**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** |       | **For the  quarterly period ended March 31, 2007**                                                      |
| ** ** |       | ** **                                                                                              |
| **OR**     |
| ** ** |       | ** **                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                   to                         **

**CommissionFile Number 000-30819**

**Particle DrillingTechnologies, Inc.******(Exact name of registrant as specified in its charter)

| **Nevada**                       |   | **20-1563395**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**11757 Katy Freeway, Suite 1300**

**Houston, Texas 77079**

(Address of principal executive offices)

(Zip Code)

**713-223-3031**

(Registrant’stelephone number, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler o                            Accelerated filer x                      Non-acceleratedfiler o

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

The number of shares ofthe registrant’s common stock, $.001 par value, outstanding as of May 1, 2007was 30,617,574.

 

----

**PARTICLE DRILLINGTECHNOLOGIES, INC.(a development stage enterprise)**

**FORM 10-QFOR THE QUARTER ENDED MARCH 31, 2007**

**INDEX**
| **Part I - Financial Information** |
|------------------------------------|
| ** **                         |
| Item 1.                            |   | Financial Statements |   |   |
|                               |   |   |   |   |
|                               |   | Consolidated  Balance Sheets at March 31, 2007 (Unaudited) and September 30, 2006 |   |   |
|                               |   |   |   |   |
|                               |   | Consolidated  Statements of Operations (Unaudited) - Three and Six Months Ended March 31,  2007 and 2006, and from June 9, 2003 (date of inception) to March 31, 2007 |   |   |
|                               |   |   |   |   |
|                               |   | Consolidated  Statements of Stockholders’ Equity (Unaudited) for the period from September  30, 2006 to March 31, 2007 |   |   |
|                               |   |   |   |   |
|                               |   | Consolidated  Statements of Cash Flows (Unaudited) - Six Months Ended March 31, 2007 and  2006, and from June 9, 2003 (date of inception) to March 31, 2007 |   |   |
|                               |   |   |   |   |
|                               |   | Notes  to Consolidated Financial Statements (Unaudited) |   |   |
|                               |   |   |   |   |
| Item  2.                           |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
|                               |   |   |   |   |
| Item  3.                           |   | Quantitative  and Qualitative Disclosures about Market Risk |   |   |
|                               |   |   |   |   |
| Item  4.                           |   | Controls  and Procedures |   |   |
|                               |   |   |   |   |
| **Part II  - Other Information**   | ** ** | ** ** |
|                               |   |   |   |   |
| Item  4.                           |   | Submission  of Matters to a Vote of Security Holders |   |   |
|                               |   |   |   |   |
| Item 6.                            |   | Exhibits |   |   |
|                               |   |   |   |   |
|                               |   | Signatures |   |   |

 

2

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**PARTICLE DRILLING TECHNOLOGIES, INC.**

**(a development stage enterprise)**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                                                                                                                          | ** ** | **March 31,  2007** | ** ** | **September 30,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **(Unaudited)**          | ** ** | ** **                   | ** ** |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| **ASSETS**                                                                                                                                                                                                                          | ** ** | ** **               | ** ** | ** **                   | ** ** |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Current assets:                                                                                                                                                                                                                     |       |                     |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                                                           |       | $                        | 8,024,912  |                         | $          | 2,291,586 |   |
| Short-term investments                                                                                                                                                                                                              |       | —                   |       | 385,839                      |       |
| Prepaid expenses                                                                                                                                                                                                                    |       | 165,667                  |       | 234,488                      |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Total current assets                                                                                                                                                                                                                |       | 8,190,579                |       | 2,911,913                    |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Property, plant  & equipment, net                                                                                                                                                                                               |       | 2,214,973                |       | 1,326,713                    |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Intangibles, net                                                                                                                                                                                                                    |       | 1,267,920                |       | 1,230,086                    |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Other assets                                                                                                                                                                                                                        |       | 14,650                   |       | 14,650                       |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Total assets                                                                                                                                                                                                                        |       | $                        | 11,688,122 |                         | $          | 5,483,362 |   |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                       | ** ** | ** **               | ** ** | ** **                   | ** ** |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Current  liabilities:                                                                                                                                                                                                               |       |                     |       |                         |       |
| Accounts payable                                                                                                                                                                                                                    |       | $                        | 1,456,272  |                         | $          | 830,552 |   |
| Short-term notes payable                                                                                                                                                                                                            |       | 25,985                   |       | 179,143                      |       |
| Current portion of long-term debt                                                                                                                                                                                                   |       | 13,891                   |       | 19,270                       |       |
| Accrued liabilities                                                                                                                                                                                                                 |       | 494,265                  |       | 471,463                      |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Total current liabilities                                                                                                                                                                                                           |       | 1,990,413                |       | 1,500,428                    |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Long-term debt                                                                                                                                                                                                                      |       | 10,248                   |       | 15,305                       |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Commitments and  contingencies - Note 8                                                                                                                                                                                             |       |                     |       |                         |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Stockholders’  equity:                                                                                                                                                                                                         |       |                     |       |                         |       |
| Common stock, $.001 par value, 100,000,000 shares  authorized, 33,620,660 shares issued and 30,617,574 shares outstanding at  March 31, 2007, and 28,013,291 shares issued and 25,010,205 shares  outstanding at September 30, 2006 |       | 33,621                   |       | 28,014                       |       |
| Additional paid-in capital                                                                                                                                                                                                          |       | 37,201,706               |       | 25,239,221                   |       |
| Treasury stock at cost, 3,003,086 shares at March  31, 2007 and September 30, 2006                                                                                                                                                  |       | (1,511,817               | )          | (1,511,817                   | )          |
| Deficit accumulated during the development stage                                                                                                                                                                                    |       | (26,036,049              | )          | (19,787,789                  | )          |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Total stockholders’ equity                                                                                                                                                                                                     |       | 9,687,461                |       | 3,967,629                    |       |
|                                                                                                                                                                                                                                |       |                     |       |                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                    |       | $                        | 11,688,122 |                         | $          | 5,483,362 |   |

