Note 3 – Summary of Significant Accounting Policies

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 3 - Summary of Significant Accounting Policies

Note 3 - Summary of Significant Accounting Policies

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with Accounting Standards Codification ("ASC") 350-30, General Intangibles Other Than Goodwill. As of December 31, 2011, the Company recorded $111,694 in net patents comprised of $115,190 in gross patents and $3,495 in cumulative amortization which are capitalized in the accompanying consolidated balance sheet. This compares with a net of $118,153 at June 30, 2011 comprised of $121,112 in gross capitalized patents and accumulated amortization of $2,963. On October 25, 2011, the Company had a patent granted for its Multi-Stage Cavitation Device which will be amortized over an estimated useful life of 4 years. The Company has been issued two patents and has eight US and eight PCT/international applications pending.

At December 31, 2011, future amortization of patent costs is estimated as follows:

Year Ended
December 31,		Amount
2012	$	4,738
2013		12,409
2014		19,312
2015		21,453
2016		18,240
Thereafter		35,542
Total	$	111,694

Related Party Advances

The Company advanced Igor Gorodnitsky, President, and Roman Gordon, Chief Technology Officer, $15,000 each for operating expenditures that will be incurred on behalf of the Company during fiscal 2012. This amount was reduced to $25,560 on December 31, 2011.

Deferred Revenue

The Company received a license fee of $100,000 from the Desmet Ballestra Group ("Desmet") during the six months ended December 31, 2011 for CTi Nano Reactors that are expected to be delivered to Desmet during fiscal 2012. The Company received a deposit of $7500 during the 4^th quarter of fiscal 2010 and $9,451 during the 1^st quarter of fiscal 2011 relating to the fabrication of the Company's NANO Neutralization System. We expect the customer to complete trials in the 3^rd or 4^th quarter of fiscal 2012 at which time we expect to recognize this amount as revenue.

Fair Value Measurement

ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2011, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.

The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of December 31, 2011 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

		Fair Value		Fair Value Measurements at December 31, 2011
		as of		Using Fair Value Heirarchy
Financial Instruments		December 31, 2011		Level 1		Level 2		Level 3
Liabilities:
Derivative liability		77,808		-		-		77,808
Total	$	77,808	$	-	$	-	$	77,808

The derivative liability attributed to the convertible notes' conversion feature is measured using the Black-Sholes option valuation model. Refer to Note 8, "Convertible Notes Payable" for the inputs to the Black-Sholes option valuation model.

The following tables provide a reconciliation of the beginning and ending balances of our financial liabilities classified as Level 3:

Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
		Derivative Liability
Balance at December 31, 2011	$	121,679
Total (gains) losses included in interest expense and other		(3,536)
Creation - convertible note issuances		45,696
Settlements - note conversions		(86,031)
Balance at December 31, 2011	$	77,808

Advertising and Promotion Costs

Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred. Expenses amounted to $26,964, $12,281, and $249,288 for the six months ended December 31, 2011 and 2010, and the period from January 29, 2007 (date of inception) through December 31, 2011, respectively. Advertising expenses amounted to $12,850 and $8,178 for the three months ended December 31, 2011 and 2010, respectively.