on demand. As of September 30, 2009 and 2008, notes payable amounted to $107,000 and $114,000, respectively. Accrued interest on the notes amounted to $84,016 and $74,482 at September 30, 2009 and 2008, respectively, and is included in accrued expenses. Interest expenses on these notes for the years ended September 30, 2009 and 2008 were $11,349 and $12,718, 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 Company determined the fair value of the 500,000 shares of common stock to be $80,625 based on the trading price of the stock, and recorded the $80,625 as interest and financing costs in the accompanying statement of operations. 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.

On July 15, 2009 and August 11, 2009, the Company borrowed a total of $150,000 from Trillium Partner LP and MKM Capital. The loans are evidenced by two promissory notes and mature 90 days from the date of the notes. As consideration for the loans, the Company issued a total of 300,000 shares of common stock. The Company determined the fair value of the 300,000 shares of common stock to be $55,000 based on the trading price of the stock, and recorded the $55,000 as interest and financing costs in the accompanying statement of operations. These 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.

As of September 30, 2009, the outstanding principal balance of the short-term promissory notes was $390,000. Accrued interest on the notes amounted to $9,106 at September 30, 2009, and is included in accrued expenses. Interest expense on these notes for the year ended September 30, 2009 was $9,106.

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 September 30, 2009 the conversion price was $0.04 per share.

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

F-12

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.

During the year ended September 30, 2009, $45,139 of principal and $5,158 of interest has been converted into 1,535,728 shares of common stock.

As of September 30, 2009 and 2008, the outstanding principal amount of the convertible notes was $488,194 and $533,333, respectively. Accrued interest on the notes amounted to $107,177 and $75,224 at September 30, 2009 and 2008, respectively, and is included in accrued expenses. There was no unamortized embedded beneficial conversion feature discount as of September 30, 2009 and 2008.

For the years ended September 30, 2009 and 2008, interest expense was $52,482 and $69,702, respectively, and amortization expense for the embedded beneficial conversion feature discount for the years ended September 30, 2009 and 2008 was $0 and $290,566, respectively, which was included in interest expense in the other income (expense) section of the statement of operations.

As of September 30, 2009, these notes remain past due as they matured per the terms of the original notes agreements.

Convertible Notes 2

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

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

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

During the years ended September 30, 2009 and 2008, the investors converted $26,000 principal plus accrued interest into 3,094,000 shares of common stock and $60,000 principal plus accrued interest into 6,711,800 shares of common stock, respectively.

As of September 30, 2009, there was no outstanding principal of the convertible notes and there was no unamortized embedded beneficial conversion feature discount. As of September 30, 2008, the outstanding principal was $26,000 and the unamortized embedded conversion discount was $2,890.

For the years ended September 30, 2009 and 2008, interest expense was $1,445 and $8,084, respectively, and amortization expense for the embedded beneficial conversion feature discount for the years ended September 30, 2009 and 2008 was $2,890 and $64,000, respectively, which was included in interest expense in the other income (expense) section of the statement of income.

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 $78,750 of expenses as liquidated damages. For the year ended September 30, 2009, $75,000 of the liquidating damages were converted into 937,500 shares of common stock. No derivative liability is recorded as the amount of liquidated damage is fixed with a maximum ceiling.

F-13

During the year ended September 30, 2009, $235,000 of principal and $49,579 of interest has been converted into 3,189,691 shares of common stock.

As of September 30, 2009 and 2008, the outstanding principal amount of the convertible notes was $250,000 and $485,000, respectively. Accrued interest on the notes amounted to $44,460 and $67,417, respectively, for September 30, 2009 and 2008. There was no unamortized warrant discount or embedded beneficial conversion feature discount as of September 30, 2009 and 2008.

For the years ended September 30, 2009 and 2008, interest expense was $26,622 and $68,097, respectively. Amortization expense for the warrant discount and amortization expense for the beneficial conversion feature discount as of September 30, 2008 was $305,228 and $396,543, respectively, which was included in interest expense in the other income (expense) section of the statement of operations. There was no amortization expense for the warrant discount and no amortization expense for the beneficial conversion feature discount for the year ended September 30, 2009.

As of September 30, 2009, these notes remain past due as they matured per the terms of the original notes agreements.

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, and is not certain to occur. 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 September 30, 2009 and 2008, the principal outstanding totaled $1,000,000.

Accrued interest on the notes amounted to $120,000 and $21,041 at September 30, 2009 and 2008, respectively, and is included in accrued expenses. For the years ended September 30, 2009 and 2008, interest expense was $120,000 and $21,041, respectively.

These notes matured during July 2009. Subsequent to September 30, 2009, the notes were amended on October 22, 2009 to extend the maturity date of the notes to April 29, 2010.

NOTE 9 - 10% SUBORDINATED DEBENTURES

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

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 September 30, 2009 and 2008, the principal outstanding totaled $482,493 and $425,000, respectively, and there was no unamortized warrant discount.

For the years ended September 30, 2009 and 2008, interest expense was $44,596 and $30,362, respectively, and amortization expense for the warrant discount was $24,204 and $72,610, respectively, which was included in interest expense in the other income (expense) section of the statement of operations.

These notes mature on December 31, 2009. Subsequent to December 31, 2009, these notes remain outstanding. The Company is seeking to renegotiate the terms of these notes. The Company has not received any demand for payment on these notes.

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NOTE 10 - WARRANT AND OPTION LIABILITY

The Company determined that liability accounting was triggered for the following warrants and options as there were insufficient shares to fulfill all potential conversions. The changes in the values of the warrant and option liability are shown in the accompanying statements of operations as “gain (loss) on change in fair value of warrant and option liability.”

2001 Executive Officers Stock Option Plan

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

The fair value of the options was $825,905 as of September 30, 2009, calculated using the Black Sholes valuation model with the following assumptions: risk free rate of return of 0.95%; volatility of 156%; dividend yield of 0%; and expected term of 1.55 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 Sholes valuation model with the following assumptions: risk free rate of return of 4.96% to 5.02%; volatility ranging from 219.89% to 226.04%; dividend yield of 0% and expected term of 5 years.

The fair value of the warrants was $353,574 as of September 30, 2009, calculated using the Black Sholes valuation model with the following assumptions: risk free rate of return of 1.45%; volatility of 155%; dividend yield of 0%; and expected terms of ranging from 2.73 to 1.55 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 five year warrants to purchase up to 150,000 shares of common stock at an exercise price of $0.25 per share for services.

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

The fair value of the warrant was $23,146 as of September 30, 2009, using the Black Sholes valuation model with the following assumptions: risk free rate of return of 1.45%; volatility of 155%; dividend yield of 0%; and expected term of 3.07 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 Sholes option valuation model with the following assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0%; and expected term of 5 years.

The fair value of the warrants was $1,344,127 as of September 30, 2009, using the Black Sholes valuation model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and expected terms ranging from 3.21 to 3.98 years.

Option Issued to Director

F-15

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

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

The fair value of the option was $155,570 as of September 30, 2009, using the Black Sholes model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and expected term of 3.21 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.

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

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 8 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 vested option was $456,801 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and expected term of 3.22 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 8 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 $1,329,718 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and expected term of 3.22 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.