Theaccompanying notes are an integral part of these statements.

3

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**PARTICLEDRILLING TECHNOLOGIES, INC.**

**(adevelopment stage enterprise)**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(Unaudited)**
| ** **                                                                | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **         | ** ** | ** ** | ** ** | **Period from**       | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------|------------|------------|------------|----------------------------|------------|
| ** **                                                                | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **         | ** ** | ** ** | ** ** | **June 9, 2003** | ** ** |
| ** **                                                                | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **         | ** ** | ** ** | ** ** | **(date of**          | ** ** |
| ** **                                                                | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **         | ** ** | ** ** | ** ** | **inception) to**     | ** ** |
| ** **                                                                | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                                | ** ** | **2007**                                             | ** ** | **2006**                                           | ** ** | **2007**           | ** ** | **2006**   | ** ** | **2007**                   | ** ** |
| ** **                                                                | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **         | ** ** | ** ** | ** ** | **(Restated)**             | ** ** |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Revenues                                                                  |       | $                                                    | —     |                                               | $          | —             |       | $          | —     |                       | $          | — |   | $ | — |   |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Operating  expenses:                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Research and development                                                  |       | 2,040,316                                            |       | 1,448,107                                          |       | 3,705,159          |       | 2,733,592  |       | 13,133,130                 |       |
| General and administrative                                                |       | 1,481,607                                            |       | 1,381,209                                          |       | 2,780,151          |       | 2,372,171  |       | 13,730,250                 |       |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Total operating expenses                                                  |       | 3,521,923                                            |       | 2,829,316                                          |       | 6,485,310          |       | 5,105,763  |       | 26,863,380                 |       |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Loss from operations                                                      |       | (3,521,923                                           | )          | (2,829,316                                         | )          | (6,485,310         | )          | (5,105,763 | )          | (26,863,380                | )          |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Other income  (expenses)                                                  |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Interest income                                                           |       | 113,834                                              |       | 74,255                                             |       | 241,732            |       | 160,296    |       | 711,951                    |       |
| Rental income - related party                                             |       | —                                               |       | 23,283                                             |       | —             |       | 46,565     |       | 73,727                     |       |
| Gain on debt extinguishment                                               |       | —                                               |       | —                                             |       | —             |       | —     |       | 35,283                     |       |
| Gain on assignment of lease - related party                               |       | —                                               |       | 55,614                                             |       | —             |       | 55,614     |       | 55,614                     |       |
| Interest expense                                                          |       | (1,710                                               | )          | (743                                               | )          | (4,682             | )          | (1,602     | )          | (49,244                    | )          |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Total other income                                                        |       | 112,124                                              |       | 152,409                                            |       | 237,050            |       | 260,873    |       | 827,331                    |       |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Net loss                                                                  |       | $                                                    | (3,409,799 | )                                                  | $          | (2,676,907         | )          | $          | (6,248,260 | )                          | $          | (4,844,890 | ) | $ | (26,036,049 | ) |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Net loss per  common share, basic and diluted                             |       | $                                                    | (0.11      | )                                                  | $          | (0.11              | )          | $          | (0.21      | )                          | $          | (0.20 | ) | $ | (1.29 | ) |
|                                                                      |       |                                                 |       |                                               |       |               |       |       |       |                       |       |
| Weighted average number  of common shares outstanding - basic and diluted |       | 30,165,484                                           |       | 24,436,820                                         |       | 29,588,832         |       | 24,365,875 |       | 20,200,763                 |       |

 

The accompanying notesare an integral part of these statements.

4

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**PARTICLEDRILLING TECHNOLOGIES, INC.**

**(adevelopment stage enterprise)**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**For the Period from September 30,2006 to March 31, 2007(Unaudited)**
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **              | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Deficit**     | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **              | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Accumulated** | ** ** | **Total**              | ** ** |
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **              | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | **During**      | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                                  | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Equity**     | ** ** |
| ** **                                                                                                                  | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Stage**       | ** ** | **(Deficit)**          | ** ** |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Balance,  September 30, 2006                                                                                                |       | 28,013,291            |       | 28,014                  |       | (3,003,086  | )          | (1,511,817      | )          | 25,239,221     |       | (19,787,789     | )          | 3,967,629              |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued in private placement for cash at $2.35 per share in October 2006, less  offering expense of $1,034,012 |       | 5,000,000             |       | 5,000                   |       | —      |       | —          |       | 10,710,988     |       | —          |       | 10,715,988             |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Restricted stock  issued to an employee at $1.99 per share in October 2006                                                  |       | 3,000                 |       | 3                       |       | —      |       | —          |       | (3             | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Restricted stock  issued to employees at $2.85 per share in October 2006                                                    |       | 68,250                |       | 68                      |       | —      |       | —          |       | (68            | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued upon exercise of warrants at $0.12 per share in October 2006                                           |       | 5,745                 |       | 6                       |       | —      |       | —          |       | (6             | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued for cash at $0.12 per share upon exercise of employee stock options in  November 2006                  |       | 6,000                 |       | 6                       |       | —      |       | —          |       | 714            |       | —          |       | 720                    |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued upon cashless exercise of warrants at $0.12 per share in February 2007                                 |       | 5,816                 |       | 6                       |       | —      |       | —          |       | (6             | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued upon exercise of warrants at $0.12 per share in February 2007                                          |       | 2,000                 |       | 2                       |       | —      |       | —          |       | 238            |       | —          |       | 240                    |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Common stock  issued upon cashless exercise of warrants at $0.12 per share in March 2007                                    |       | 486,558               |       | 486                     |       | —      |       | —          |       | (486           | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Restricted stock  issued to certain Directors at $3.93 per share in March 2007                                              |       | 30,000                |       | 30                      |       | —      |       | —          |       | (30            | )          | —          |       | —                 |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Stock-based  employee compensation                                                                                          |       | —                |       | —                  |       | —      |       | —          |       | 1,251,144      |       |            |       | 1,251,144              |       |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Net loss                                                                                                                    |       | —                |       | —                  |       | —      |       | —          |       | —         |       | (6,248,260      | )          | (6,248,260             | )          |
|                                                                                                                        |       |                  |       |                    |       |        |       |            |       |           |       |            |       |                   |       |
| Balance, March 31, 2007                                                                                                     |       | 33,620,660            |       | $                       | 33,621     |        | (3,003,086 | )               | $          | (1,511,817     | )          | $               | 37,201,706 |                   | $          | (26,036,049 | ) | $ | 9,687,461 |   |
|                                                                                                                             |            |                       |            |                         |            |             |            |                 |            |                |            |                 |            |                        |            |  |  |  |  |  |

 

The accompanying notes are an integral part of these statements.

5

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**PARTICLEDRILLING TECHNOLOGIES, INC.**