F-16

The fair value of the warrants was $96,814 at the date of issuance, which was calculated using the Black-Scholes valuation model, using the following assumptions: risk free rate of return ranging from 2.64% to 3.26%, volatility ranging from 97.08% to 98.27%, dividend yield of 0%; and expected term of 6 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 $142,046 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.25 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 $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 ranging from 1.32% to 2.17%; volatility ranging from 72.4% to 77.86%; dividend yield of 0%; and expected term of 3 years.

The fair value of the warrants was $1,511,238 as of September 30, 2009, using the Black-Scholes valuation model with the following assumptions: risk free rate of return ranging from 0.40% to 0.95%; volatility of 156%; dividend yield of 0%; and expected terms ranging from of 1.45 to 1.65 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 $67,259 as of September 30, 2009, using the Black-Scholes valuation model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.73 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 $79,938 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and an expected term of 3.78 years.

Warrant Issued to Director (Marcus Woods)

F-17

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 $104,026 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of 1.45%; volatility of 201%; dividend yield of 0%; and expected term of 3.81 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 $241,575 as of September 30, 2009, using the Black-Scholes model with the following assumptions: risk free rate of return of 1.45%; volatility of 201%; dividend yield of 0%; and expected term of 3.98 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 $584,768 as of September 30, 2009, using the Black-Scholes valuation model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.14 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 option 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 $173,671 as of September 30, 2009, using the Black-Scholes valuation model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.50 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.

F-18

The fair value of the vested option 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 an expected term of 5 years.

The fair value of the vested options was $120,605 as of September 30, 2009, using the Black Sholes valuation model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.50 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 $188,144 as of September 30, 2009, using the Black-Scholes valuation model with the following assumptions: risk free rate of return of 2.31%; volatility of 230%; dividend yield of 0%; and expected term of 4.50 years.

NOTE 11 - BENEFICIAL CONVERSION FEATURES LIABILITY

Between October 17, 2006 and February 27, 2007, the Company 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 classified all embedded conversion options as liabilities.

On June 6, 2007, the outstanding principal and interest balance of Convertible Note 1 was approximately $791,000, which was convertible into 79,066,096 shares of common stock at a conversion price of $0.01. The Company determined the fair value of the beneficial conversion option to be $27,056,815 using the Black-Scholes model with the following assumptions:

·	risk free rate of return of 4.99%;

·	volatility of 277%;

·	dividend yield of 0%; and

·	expected term between 1.04 and 1.23 years.

On June 6, 2007, the outstanding principal and interest balance of Convertible Note 2 was $86,000, which was convertible into 8,600,000 shares of common stock at a conversion price of $0.01. The Company determined the fair value of the beneficial conversion option to be $2,982,368 using the Black-Scholes model with the following assumptions:

·	risk free rate of return of 4.99%;

·	volatility of 277%;

·	dividend yield of 0%; and

·	expected term of 1.57 years.

Between June 21, 2007 and July 17, 2007, the Company issued 11 secured convertible promissory notes (“Convertible Notes 3”) for total proceeds to the Company of $1,025,000. Convertible Notes 3 could be converted into shares of the Company’s common stock at a conversion price of $0.22 per share, which was subsequently amended to $0.19 per share.

At the date of issuance, the Company determined the fair value of the beneficial conversion option to be $1,116,031 using the Black-Scholes model with the following assumptions:

·	risk free rate of return between 4.96% and 5.00%;

·	volatility between 196% and 198%;

·	dividend yield of 0%; and

·	expected term of 1 year.

As of September 30, 2009, the Company had approximately $894,000 in convertible notes that could be converted into 16,315,982 shares of common stock. The Company determined the fair value of the beneficial conversion option to be $2,001,143 using the Black-Scholes model with the following assumptions:

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risk free rate of return between 0.14%;

·	volatility of 132%;

·	dividend yield of 0%; and

·	expected term of 0.25 years.

NOTE 12 - STOCKHOLDERS’ EQUITY

COMMON STOCK

The Company has 150,000,000 authorized shares of common stock, par value $0.001 per share. As of September 30, 2009 and September 30, 2008, the Company had 148,795,946 and 134,756,213 shares of common stock issued, respectively. As of September 30, 2009 and 2008, there were 481,900 shares of common stock subject to cancellation. Subsequent to cancellation, the total issued and outstanding shares of common stock would be 148,314,046 and 134,274,313, respectively.

During the year ended September 30, 2009, the Company issued the following shares of common stock:

·	7,819,419 shares for the payment of $306,139 of debt, $71,303 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;

·	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 the receipt of $5,000 in cash that resulted in a loss on debt settlement of $16,184;

·	833,333 shares of common stock for $125,000 of machinery and equipment from RJ Metal, Inc.;

·	1,200,139 shares to legal counsel, with a fair value of $226,229 at the date of issuance, for services having a value of $180,014;

·	800,000 shares as additional consideration in connection with short-term promissory notes totaling $390,000 from Steel Pier Capital Advisors, Steel Pier Capital Fund LP, Trillium Partner LP, and MKM Capital; and

·	2,886,842 shares for warrant exercises at $0.10 per share for total proceeds of $265,000.

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
				Weighted					Average
				Average			Aggregate		Remaining
	Number			Exercise			Intrinsic		Contractual
	of Options			Price			Value		Life

Outstanding at October 1, 2007		7,034,160		$	0.15
Granted		10,539,312			0.25
Expired		-			-
Forfeited		(5,605,786	)		(0.25	)
Exercised		-			-
Outstanding at September 30, 2008		11,967,686			0.19
Granted		7,333,650			0.15
Expired		-			-
Forfeited		-			-
Exercised		-			-
Outstanding at September 30, 2009		19,301,336		$	0.18		$	287,356	3.02
Exercisable at September 30, 2009		18,342,901		$	0.18		$	268,187	2.95

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Options outstanding as of September 30, 2009:

				Weighted				Weighted
				Average				Average
				Remaining				Remaining
Exercise		Options		Contractual		Options		Contractual
Price		Outstanding		Life		Exercisable		Life

$	0.15		14,367,790		2.96		13,409,375		2.85
$	0.25		4,933,526		3.21		4,933,526		3.21
			19,301,316		3.02		18,342,901		2.95

During the year ended September 30, 2009, the Company granted 7,333,650 options with a weighted average grant-date fair value of $0.10. The weighted average grant-date fair value for the options granted on June 11, 2007 and May 15, 2008, were $0.13 and $0.48, respectively. The fair value of these options was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

·	risk free rate of return between 1.72% and 2.51%;

·	volatility between 247% and 262%;

·	dividend yield of 0%; and

·	expected term of 5 years.

Stock Warrants

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

	Weighted
	Average
	Exercise		Number
	Price		of Warrants
Outstanding at October 1, 2007	$	0.50		2,795,454
Granted		0.20		40,053,645
Expired		-		-
Forfeited		-		-
Exercised		-		-
Outstanding at September 30, 2008	$	0.20		42,849,099
Granted		-		-
Expired		-		-
Forfeited		-		-
Exercised		0.10		(3,150,000	)
Outstanding at September 30, 2009	$	0.18		39,699,099
Exercisable at September 30, 2009	$	0.20		36,365,766

F-21

NOTE 13 – INCOME TAXES

Through September 30, 2009, the Company incurred net operating losses for tax purposes of approximately $24,605,000. The net operating loss carry forward for federal and state purposes may be used to reduce taxable income through the year 2029. The availability of the Company's net operating loss carry forward is subject to limitation if there is a 50% or more positive change in the ownership of the Company's stock.