**(adevelopment stage enterprise)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | **Period from**       | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|
| ** **                                                                   | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | **June 9, 2003** | ** ** |
| ** **                                                                   | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | **(date of**          | ** ** |
| ** **                                                                   | ** ** | **Six Months Ended  March 31,** | ** ** | **inception) to   March 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007**                   | ** ** |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Cash flows from  operating activities:                                       |       |                                           |       |                                         |       |                       |       |
| Net loss                                                                     |       | $                                              | (6,248,260 | )                                            | $          | (4,844,890                 | )          | $ | (26,036,049 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                           |       |                                         |       |                       |       |
| Gain on debt extinguishment                                                  |       | —                                         |       | —                                       |       | (35,283                    | )          |
| Gain on assignment of lease - related party                                  |       | —                                         |       | (55,614                                      | )          | (54,103                    | )          |
| Depreciation and amortization expense                                        |       | 362,503                                        |       | 324,590                                      |       | 1,589,565                  |       |
| Short-term note issued for services                                          |       | —                                         |       | —                                       |       | 44,000                     |       |
| Common stock issued for services                                             |       | —                                         |       | —                                       |       | 931,500                    |       |
| Warrants issued for services                                                 |       | —                                         |       | —                                       |       | 63,829                     |       |
| Stock-based employee compensation                                            |       | 1,251,144                                      |       | 887,147                                      |       | 3,931,335                  |       |
| Changes in operating assets and liabilities:                                 |       |                                           |       |                                         |       |                       |       |
| Decrease in note receivable                                                  |       | 385,839                                        |       | —                                       |       | 385,839                    |       |
| (Increase) in accounts receivable - related party                            |       | —                                         |       | (15,451                                      | )          | (42,331                    | )          |
| Decrease in prepaid expenses                                                 |       | 68,821                                         |       | 98,769                                       |       | 200,308                    |       |
| Increase (Decrease) in accounts payable                                      |       | 625,720                                        |       | (101,415                                     | )          | 1,116,334                  |       |
| Increase in accrued liabilities                                              |       | 22,802                                         |       | 223,812                                      |       | 591,062                    |       |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Net cash used in operating activities                                        |       | (3,531,431                                     | )          | (3,483,052                                   | )          | (17,313,994                | )          |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Cash flows from  investing activities:                                       |       |                                           |       |                                         |       |                       |       |
| Payments to purchase property and equipment                                  |       | (1,225,524                                     | )          | (272,232                                     | )          | (3,046,143                 | )          |
| Proceeds from sale of property and equipment                                 |       |                                           |       | —                                       |       | 20,957                     |       |
| Payments to purchase intangibles                                             |       | (63,076                                        | )          | (63,614                                      | )          | (671,690                   | )          |
| Payments to purchase other assets                                            |       | —                                         |       | —                                       |       | (419,504                   | )          |
| Payments issued for note receivable                                          |       | —                                         |       | —                                       |       | (300,783                   | )          |
| Payments issued for note receivable - related party                          |       | —                                         |       | —                                       |       | (56,783                    | )          |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Net cash used in investing activities                                        |       | (1,288,600                                     | )          | (335,846                                     | )          | (4,473,946                 | )          |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Cash flows from  financing activities:                                       |       |                                           |       |                                         |       |                       |       |
| Proceeds from issuance of common stock                                       |       | 10,716,951                                     |       | 6,450                                        |       | 31,698,806                 |       |
| Repurchase of common stock                                                   |       | —                                         |       | —                                       |       | (1,511,817                 | )          |
| Proceeds from issuance of convertible notes                                  |       | —                                         |       | —                                       |       | 553,500                    |       |
| Repayments of notes payable                                                  |       | (163,594                                       | )          | (79,342                                      | )          | (927,637                   | )          |
| Proceeds from borrowings under loan agreements -  related parties            |       | —                                         |       | —                                       |       | 23,195                     |       |
| Repayment of borrowings under loan agreements -  related parties             |       | —                                         |       | —                                       |       | (23,195                    | )          |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Net cash provided by (used in) financing activities                          |       | 10,553,357                                     |       | (72,892                                      | )          | 29,812,852                 |       |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Net increase  (decrease) in cash and cash equivalents                        |       | 5,733,326                                      |       | (3,891,790                                   | )          | 8,024,912                  |       |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Cash and cash  equivalents - beginning of period                             |       | 2,291,586                                      |       | 10,504,646                                   |       | —                     |       |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Cash and cash  equivalents - end of period                                   |       | $                                              | 8,024,912  |                                         | $          | 6,612,856                  |       | $ | 8,024,912 |   |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Supplemental  disclosures of cash flow information:                          |       |                                           |       |                                         |       |                       |       |
| Cash paid for interest                                                       |       | $                                              | 4,682      |                                         | $          | 1,427                      |       | $ | 49,244 |   |
|                                                                         |       |                                           |       |                                         |       |                       |       |
| Non-cash  investing and financing activities:                                |       |                                           |       |                                         |       |                       |       |
| Prepaid insurance acquired with note payable                                 |       | $                                              | —     |                                         | $          | —                     |       | $ | 111,990 |   |
| Common stock issued as consideration for account  payable                    |       | —                                         |       | —                                       |       | 6,000                      |       |
| Common stock issued as consideration for note  payable                       |       | —                                         |       | —                                       |       | 50,000                     |       |
| Related party note receivable exchanged for property  and equipment          |       | —                                         |       | —                                       |       | 56,783                     |       |
| Note payable converted into common stock                                     |       | —                                         |       | —                                       |       | 553,500                    |       |
| Property and equipment acquired with assumed  liabilities                    |       | —                                         |       | —                                       |       | 479,610                    |       |
| Intangibles acquired with assumed liabilities                                |       | —                                         |       | —                                       |       | 757,792                    |       |
| Property and equipment acquired with note payable                            |       | —                                         |       | 30,487                                       |       | 30,487                     |       |
| Short-term  investments reclassified from other assets                       |       | —                                         |       | —                                       |       | 385,839                    |       |

The accompanying notesare an integral part of these statements.

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**PARTICLE DRILLING TECHNOLOGIES,INC.(a development stage enterprise)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**1.  ****     BASIS OF PRESENTATION**

The accompanyingunaudited interim consolidated financial statements, which include the accountsof Particle Drilling Technologies, Inc. (which is referred to hereinas “we,” “us,” “our” or the “Company”) and its subsidiary, have been preparedin accordance with generally accepted accounting principles in the UnitedStates of America (“US GAAP”) and pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith US GAAP have been condensed or omitted in accordance with suchrules and regulations. The information furnished in the unaudited interimconsolidated financial statements includes normal recurring adjustments andreflects all adjustments, which in the opinion of management are necessary fora fair presentation of such financial statements. Although management believesthe disclosures and information presented are adequate to make the informationnot misleading, these unaudited interim consolidated financial statementsshould be read in conjunction with the Company’s September 30, 2006audited consolidated financial statements and notes thereto in its AnnualReport on Form 10-K. Operating results for the three months and six monthsended March 31, 2007 are not necessarily indicative of the results that may beexpected for the year ending September 30, 2007.