The gross deferred tax asset balance as of September 30, 2009 is approximately $9,516,000. A 100% valuation allowance has been established against the deferred tax assets, as the utilization of the loss carry forward cannot reasonably be assured. Components of the deferred tax assets are limited to the Company’s net operating loss carryforwards, and are presented as follows at September 30:

	2009			2008
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	9,516,000		$	8,347,000
Deferred tax assets, net		9,516,000			8,347,000
Valuation allowance		(9,516,000	)		(8,347,000	)
Net deferred tax assets	$	-		$	-

Differences between the benefit from income taxes and income taxes at the statutory federal income tax rate are as follows for years ended September 30:

	2009						2008
	Amount			Rate			Amount			Rate

Tax expense (credit) at statutory rate-federal	$	1,708,000			34	%	$	5,287,000			34	%
State tax expense net of federal tax		301,000			6	%		933,000			6	%
Change in warrant and option liability		253,000			5	%		(1,566,000	)		(10	)%
Change in beneficial conversion liability		(3,388,000	)		(67	)%		(8,698,000	)		(56	)%
Other		(43,000	)		(1	)%		437,000			3	%
Net operating loss carry forward		1,169,000			23	%		3,607,000			23	%
Tax expense at actual rate	$	-			-	%	$	-			-	%

F-22

NOTE 14 - GOING CONCERN

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. The Company is continuing its efforts to obtain customers for its ELIXIR product, expanding its sales efforts worldwide as well as expanding the industries it targets for possible customers. The Company also has future plans for additional products, and revisions to its current products. In support of this the Company plans to hire additional personnel who have the industry experience and the training so that they can be immediately effective in the building of the Company. The Company is also considering alternatives related to its manufacturing capabilities and believes that it can effectively outsource most if not all of its production to contract manufacturers. This would reduce costs and improve the quality of its products. It is also continuing to seek additional investment capital in the form of debt or equity to sustain continued operations, and considering certain changes to its capital structure to become more attractive to potential investors and business partners. Last, to manage these activities the Company has hired new senior management who have the manufacturing, finance and public company experience necessary to manage the Company.

NOTE 15 - 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,
2010	$	108,660
2011		93,550

Total rent expense under this operating lease was approximately $117,360 and $18,470 for the year ended September 30, 2009 and 2008, respectively.

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 for 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.

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NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental information of Non-Cash Financial and Investing Activities.

The Company issued 7,819,419 shares of common stock for the payment of $306,139 of debt, $71,303 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 also received $5,000 in cash that resulted in a loss on debt settlement of $16,184.

The Company issued 833,333 shares of common stock for the purchase of machinery and equipment from RJ Metal, Inc. 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 17 - 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, Inc. The Company issued 833,333 shares of common stock for payment of the purchase of machinery and equipment. The purchase qualified as a related party transaction as the Company’s Chief Executive Officer and director, is also a director, officer and significant stockholder of RJ Metal, Inc.

NOTE 18 - RESTATEMENT

·	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

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

F-24


	As Previously Stated September 30, 2008			Beneficial Conversion Options			Warrants and Options			As Restated September 30, 2008
Balance Sheet (as of September 30, 2008)
Accrued expenses	$	2,721,970		$	1,590,874		$	-		$	4,312,844
Warrant and option liability		3,446,823			-			3,422,421			6,869,244
Beneficial conversion feature liability		26,000			8,855,272			-			8,881,272
Additional paid-in capital		12,688,495			-			(1,847,488	)		10,841,007
Deficit accumulated during developmental stage		(21,893,656	)		(10,446,146	)		(1,574,933	)		(33,914,735	)

Statement of Operations (for the year ended September 30, 2008)
Gain (loss) on change in fair value of warrant and option liability	$	4,748,929		$	-		$	(832,889	)	$	3,916,040
Gain (loss) on change in fair value of beneficial conversion liability		1,404,811			20,339,955			-			21,744,766
General and administrative expenses		7,445,775			-			83,855			7,529,630

Statement of Operations (since inception)
Gain (loss) on change in fair value of warrant and option liability	$	5,218,240		$	-		$	(973,727	)	$	4,244,513
Gain on change in fair value of beneficial conversion liability		1,400,767			24,258,030			-			25,658,797
General and administrative expenses		20,775,280			3,787,032			83,855			24,646,167
Financing costs		(2,299,117	)		(30,536,702	)		(897,793	)		(33,733,612	)

Statement of Cash Flows (for the year ended September 30, 2008)
Net loss	$	(3,872,820	)	$	20,339,955		$	(916,744	)	$	15,550,391
Gain (loss) on change in fair value of warrant and option liability		(4,748,929	)		-			832,889			(3,916,040	)
Gain (loss) on change in fair value of beneficial conversion liability		(1,404,812	)		(20,339,955	)		-			(21,744,767	)
Non-cash compensation expense		-			-			83,855			83,855

Statement of Cash Flows (since inception)
Net loss	$	(21,893,656	)	$	(10,065,704	)	$	(1,955,375	)	$	(33,914,735	)
(Gain) loss on change in fair value of warrant and option liability		(5,218,240	)		-			973,727			(4,244,513	)
Gain on changes in fair value of beneficial conversion liability		(1,400,768	)		(24,258,030	)		-			(25,658,798	)
Non cash compensation expense		-			3,787,032			83,855			3,870,887
Non cash financing cost		-			30,536,702			897,793			31,434,495

NOTE 19 - SUBSEQUENT EVENTS

The Company considered all subsequent events through January 12, 2010.

On December 24, 2009, the Company sold and issued in a private placement (the “December 2009 Private Placement”) $250,000 in aggregate principal amount of its 10% Convertible Debentures (each, a “Debenture”, collectively, the “Debentures”) along with warrants to purchase an aggregate of 1,250,000 shares of the Company’s common stock (the “Warrants”).

The Debentures will be convertible into common stock of the Company at a conversion price of $0.15 per share (the “Conversion Price”) from and after such time as the Company increases its authorized common stock in accordance with applicable federal securities laws, which the Company plans to do as soon as commercially and legally practicable. Each Debenture has a maturity date one year from its date of issuance and all outstanding principal and accrued interest of each Debenture will be due and payable on such date unless sooner declared due and payable by the holder upon the occurrence of an event of default. The Debentures accrue interest at the rate of 10% per year.

The Warrants will be exercisable at an exercise price of $0.25 per share from and after such time as the Company increases its authorized common stock. The Warrants have a term of five (5) years 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 Private Placement was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, inasmuch as the securities were issued to accredited investors only without any form of general solicitation or general advertising.

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A (T). 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 September 30, 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 possible. 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.

Remediation of Material Weaknesses

We have retained the services of personnel with experience in financial reporting to assist us with the process of implementing internal controls to remediate these material weaknesses. Written documentation of the internal controls of financial reporting will be prepared after our material weaknesses have been eliminated and our disclosure controls and procedures are effective.