The preparation offinancial statements in conformity with US GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting periods. Actual results could differ from these estimates.

Certain reclassificationshave been made to conform prior period amounts to the current periodpresentation. These reclassifications had no effect on net loss, net loss pershare, or stockholders’ equity.

**2.  ****       ****FINANCIALCONDITION AND MANAGEMENT PLANS**

Thefinancial statements of the Company have been prepared on the basis ofaccounting principles applicable to a going concern, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business.  As shown in the condensedconsolidated financial statements, for the three and six months ended March 31,2007, the Company reported net losses of approximately $3.4 million and $6.2million, respectively, as compared to net losses of approximately $2.7 millionand $4.8 million for the three and six months ended March 31, 2006, respectively.  The condensed consolidated financialstatements also show an accumulated deficit of approximately $26.0 million frominception (June 9, 2003) through the period ended March 31, 2007.  The financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might resultshould the Company be unable to continue as a going concern.

The Company is currentlya development stage company and its continued existence is dependent upon theCompany’s successful development of the PID technology and our ability tosuccessfully commercialize this technology. The Company has yet to generate cashflow from operations, and untilrevenues commence, the Company is highly dependent upon debt and equityfunding.  Should continuing fundingrequirements not be met, the Company’s operations may cease to exist.  Management cannot provide any assurance thatany such financing will be available on acceptable terms or at all.

**3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Impairmentof Long-Lived Assets.  *We evaluate our long-livedassets for indicators of possible impairment by comparison of the carryingamounts to future net undiscounted cash flows expected to be generated by suchassets when events or changes in circumstances indicate the carrying amount ofan asset may not be recoverable.  Should an impairment exist, theimpairment loss would be measured based on the excess carrying value of theasset over the asset’s fair value or discounted estimates of future cashflows.  We also evaluate the capitalized costs for patents and patentapplications filed but not issued for possible impairments. We have notidentified any such impairment losses to date. The evaluation of capitalizedcosts for patents and patent applications is based on a subjective cash flowforecast which is subject to change. We will reassess our cash flow forecasteach time there are fundamental changes in the underlying potential use of thepatents or patent applications in terms of performance, customer acceptance orother factors that may affect such cash flow forecasts.

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*NewAccounting Pronouncements**.  ***In July 2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109*(“FIN 48”).  FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, *Accounting for Income*Taxes*.*  It prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  This new standard also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.  The provisions of FIN 48 are to be applied toall tax positions upon initial adoption of this standard.  Only taxpositions that meet the more-likely-than-not recognition threshold at theeffective date may be recognized or continue to be recognized upon adoption ofFIN 48.  The cumulative effect of applying the provisions of FIN 48 shouldbe reported as an adjustment to the opening balance of retained earnings (orother appropriate components of equity or net assets in the statement offinancial position) for that fiscal year.  The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006.  Earlierapplication is permitted as long as the enterprise has not yet issued financialstatements, including interim financial statements, in the period ofadoption.  The Company believes that the adoption of FIN 48 will not havea material impact on our financial position, results of operations or cash flows.

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under the standard, fair value measurementswould be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears, with early adoption permitted.  The Company believes that theadoption of SFAS No. 157 will not have a material impact on its financialposition, results of operations or cash flows.

In September 2006,the FASB issued FSP No. AUG AIR-1, Accounting for Planned Major MaintenanceActivities.  FSP No. AUG AIR-1 prohibits the use of the accrue-in-advancemethod for accounting for major maintenance activities and confirms theacceptable methods of accounting for planned major maintenanceactivities.  FSP No. AUG AIR-1 is effective the first fiscal yearbeginning after December 15, 2006.  The Company believes that the adoptionof FSP No. AUG AIR-1 will not have a material impact on its financial position,results of operations or cash flows.

InSeptember 2006, the SEC issued SAB 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”(“ SAB 108”)*.*SAB 108provides interpretive guidance on how the effects of the carryover or reversalof prior year misstatements should be considered in quantifying a current yearmisstatement. The pronouncement prescribes an approach whereby the effect ofall unrecorded identified errors should be considered on all of the financialstatements rather than just either the effect on the balance sheet or theincome statement. The Company adopted the provisions of SAB 108 in fiscal 2007.The adoption of SAB 108 did not have a material impact on the Company’sConsolidated Financial Statements.

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities*(“SFASNo. 159”). SFAS No. 159 permits entities to choose to measure manyfinancial assets and financial liabilities at fair value. Unrealized gains andlosses on items for which the fair value option has been elected are reportedin earnings. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. We will adopt SFAS No. 159 on October 1, 2008 andhave not yet determined the impact, if any, on our consolidated financialstatements.

**4.  ****     REVERSE ACQUISITION WITHMEDXLINK, CORP**

On July 14, 2004,MedXLink, Corp. (“MXLK”, or the “Parent”), a Nevada corporation and an inactivepublicly-traded company, entered into an Agreement and Plan of Reorganizationwith Particle Drilling Technologies, Inc., a Delaware corporation (“PDTI-DE”),whereby MXLK agreed to acquire PDTI-DE by merging PDTI Acquisition Corp. (“MergerSub”), a newly formed Delaware corporation and wholly owned subsidiary of MXLK,with and into PDTI-DE and issued common stock of MXLK in exchange for all theoutstanding shares of PDTI-DE. On January 14, 2005, MXLK closed itsacquisition of PDTI-DE and issued 16,698,094 shares of common stock (including3,381,538 shares of common stock issued upon conversion of the same number ofshares of Series A Convertible Preferred Stock of PDTI-DE) to holders ofcommon stock of PDTI-DE and reserved for issuance (1) 228,000 shares ofcommon stock pursuant to outstanding warrants to purchase common stock ofPDTI-DE, and (2) 3,205,000 shares of common stock pursuant to outstandingoptions to purchase common stock of PDTI-DE. In addition, 1,342,404 issued andoutstanding shares of common stock of the Parent were cancelled for noadditional cash consideration in connection with the Merger. Following themerger, the Parent had 18,248,094 shares of 

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common stock issued and outstanding (which included3,381,538 shares of common stock issued upon conversion of the same number ofshares of Series A Convertible Preferred Stock of PDTI-DE) and anadditional 3,433,000 shares of common stock reserved for issuance upon exerciseof warrants and options as described above. Following the merger, PDTI-DEcontinued as the surviving corporation under the name of Particle DrillingTechnologies, Inc. as a subsidiary of Parent, the Parent changed its nameto Particle Drilling Technologies, Inc., and its stock trading symbolchanged from MXLK.OB to PDRT.OB. On June 28, 2005, the Company’s shares ofcommon stock began trading on The NASDAQ Capital Market® under the symbol PDRT.

**5.  ****     NET LOSS PER COMMON SHARE**

The Company has presentedbasic and diluted net loss per share pursuant to SFAS No. 128, *Earnings Per Share*. In accordance withSFAS No. 128, basic and diluted net loss per share has been computed usingthe weighted-average number of shares of common stock outstanding during theperiod. Dilutive net loss per share would give affect to the dilutive effect ofcommon stock equivalents consisting of options and warrants. Potentiallydilutive securities have been excluded from the net loss per common sharecalculation as the effects would be antidilutive. Potentially dilutivesecurities not included in the computation of weighted average diluted sharesof common stock because the impact of these potentially dilutive securitieswere antidilutive were 2,901,623 and 2,547,858 shares for the three monthsended March 31, 2007 and 2006, respectively, and 2,294,032 and 2,577,151 sharesfor the six months ended March 31, 2007 and 2006, respectively.

**6.  ****     COMMON STOCK**

InOctober 2006, the Company issued 5,745 shares of its common stock upon a netcashless exercise of warrants at $0.12 per share.

InOctober 2006, the Company issued 71,250 shares of its restricted stock toseveral of its employees.

InOctober 2006, the Company issued 5,000,000 shares of its common stock from aprivate placement at $2.35 per share.

In November 2006, theCompany issued 6,000 shares of its common stock for cash upon exercise ofoptions at $0.12 per share.

InFebruary 2007, the Company issued 5,816 shares of its common stock upon a netcashless exercise of warrants at $0.12 per share.

InFebruary 2007, the Company issued 2,000 shares of its common stock upon a cashexercise of warrants at $0.12 per share.

InMarch 2007, the Company issued 486,558 shares of its common stock upon a net cashlessexercise of warrants at $2.00 per share.

InMarch 2007, the Company issued 30,000 shares of its restricted stock to severalof its directors.

At March 31, 2007, theCompany had 30,617,574 shares of common stock outstanding and had outstandingoptions and warrants to purchase up to 6,320,391 additional shares of theCompany’s common stock in the aggregate.

**7.  ****     STOCK-BASED EMPLOYEECOMPENSATION**

In April 2004, theBoard of Directors adopted the 2004 Stock Incentive Plan (the “2004 Plan”). The2004 Plan provides for the issuance of incentive stock options, non-statutorystock options and restricted stock grants to directors, employees andconsultants of the Company. Provisions under the 2004 Plan allowed for theissuance of up to 3,500,000 shares of common stock pursuant to awards under the2004 Plan. As of March 31, 2007, the Company had 1,250 shares of common stockavailable for issuance pursuant to awards under the 2004 Plan.

In March 2005, theBoard of Directors adopted the 2005 Stock Option Plan (the “2005 Plan”). The2005 Plan provides for the issuance of non-statutory stock options andrestricted stock grants to directors, employees and consultants of the Company.Provisions under the 2005 Plan allow for the issuance of options and restrictedstock awards to purchase or issue 

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up to 2,000,000 shares of common stock. As of March31, 2007, the Company had 253,500 shares of common stock available for issuancepursuant to awards under the 2005 Plan.