We anticipate that our internal controls will be implemented, tested, deficiencies remediated and documented by June 30, 2010.

Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, a company's principal executive and principal financial officers and effected by a company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

·	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of September 30, 2009 management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of written documentation of internal control policies and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) lack of review and supervision over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer and our Chief Financial Officer in connection with the review of our financial statements as of September 30, 2009.

Management believes that the lack of documentation of internal controls did not have an effect on our financial results. However, management believes that the lack of segregation of duties, and a lack of review and supervision of reporting could result in a material misstatement in our financial statements in future periods.

This annual report does not include an attestation report of the Corporation's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Corporation's registered public accounting firm pursuant to temporary rules of the SEC that permit the Corporation to provide only the management's report in this annual report.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2009, the Company has retained a consultant and hired personnel with financial reporting expertise to oversee and prepare the Company’s financial reporting. The changes made by these individuals to our internal control over financial reporting included the following:

·	Timely filing of reporting information.

·	Review of financial reporting information by personnel with sufficient experience.

·	Proper application of generally accepted accounting principles.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Set forth below is certain information regarding our directors, executive officers and key personnel. There are no family relationships among our executive officers and directors. A director holds office until the annual shareholder meeting for the year in which his term expires and until his successor is elected and qualified.

Name	Age		Position	Director Since

James R. Currier		63	Chief Executive Officer and Chairman	December, 2009
David R. Wells		47	President, Chief Financial Officer and Director	December, 2009
Rodney Anderson		82	Director	January, 2001
John Pavia		46	Director	July, 2008
James Alexander		70	Director	March, 2009
Frank Power		59	Director	March, 2009

James R. Currier. James R. Currier is the Chairman of the board of directors and Chief Executive Officer of Sionix Corporation. From July 2007 Mr. Currier has been the managing partner of a private company with interests in a bio-mass conversion technology involving the mechanical disaggregation of certain bio-wastes into energy and thermal feedstock, edible fiber, pure hydrogen, C5 sugars, and other recoverable elements contained in bio-wastes of high cellulosic and starch content (principally sugar cane bagasse). From January 2004 to December 2005 he was a founder and CFO of Fireaway LLC, a manufacturer of fire protection, suppression, and extinguishing systems using a revolutionary method of interrupting the chemical chain reaction inherent to fire without eliminating oxygen, heat, or the fuel elements of the fire triangle. In both positions, Currier was responsible for the acquisition and licensing of highly proprietary non-American based technologies and securing start-up financing. During the period from January 2006 to July 2007, Mr. Currier was retired.

Mr. Currier earned a BA in Political Science and Economics from Western Illinois University in 1973.

David R. Wells. David R. Wells is the President and Chief Financial Officer of Sionix Corporation and he serves on the board of directors. Prior to joining the Company, from December 2005 to September 2009 he was the CFO of Voyant International Corporation. Prior to joining Voyant, from July 2003 to October 2005 he served as VP Finance for PowerHouse Technologies Group, Inc. (now Migo Software, Inc.). Mr. Wells possesses over 20 years experience in finance, operations and administrative positions. While mainly focused on technology companies, he has also worked in supply-chain management, manufacturing and the professional services industry. He has experience working with auditors and regulatory agencies to rapidly address non-conforming situations and assisting companies who desire to increase their internal controls.

Mr. Wells earned a BA in Finance and Entrepreneurship from Seattle Pacific University, and holds an MBA from Pepperdine University.

Rodney Anderson. From 1982 to 2007, Mr. Anderson was president and a principal shareholder of RJ Metal, Inc., a manufacturer of hardware supplying the U.S. defense industry and Sionix. At RJ Metal, Inc., Mr. Anderson was responsible for accounting and financial reporting functions, in addition to his executive duties. He has served on our Board of Directors since 2001 and he was appointed as our interim Chief Executive Officer on October 15, 2008 and served through December 31, 2009.

John Pavia. Mr. Pavia joined our board in July 2008. He is the founding partner and Executive Managing Director of Siena Lane Partners, LLC, an advisory group that assists small and medium sized companies with devising and implementing growth strategies. He has served in this role since October 2006. Mr. Pavia also serves as general counsel to several companies including IPT, LLC, a national facilities management company, BeenVerified, LLC and OneWayLimo.com, Inc., and he sits on the board of directors of RedRoller Holdings, Inc., a publicly traded company. From 2002 to 2006, Mr. Pavia served as vice president, deputy general counsel and assistant secretary of RR Donnelley & Sons after joining the management team that took control of Moore Corporation Ltd. in late 2000. Mr. Pavia still serves as a consultant to the chief executive officer of RR Donnelley & Sons providing advice and assistance on federal government affairs. Mr. Pavia attended American University School of Law and later clerked for U.S. District Judge Robert Zampano. He served as an Assistant District Attorney in Brooklyn from 1992 to 1995 and later became a partner at the law firm of Levy & Droney, where he worked from 1995 to 1999. Mr. Pavia has been associated with Quinnipiac University School of Law since 1990 as an adjunct professor.

JamesAlexander. Mr. Alexander joined our board in March 2009. From January 1993 to the present, Mr. Alexander has been the General Manager of Alexander Energy, a Nevada general partnership. Alexander Energy engages in the purchase and management of oil and gas resources, including exploration and production. Mr. Alexander received a Bachelor of Business Administration from the University of Oklahoma.

Frank Power. Mr. Power joined our board in March 2009. Mr. Power is a 28-year veteran of the aerospace industry. He has served in a number of executive positions with Sonfarrel Inc. beginning in 1981. His background covers manufacturing management, operations, sales, and marketing. He has managed millions of dollars in defense contracts with all of the Tier 1 defense contractors in the United States. He is a Lean expert, Six Sigma, and an expert in continuous improvement methodology.

None of our directors or executive officers has, during the past five years,

·	had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,

·	been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding,

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or

·	been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Director Compensation

The following table sets forth certain information concerning compensation granted to our directors during the 2008 and 2009 fiscal year. No options were exercised by our directors during the last fiscal year.

Name	Year	Fees Earned or Paid in Cash		Stock Awards		Warrant/ Option Awards		Non-Equity Incentive Plan Compensation		Non-Qualified Deferred Compensation		Other		Total

James R. Currier	2009 2008		- -		- -		- -		- -		- -		- -		- -	(1)
David R. Wells	2009 2008		- -		- -		- -		- -		- -		- -		- -	(1)
Rodney Anderson	2009 2008		- -		- -		41,847 171,520		- -		- -		- -		41,847 171,520	(2) (3)
John Pavia	2009 2008		- -		- -		51,582		- -		- -		- -		51,582	(4)
James Alexander	2009 2008		- -		- -		- -		- -		- -		- -		- -
Frank Power	2009 2008		- -		- -		- -		- -		- -		- -		- -

(1) Mr. Currier and Mr. Wells do not receive compensation for participation on the board of directors. Both were appointed to the board of directors on December 16, 2009.

(2) The value of this award was computed using the Black Scholes Option Pricing Model using the following assumptions: risk free interest rate of 0.58%, expected volatility of 109.22%, dividend yields of 0% and expected term of 5 years.

(3) The value of this award was computed using the Black Scholes Option Pricing Model using 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.