In March 2007, theshareholders approved the 2007 Stock Incentive Plan (the “2007 Plan”). The 2007Plan provides for the issuance of incentive stock options, non-statutory stockoptions and restricted stock grants to directors, employees and consultants ofthe Company. Provisions under the 2007 Plan allow for the issuance of optionsand restricted stock awards to purchase or issue up to 1,500,000 shares ofcommon stock. As of March 31, 2007, the Company had 1,500,000 shares of commonstock available for issuance pursuant to awards under the 2007 Plan.

Stock-based employeecompensation expense recorded for awards issued under the 2004 Plan, the 2005Plan, and the 2007 Plan for the three months ended March 31, 2007 and 2006 was$623,513 and $496,598, respectively. Stock-based employee compensation expenserecorded for awards issued under the 2004 Plan, the 2005 Plan, and the 2007Plan for the six months ended March 31, 2007 and 2006 was $1,251,144 and$887,147, respectively. Stock-based employee compensation expense recorded forawards issued under the 2004 Plan, the 2005 Plan, and the 2007 Plan sinceinception (June 9, 2003) to March 31, 2007 was $3,931,335.

**8.  ****     COMMITMENTS AND CONTINGENCIES**

In June 2006, weextended the lease for our commercial operating facility that expired onJune 30, 2006 for one additional year. The lease for our commercialoperating facility will expire on June 30, 2007. The total future minimumlease payments under this lease as of March 31, 2007 are $15,000.

In April 2006, theCompany entered into a thirteen (13) month lease agreement for new corporateoffices that commenced in May 2006. We moved our previous corporate officesthat were located at 1021 Main Street, Suite 2650, Houston, Texas 77002,to 11757 Katy Freeway, Suite 1300, Houston, Texas 77079. In April 2006, wedelivered to the lessor a security deposit of $9,400. The total future annualminimum lease payments as of March 31, 2007 are $22,560.

**9.    INCOME TAXES**

The Company reports itsincome taxes in accordance with SFAS No. 109, *Accounting for Income Taxes*, which calls for the utilizationof the asset and liability method of accounting for income taxes. Under thismethod, deferred taxes are determined based on differences between financialreporting and tax bases of assets and liabilities and are measured using theenacted marginal tax rates and laws that will be in effect when the differencesreverse. Temporary differences have been created for all stock option plans andare included in our SFAS No. 109 computation. For the quarter ended March31, 2007, there were permanent and temporary differences of approximately$12,000 and $908,000, respectively. At March 31, 2007, we had cumulative netoperating loss carryforwards of approximately $21,891,000, which expire inyears 2007 through 2025. No effect has been shown in the consolidated financialstatements for the net operating loss carryforwards as the likelihood of futuretax benefit from such net operating loss carryforwards is not determinable atthis time. Accordingly, the potential tax benefits of the net operating loss carryforwards,estimated based upon tax rates at March 31, 2007, have been offset by valuationreserves of the same amount.

**10.          SUBSEQUENT EVENTS**

InApril 2007, the Company entered into a 60 month lease agreement for a newcorporate office and operating facility and delivered to the lessor a securitydeposit of $41,144.  The new facility will combine the corporate officepersonnel and the operations personnel into one location at 5611 Baird Court,Houston, TX 77041.  The total futureminimum lease payments under this lease are $1,927,456.

**Item 2:  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

The following discussionof our financial condition and results of operations should be read togetherwith the unaudited consolidated financial statements and related notes that areincluded elsewhere in this report. This discussion may contain forward-lookingstatements based upon current expectations that involve risks and uncertaintiesthat could cause actual results to differ materially from the forward-lookingstatements.   Please see “Forward-LookingStatements” below.

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**Overview**

On January 14, 2005,we acquired Particle Drilling Technologies, Inc., a privately-heldDelaware corporation (“PDTI”). As a result of this acquisition, our company,which previously had no material operations, acquired the business of PDTI andwe are now engaged in the development of the Particle Impact DrillingSystem, a patented system utilizing a specially designed “fit for purpose”drill bit fitted with jetting nozzles and polycrystalline diamond compactcutting structures for use in the oil and gas drilling industry.

We are adevelopment-stage company and have a limited operating history. Our predecessorcompany for financial reporting purposes was formed on June 9, 2003 toacquire the technology related to the Particle Impact Drilling System (the“PID technology”). We are still developing this technology, and to date, wehave not generated any revenues from our operations. As we continue to executeour operations plan, we expect our operating expenses to increase.

*Researchand development.  *We have made and expect tocontinue to make substantial investments in research and development activitiesin order to develop and market the PID technology. Research and developmentcosts consist primarily of general and administrative and operating expensesrelated to research and development activities. We expense research and developmentcosts as incurred except for property, plant and equipment related to researchand development activity that have an alternative future use. Property, plantand equipment for research and development activity that have an alternativefuture use are capitalized and the related depreciation is expensed as researchand development costs.

After conductingfour full scale field trials, we believe that all components of the PID systemare now functioning satisfactorily with the exception of the frac pump driveninjection system.  While some minormodifications will be made to the PID bit in order to further improveperformance, most of our focus is now directed towards implementation of a newparticle injection system.  The preferredalternative to the current system is an extruder based system which has beenpurchased and is currently undergoing testing and modification.  Should the extruder system prove unable tomeet our objectives, we have also developed a prototype canister system whichis slightly more complex and expensive but we believe should also be capable ofmeeting our objectives.