(4) The value of this award was computed using the Black Scholes Option Pricing Model using the following assumptions: risk free interest rate of 2.30%, expected volatility of 71.69%, dividend yields of 0% and expected term of 5 years.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules thereunder require our officers and directors, and persons who own more than 10% of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish us with copies. To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during the 2009 fiscal year our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following:

Name and Title	Form		Transactions
John Pavia, director		4	On July 13, 2009 Mr. Pavia filed a late form 4 disclosing the purchase of 50,000 shares of common stock on June 24, 2009.

James W. Alexander, director	3	Mr. Alexander was appointed as a director on March 3, 2009, but failed to file a form 3 disclosing his ownership of 500,000 shares of our common stock and a warrant to purchase 1,000,000 shares of our common stock.
	4	On March 25, 2009 Mr. Alexander filed a late form 4 disclosing the purchase of 101,666 shares of common stock on various dates.
	4	On July 1, 2009 Mr. Alexander filed a late form 4 disclosing the purchase of 100,000 shares of common stock on June 24, 2009.

Robert Hasson, former Chief Financial Officer	3	Mr. Hasson was appointed as our Chief Financial Officer on March 11, 2009, but failed to file a form 3.
	4	Mr. Hasson failed to file a form 4 disclosing the grant of an option on March 30, 2009 to purchase 958,412 shares of common stock.

Frank Power, director	3	Mr. Power was appointed as a director on March 24, 2009, but failed to file a form 3.

Code of Ethics

The Company had not adopted a code of ethics as of September 30, 2009. The Company expects that a code of ethics will be adopted during the 2010 fiscal year.

Corporate Governance

Our board of directors does not have an audit committee, a compensation committee or a nominating committee.

We have not adopted any procedures by which our security holders may recommend nominees to our board of directors and that has not changed during this fiscal year.

With the exception of David R. Wells, none of the members of our board of directors could qualify as an “audit committee financial expert”, as defined by Item 407 of Regulation S-K promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934. We do not have an audit committee. Mr. Wells is not an independent director since he is our President and Chief Financial Officer.

ITEM 11.

EXECUTIVE COMPENSATION

The following table and discussion sets forth information with respect to all compensation awarded to, earned by or paid to our chief executive officer and up to four of our executive officers whose annual salary and bonus exceeded $100,000 during our last two completed fiscal years (collectively referred to in this discussion as the “named executive officers”). Robert McCray resigned as our chief financial officer on March 24, 2008, Richard Papalian resigned as our Chief Executive Officer on August 14, 2008 and subsequent to the 2008 fiscal year, on October 15, 2008, Marcus Woods separated from service as chief financial officer.

Principal Position	Year	Salary		Bonus		Stock Awards		Warrant/Option Awards		Non-Equity Incentive Plan Compensation		Non-Qualified Deferred Compensation		Other		Total

James J. Houtz,	2009	$	37,500	$	-	$	-	$	-	$	-	$	-	$	6,325	$	43,825	(1)(2)
Former Chief Executive Officer President	2008	$	186,242	$	-	$	-	$	-	$	-	$	-	$	22,641	$	208,883	(2)(3)

Rodney Anderson,	2009	$	64,458	$	-	$	179,415	$	62,771	$	-	$	-	$	554	$	307,197	(2)(4)(4a)(4b)(4c)
Former Interim Chief Executive Officer,	2008	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
and Chief Financial Officer and President

Robert Hasson,	2009	$	69,416	$	-	$	124,594	$	43,591	$	-	$	-	$	7,161	$	244,761	(4b)(4c)(5)(5a)(5b)
Interim Chief Financial Officer	2008	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
					-
Robert McCray	2009	$	-	$	-	$	-	$	-	$	-	$	-	$	22,641	$	208,883
former Chief Financial Officer	2008	$	26,400	$	-	$	-	$	171,520	$	-	$	-	$	-	$	197,920	(6)(6a)

Richard Papalian,	2009	$	-	$	-	$	-	$	238,244	$	-	$	-	$	-	$	238,244	(7)
Former Chief Executive Officer	2008	$	-	$	-	$	-	$	1,448,321	$	-	$	-	$	-	$	1,448,321	(8)

Marcus Woods,	2009	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Former Chief Financial Officer	2008	$	35,000	$	-	$	-	$	51,582	$	-	$	-	$	-	$	86,582	(9)(10)

(1) James Houtz was terminated as Chief Executive Officer and President on February 26, 2009. There were salary payments subsequent to the resignation.

(2) Other compensation is for automobile allowance.

(3) This amount was accrued but has not been paid.

(4) Rodney Anderson was Interim Chief Financial Officer from October 15, 2008 to February 26, 2009. He was appointed as Interim Chief Executive Officer effective February 26, 2009. These salary payments are subsequent to his appointment

(4a) Salary includes accrued wages of $2,500.

(4b) The value of the stock options vested.

(4c) The value of common stock granted on October 14, 2008.

(5) Robert Hasson was appointed as Interim Chief Financial Officer on March 11, 2009.

(5a) Salary includes accrued wages of $2,693.

(5b) Other compensation is for medical reimbursement.

(6) The value of the option was computed using the Black Scholes Option Pricing Model using 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.

(6a) Robert McCray resigned as Chief Financial Officer on March 24, 2008. There were salary payments subsequent to the resignation.

(7) Richard Papalian was issued options on November 11, 2008 to purcahse 3,500,000 shares of common stock on November 11, 2008. The value of the option was computed using the Black Scholes Option Pricing Model using the following assumptions: risk free interest rate of 1.16%; expected volatility of 89.31%; dividend yields of 0%; and expected term of 5 years.

(8) The value of the option was computed using the Black Scholes Option Pricing Model using the following assumptions: risk free interest rate of 3.26%; expected volatility of 98.01%; dividend yields of 0%; and expected term of 5 years. On November 11, 2008 we entered into an agreement with Mr. Papalian as part of his separation from service. Pursuant to the agreement, he agreed to forfeit 5,605,786 option shares.

(9) Marcus Woods was Chief Financial Officer from August 2008 to September 2008.

(10) The value of the option was computed using the Black Scholes Option Pricing Model using the following assumptions: risk free interest rate of 2.30%; expected volatility of 71.69%; dividend yields of 0%; and expected term of 5 years.

We have had limited cash resources to pay the full salaries to our executive officers as they have come due. On occasion, in lieu of cash, we have paid our executive officers with awards of stock options. For example, during the 2008 fiscal year we granted an option to purchase 8,539,312 shares of our common stock to Richard Papalian in lieu of cash salary. During 2009, we paid $61,958 in salary to Mr. Anderson and accrued $2,500.

When we are able to do so, our plan is to implement a compensation program consisting of base salary, bonuses and awards of stock options or, restricted stock. We believe that a combination of cash, options for the purchase of common stock, or grants of restricted stock will allow us to attract and retain the services of the individuals who will help us achieve our business objectives, thereby increasing value for our shareholders. We grant options or restricted stock because we believe that share ownership by our employees is an effective method to deliver superior stockholder returns by increasing the alignment between the interests of our employees and our shareholders. No employee is required to own common stock in our company.

In setting the compensation for our officers, we look primarily at the person’s responsibilities, at salaries paid to others in businesses comparable to ours, at the person’s experience and at our ability to replace the individual. We expect the salaries of our executive officers to remain relatively constant unless the person’s responsibilities are materially changed. During the 2008 and 2009 fiscal years, we have accrued salaries for our executive officers. It is not likely that we will be able to pay these salaries until we begin to generate cash from sales of our products or we arrange financing that will permit us to pay some or all of the amounts outstanding.

We also expect that we may pay bonuses in the future to reward exceptional performance, either by the individual or by the Company.

The following table sets forth certain information concerning stock option awards granted to our executive officers as of September 30, 2009. No options were exercised by our executive officers during the last fiscal year.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Number of Securities Underlying

Employment Agreements

On September 30, 2003 we entered into an employment agreement with James J. Houtz. The term of the agreement began on October 1, 2003 and continued until September 30, 2008. At the maturity date the Company determined it was unwilling to renew the employment agreement with Mr. Houtz and the relationship terminated. Pursuant to the terms of the agreement, Mr. Houtz provided services as president and chief executive officer. For his services, Mr. Houtz was initially paid $11,407.78 per month until October 1, 2004, when his compensation was increased by 8% per year. Mr. Houtz initially received an automobile allowance of $1,288.65 per month, which is increased by 10% each year. We also agreed to provide life insurance to Mr. Houtz in the face amount of $500,000 and disability insurance that would provide disability benefits to Mr. Houtz in an amount equal to one-half of his base salary until he reached 65 years of age. We could terminate the agreement immediately for cause, or upon 30 days written notice. The agreement could terminate automatically upon mutual agreement of the parties, at the election of either party upon the bankruptcy or insolvency of either party, upon Mr. Houtz’s death or, at the election of either party, upon Mr. Houtz’s disability, if such disability lasts for a period of at least 6 months.

For information relating to the employment and other agreements we entered into with Mr. Papalian, please see the section of this report titled “Certain Relationships and Related Transactions and Director Independence”.

On December 16, 2009 we entered into employment agreements with James R. Currier to become our Chief Executive Officer and with David R. Wells to become our President and Chief Financial Officer. We have agreed to pay to each of Mr. Currier and Mr. Wells a salary of $180,000 per year. Each of Mr. Currier and Mr. Wells will be eligible to receive a performance bonus of up to 50% of their annual compensation, which, if earned, will be paid one-half in cash and one-half in shares of the Company’s common stock. The performance bonus will be paid upon the executive’s achieving certain objectives during the 2010 fiscal year. We also have granted to each executive an option to purchase 400,000 shares of our common stock at a price of $0.15 per share, and for the first year will grant an additional option to purchase 400,000 shares of our common stock at the beginning of each fiscal quarter at a price equal to the trailing VWAP of our common stock as quoted on the OTCBB, but in any event no less than $0.15 per share.

Each executive is also entitled to participate in benefit programs offered to other executives of Sionix, including, life, health, dental, accident, disability, or other insurance programs; pension, profit-sharing, 401(k), savings, or other retirement programs, although we are not obligated to adopt or maintain any particular benefit program.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of January 6, 2010, information regarding the beneficial ownership of our common stock with respect to each of our executive officers, each of our directors, each person known by us to own beneficially more than 5% of the common stock, and all of our directors and executive officers as a group. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities. Each individual or entity named has sole investment and voting power with respect to the shares of common stock indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted.

Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of January 6, 2010 are considered outstanding and beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

Title of Class of Security	Name and Address (1)	Number of Shares of Common Stock Beneficially Owned			Percentage of Common Stock

Common Stock	James J. Houtz, former CEO, President and Director		6,250,167	(2)		4.20	%
Common Stock	Rodney Anderson, Director and former Interim CEO		1,300,000	(3)		0.87	%
Common Stock	Robert Hasson, former Interim CFO		958,412	(4)		0.64	%
Common Stock	David R. Wells, President, CFO and Director		800,000	(5)		0.54	%
Common Stock	James R. Currier, Chairman and Chief Executive Officer		800,000	(5)		0.54	%
Common Stock	Marcus Woods, former Director		500,000	(6)		0.34	%
Common Stock	John Pavia, Director		500,000	(6)		0.34	%

(1) The address for each of our officers and directors is 2801 Ocean Park Blvd., Suite 339, Santa Monica, California 90405.

(2) Includes 79,167 shares of common stock and an option granted on April 20, 2001, to purchase 6,171,000 shares of common stock at $0.15 per share from the 2001 executive officers stock option plan, which expires on April 19, 2011.

(3) Includes 300,000 shares of common stock and an option granted on December 13, 2007, to purchase 1,000,000 shares of common stock at $0.25 per share, which expires on December 12, 2012.

(4) Consists of an option granted on March 31, 2009 to purchase 958,412 shares of common stock at $0.15 per share, which expires on March 30, 2013.

(5) Consists of an option grant as a result of employment contract dated December 16, 2009.

(6) Consists of an option granted on July 11, 2008, to purchase 500,000 shares of common stock at $0.25 per share, which expires on July 10, 2012.

For information relating to securities authorized for issuance under our equity compensation plans, please see Part II, Item 5 of this report.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Using the definition of “independent” set forth in Section 803A of the Rules of NYSE Alternext US, we have determined that 3 of our directors, John Pavia, James Alexander and Frank Power, are independent.

On November 7, 2007 we entered into a Stock Exchange Agreement with Rodney L. Anderson, Joey M. Anderson and Robert A. Hasson, the sole shareholders of RJ Metal, Inc. (collectively referred to in this discussion as the “RJ Metal Holders”). Pursuant to the Stock Exchange Agreement, we were to acquire from the RJ Metal Holders all of the issued and outstanding shares of RJ Metal, Inc. in exchange for issuing to the RJ Metal Holders a total of 3,400,000 shares of our common stock (the “Transaction”). Rodney Anderson is a significant shareholder of RJ Metal, Inc. and one of our directors. The Transaction was not consummated and on March 14, 2008 our board of directors approved, and we entered into with RJ Metal Holders, a Termination Agreement. Pursuant to the Termination Agreement, the Share Exchange Agreement was terminated and the parties released each other and each of their officers, employees, principals and agents from any and all claims or demands incidental to the Share Exchange Agreement and the Transaction.

On October 8, 2008 we issued a Notice of Grant of Stock Option and a Stock Option Agreement to Mr. David Ross, a former director. The stock option was authorized by the board of directors on December 13, 2007. The option permits Mr. Ross to purchase 2,880,000 shares of our common stock at an exercise price of $0.25 per shares. The option was fully vested on the date of grant and has a term of 5 years. Pursuant to the stock option agreement, Mr. Ross agreed not to sell any shares of common stock acquired upon exercise of his option prior to December 13, 2008. On December 13, 2007, the fair value of the option was $519,235 at the date of grant and was calculated using the Black Sholes option valuation model with the following assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0% and expected term of 5 years.

On October 14, 2008, we entered into an agreement with RJ Metal, Inc., a company controlled by one of our directors, Rodney Anderson, to purchase equipment valued at $125,000 in consideration of an aggregate of 833,334 shares of our common stock. Mr. Anderson received 300,000 of the shares issued. The market value of our common stock on October 14, 2008 was $0.13 per share.

On November 11, 2008, we entered into a Termination, Separation and Release Agreement (the “Separation Agreement”) with Richard H. Papalian, our former chief executive officer, pursuant to which we and Mr. Papalian mutually agreed to terminate Mr. Papalian’s Employment Agreement dated December 19, 2007, and agreed that such termination would be deemed neither a termination by us for “Cause” nor a termination by Mr. Papalian for “Good Reason”, as those terms are defined in the Employment Agreement, and agreed to a mutual general release of any claims arising from Mr. Papalian’s service as an officer and director. Mr. Papalian agreed to forfeit all unvested stock options granted to him pursuant to the Notice of Grant of Stock Option dated December 19, 2007, leaving him with a vested option to purchase 2,933,526 shares of our common stock at an exercise price $0.25 per share, after giving effect to anti-dilution adjustments to which Mr. Papalian was entitled pursuant to his Stock Option Agreement dated December 19, 2007. In addition, we agreed to grant Mr. Papalian a fully vested 5-year option to purchase 3,500,000 shares of our common stock at an exercise price of $0.15 per share in consideration of Mr. Papalian’s acceptance of the Separation Agreement. The fair value of the option on November 11, 2008 was $238,244 at the date of grant and was calculated using the Black Sholes option valuation model with the following assumptions: risk free interest rate of 1.16%, expected volatility of 89.31%, dividend yields of 0% and expected term of 5 years.

On February 21, 2008, we entered into a one year Consulting Agreement with Dr. John H. Foster, Ph.D., who was the chairman of our board of directors on that date. Pursuant to the Consulting Agreement, Dr. Foster will (i) actively assist in the testing and demonstration of our water purification product on site at the Villa Park Dam in Irvine, California; (ii) attend technical meetings, demonstrations and trade shows in support of our business; (iii) prepare grant applications and white papers as technological and scientific results are confirmed; and (iv) act in our best interests and aid in our day-to-day operations for a minimum of 5 days per month, after which we will pay Dr. Foster an hourly rate of $250 per hour. The term of the Consulting Agreement is from January 1, 2008 until January 1, 2009 (the “Term”).

As compensation for the services, we agreed to pay Dr. Foster:

(i) so long as we raise at least $250,000 in gross proceeds from an equity financing or series of equity financings occurring on or after December 31, 2007 and before the end of the Term, for services performed from January 1 until June 1, 2008, $10,000 per month payable on the first day of each month during such period; and

(ii) so long as we raise at least $500,000 in gross proceeds (including the $250,000 referred to above) from an equity financing or series of equity financings occurring on or after December 31, 2007 and before the end of the Term: (i) a one time payment of $30,000 for services performed from October 1, 2007 through December 31, 2007, and (ii) for services performed from July 1 until December 31, 2008, $10,000 per month payable on the first day of each month during such period.

In addition, in consideration of Dr. Foster’s efforts in bringing about a definitive licensing, manufacturing, distribution, purchase order or substantially similar agreement between us and Primon, an Ireland based company in the business of water purification, or any of its affiliates, during the Term or within six months thereafter, Dr. Foster will receive, regardless of the termination of the Consulting Agreement, 2.5% of the royalty payments or other amounts received by us from Primon pursuant to the agreement, until Dr. Foster has received $2,500,000 in such commissions, after which we will have no further obligation to pay such commissions.

Pursuant to the Consulting Agreement, we also agreed to carry forward the debt incurred to Dr. Foster in the amount of $144,000 for services rendered during the time Dr. Foster served as a member of our board of advisors, which will be payable at the earlier of September 30, 2010 or the date on which we show on our balance sheet as filed with the Securities and Exchange Commission at least $1.5 million in working capital and the closing price of our common stock has been at least $1.25 for at least 15 consecutive trading days. This obligation will survive the termination of the Consulting Agreement.

In addition, on February 21, 2008, pursuant to a Notice of Grant of Stock Option and a Stock Option Agreement (the “Option Agreement”), we granted to Dr. Foster a 5-year fully vested option to purchase 2,880,000 shares of our common stock at an exercise price of $0.25 per share. The option may be exercised on a cashless basis. Pursuant to the Option Agreement, Dr. Foster agreed not to sell any shares of common stock acquired upon exercise of his option prior to December 13, 2008, which is the one year anniversary of the date the option was authorized by our board of directors. On December 13, 2007, the date of authorization by the board of directors, the fair value of the option was $519,235 at the date of grant and was calculated using the Black Sholes option valuation model with the following assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0% and expected term of 5 years.

Dr. Foster resigned from our board of directors on October 15, 2008.

On February 21, 2008, we entered into a one year Consulting Agreement with Dr. W. Richard Laton who was, at the time, a member of our board of directors. Pursuant to the Consulting Agreement, Dr. Laton will (i) actively assist in the testing and demonstration of our water purification product on site at the Villa Park Dam in Irvine, California; (ii) attend technical meetings, demonstrations and trade shows in support of the Registrant’s business; (iii) prepare grant applications and white papers as technological and scientific results are confirmed; and (iv) act in our best interests and aid in our day-to-day operations for a minimum of 5 days per month, after which we will pay Dr. Laton an hourly rate of $250 per hour. The term of the Consulting Agreement is from January 1, 2008 until January 1, 2009 (the “Term”).

As compensation for the services, we agreed to pay Dr. Laton:

In addition, in consideration of Dr. Laton’s efforts in bringing about the Primon Agreement during the Term or within six months thereafter, Dr. Laton will receive, regardless of the termination of the Consulting Agreement, 5% of the royalty payments or other amounts received by us from Primon pursuant to the agreement, until Dr. Laton has received $5,000,000 in such commissions, after which we will have no further obligation to pay such commissions.

Pursuant to the Consulting Agreement, we also agreed to carry forward the debt incurred to Dr. Laton in the amount of $144,000 for services rendered during the time Dr. Laton served as a member of our board of advisors, which will be payable at the earlier of September 30, 2010 or the date on which we show on our balance sheet as filed with the Securities and Exchange Commission at least $1.5 million in working capital and the closing price of our common stock has been at least $1.25 for at least 15 consecutive trading days. This obligation will survive the termination of the Consulting Agreement.

In addition, on February 21, 2008, pursuant to a Notice of Grant of Stock Option and a Stock Option Agreement (the “Option Agreement”), we granted to Dr. Laton a 5-year fully vested option to purchase 2,880,000 shares of our common stock at an exercise price of $0.25 per share. The option may be exercised on a cashless basis. Pursuant to the Option Agreement, Dr. Laton agreed not to sell any shares of common stock acquired upon exercise of his option prior to December 13, 2008, which is the one year anniversary of the date the option was authorized by our board of directors. On December 13, 2007, the date of authorization by the board of directors, the fair value of the option was $519,235 at the date of grant and was calculated using the Black Sholes option valuation model with the following assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields of 0% and expected term of 5 years.

Dr. Laton resigned from our board of directors on July 16, 2008.

On December 19, 2007, we entered into a one year Employment Agreement with Richard H. Papalian pursuant to which Mr. Papalian was appointed as our chief executive officer and was elected to fill a vacancy on our board of directors. Mr. Papalian did not receive a cash salary or any fringe benefits under the Employment Agreement. Instead, pursuant to a Notice of Grant of Stock Option and a Stock Option Agreement dated December 19, 2007, we granted Mr. Papalian a five year option to purchase up to 8,539,312 shares of our common stock at an exercise price of $0.25 per share, which represented 5% of the outstanding shares of our common stock on a fully diluted basis. The option was subject to the following vesting conditions: (i) 30% of the option vested upon the grant date; (ii) 20% of the option was to vest when our market capitalization exceeded $50 million for fifteen consecutive trading days; (iii) 30% of the option was to vest when our market capitalization exceeded $75 million for fifteen consecutive trading days; and (iv) 20% of the option was to vest when our market capitalization exceeded $100 million for fifteen consecutive trading days.

We also entered into an Indemnification Agreement with Mr. Papalian on December 19, 2007. The Indemnification Agreement provides for indemnification of Mr. Papalian to the extent he becomes a party or is threatened to be made a party to any legal proceeding by reason of his status as our officer or director, against any expenses incurred as a result of such proceeding, as and when such expenses are incurred. Before any claim for indemnification is approved by us, we will determine by any of the methods set forth in the Nevada Revised Statutes that Mr. Papalian has met the applicable standards of conduct which make it permissible to indemnify him.

Mr. Papalian resigned as our chief executive officer on August 14, 2008 and as a member of our board of directors on November 11, 2008.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

	2009		2008

Fee Category:
Audit fees	$	114,000	$	53,000
Tax fees		7,000		-
All other fees		-		-

	$	121,000	$	53,000

The following is a summary of the fees billed to us by Kabani & Company, Inc. and Windes & McClaughry Accountancy Corporation for professional services rendered for the fiscal years ended September 30, 2009 and 2008:

Audit Fees consists of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by Kabani & Company, Inc. in connection with our statutory and regulatory filings or engagements.

Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning.

All Other Fees consists of fees for products and services other than the services reported above.

We do not have an audit committee. Our board of directors pre-approves all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval would generally be provided for up to one year and any pre-approval would be detailed as to the particular service or category of services, and would be subject to a specific budget. The independent auditors and management are required to periodically report to the board of directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed. The board of directors may also pre-approve particular services on a case-by-case basis.

ITEM 15.

EXHIBITS.

The following exhibits are filed herewith or incorporated by reference:

No.

Description

3.1				Amended and Restated Articles of Incorporation (1)
3.2				Amended and Restated Bylaws (1)
10.1				Form of Securities Purchase Agreement, dated as of June 18, 2007, between the registrant and certain investors (2)
10.2				Form of Convertible Debenture, dated as of June 18, 2007, issued by the registrant to certain investors. (2)
10.3				Form of Registration Rights Agreement, dated as of June 18, 2007, between the registrant and certain investors (2).
10.4				Form of Warrant, dated as of June 18, 2007, issued by the registrant to certain investors. (2)
10.5				Termination Agreement dated March 14, 2008 between the registrant and the shareholders of RJ Metals, Inc. (4)*
10.6				Indemnification Agreement between the registration and Richard H. Papalian (3)*
10.7				Notice of Grant of Stock Option to David Ross (5)*
10.8				Stock Option Agreement between the registrant and David Ross (5)*
10.9				Notice of Grant of Stock Option to Rodney Anderson (5)*
10.10				Stock Option Agreement between the registrant and Rodney Anderson (5)*
10.11				Form of Securities Purchase Agreement for 12% Convertible Debentures (6)
10.12				Sionix Corporation 12% Convertible Debenture due July 29, 2009 (6)
10.13				Form of Common Stock Purchase Warrant dated July 29, 2008 (6)
10.14				Form of Unit Offering Securities Purchase Agreement (7)
10.15				Form of Common Stock Purchase Warrant (7)
10.16				Amended and Restated Promissory Notes with Calico Capital Management LLC, BRAX Capital LLC and Gene Salkin (8)
10.17				Second Amended and Restated Convertible Promissory Notes dated March 17, 2008 with Calico Capital Management LLC, BRAX Capital LLC and Gene Salkin (9)
10.18				Form of Securities Purchase Agreement for 10% Debentures (10)
10.19				Form of Subordinated 10% Debenture (10)
10.20				Form of Common Stock Purchase Warrant (10)
10.21				Consulting Agreement dated February 21, 2008 between the registrant and John H. Foster, Ph.D. (13)*
10.22				Notice of Grant of Stock Option to John H. Foster (11)*
10.23				Stock Option Agreement between the registrant and Dr. John H. Foster (11)*
10.24				Consulting Agreement dated February 21, 2008 between the registrant and Dr. W. Richard Laton (11)*
10.25				Notice of Grant of Stock Option (11)
10.26				Stock Option Agreement between the registrant and Dr. W. Richard Laton (11)*
10.27				Letter Agreement dated October 14, 2008 between the registrant and RJ Metals Inc. (5)*
10.28				Waiver and Amendment Agreement dated August 13, 2009 between the registrant and all current and past holders of Secured Convertible Promissory Notes issued by the registrant (12)
10.29				Waiver, Consent and Securities Modification Agreement dated October 22, 2009 by and among the registrant and investors who hold debentures and warrants issued by the registrant (13)
10.30				Employment Agreement dated December 16, 2009 between the registrant and James R. Currier*
10.31				Employment Agreement dated December 16, 2009 between the registrant and David R. Wells*
10.32				Form of Securities Purchase Agreement for December 2009 10% Debentures
10.33				Form of Subordinated 10% Debenture
10.34				Form of Common Stock Purchase Warrant
31.1				Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2				Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1				Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2				Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Denotes a contract with management.

(1) Incorporated by reference from registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on July 15, 2003, and incorporated herein by reference.

(2) Incorporated by reference from registrant's Current Report on Form 8-K, file no. 002-95626-D , filed with the Commission on August 14, 2007, and incorporated herein by reference.

(3) Incorporated by reference from registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on December 20, 2007, and incorporated herein by reference.

(4) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on March 17, 2008, and incorporated herein by reference.

(5) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on October 23, 2008, and incorporated herein by reference.

(6) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on July 30, 2008, and incorporated herein by reference.

(7) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on May 29, 2008, and incorporated herein by reference.

(8) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on January 28, 2008, and incorporated herein by reference.

(9) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on March 24, 2008, and incorporated herein by reference.

(10) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on March 3, 2008, and incorporated herein by reference.

(11) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on February 25, 2008, and incorporated herein by reference.

(12) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on August 18, 2009, and incorporated herein by reference.

(13) Incorporated by reference from the registrant’s Current Report on Form 8-K, file no. 002-95626-D, filed with the Commission on November 12, 2009, and incorporated herein by reference.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIONIX, INC.



January 13, 2010	By:	/s/ James R. Currier
		James R. Currier
		Chief Executive Officer



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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated

Signature	Title	Date

/s/ James R. Currier	Chief Executive Officer and Chairman	January 13, 2010
James R. Currier

/s/ David R. Wells	President, Chief Financial Officer and Director	January 13, 2010
David R. Wells

/s/ Rodney Anderson	Director	January 13, 2010
Rodney Anderson

/s/ James Alexander	Director	January 13, 2010
James Alexander

/s/ Frank Power	Director	January 13, 2010
Frank Power

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