*Generaland administrative.  *General and administrativeexpenses consist primarily of salaries and benefits, office expense,professional services, and other corporate overhead costs. We have experiencedand expect to continue to experience increases in general and administrativeexpenses as a result of: (1) reporting and compliance obligationsapplicable to publicly-held companies; (2) our continuing efforts todevelop, test and prepare the PID technology for commercialization; and(3) the hiring of additional personnel.

**Resultsof Operations**

***Three Months Ended March 31, 2007 Compared to Three MonthsEnded March 31, 2006***

*Researchand development.  *Research and developmentexpenses were $2,040,316 and $1,488,107 for the three months ended March 31,2007 and 2006, respectively, representing an increase of $592,209. Thisincrease was primarily related to the continuing development of a new particleinjection system, contstruction of our second PID Unit (which was not 

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capitalized since we have yet to achieve commercialrevenues), increased compensation due to the hiring of additional personnel, andincreased costs related to stock-based compensation for research anddevelopment personnel during the three months ended March 31, 2007.

*Generaland administrative.  *General and administrativeexpenses were $1,481,607 and $1,381,209 for the three months ended March 31,2007 and 2006, respectively, representing an increase of $100,398. Thisincrease was primarily the result of increased costs related to stock-basedcompensation for personnel other than research and development personnel duringthe three months ended March 31, 2007 compared to the three months ended March31, 2006.  This increase was primarilyrelated to the issuance of new stock options in October 2006 and the hiring ofadditional personnel.

*Otherincome (expenses).  *Other income was $112,124 and$152,409 for the three months ended March 31, 2007 and 2006, respectively,representing a decrease in other income of $40,285. The decrease was primarilyattributable to the gain on assignment of a lease and the rental income from arelated party that was included in the three months ended March 31, 2006 andnot contained in the three months ended March 31, 2007.

***Six Months Ended March 31, 2007 Compared to Six MonthsEnded March 31, 2006***

*Researchand development. *Research and development expenses were$3,705,159 and $2,733,592 for the six months ended March 31, 2007 and2006, respectively, representing an increase of $971,567. This increase wasprimarily the result of the continuing development of a new particle injectorsystem, construction of our second PID Unit (which was not capitalized since wehave yet to achieve commercial revenues), increased compensation due to thehiring of additional personnel, and increased costs related to stock-basedcompensation expense for research and development personnel during the sixmonths ended March 31, 2007.

*Generaland administrative. *General and administrative expenseswere $2,780,151 and $2,372,171 for the six months ended March 31, 2007 and2006, respectively, representing an increase of $407,980.   Thisincrease was primarily the result of increased costs related to salaries andwages and stock-based compensation for personnel other than research anddevelopment personnel during the six months ended March 31, 2007 due to thehiring of additional personnel in fiscal 2007 and the issuance of new stockoptions in October 2006.

*OtherIncome. *Other income was $237,050 and $260,873 for thesix months ended March 31, 2007 and 2006, respectively, representing adecrease of $23,823.  The decrease was primarily attributable to the gainon assignment of a lease and the rental income from a related party that wasincluded in the six months ended March 31, 2006 and not contained in the sixmonths ended March 31, 2007.

**Liquidityand Capital Resources**

Ourprincipal sources of liquidity are cash and cash equivalents.  We expect that cash requirements through theend of the fiscal year 2007 will be primarily to fund research and developmentactivities, to continuously improve service capabilities, to expand operations,general and administrative costs and capital expenditures.  We believe we have sufficient cash and cashequivalents to meet our working capital and capital expenditure requirementsfor at least the next 12 months; however, our continued existence dependson the successful development of the PID technology and our ability tosuccessfully commercialize this technology. To date we have not yet generated cashflow from operations, and until wecommence recognizing revenue, we are highly dependant upon debt and equityfunding.  If we are not able to meet ourfunding requirements, our operations may cease to exist.  We cannot provide any assurance that any suchfunding will be available on acceptable terms or at all.

Sinceinception on June 9, 2003 through March 31, 2007, we have financed ouroperations through private sales of our equity and the issuance of convertiblenotes payable, totaling net proceeds of $30,190,686.  As of March 31, 2007, we had $8,024,912 incash and cash equivalents.  In October2006, we completed a private sale of five million shares of our common stockfor $2.35 per share and warrants to purchase 1.5 million shares at $3.25 pershare, yielding gross proceeds of $11,750,000. The 1.5 million warrants became exerciseable on April 22, 2007 and mayonly be exercised on a cash basis.

*Cash Flows from Operating Activities. *Cash flow used for operations isprimarily affected by our research and development progress and businessdevelopment.  Net cash flows used inoperating activities during the six months ended March 31, 2007 were $3,531,431compared to $3,483,052 for the six months ended March 31, 2006.  The increase from fiscal 2006 to fiscal 2007was the result of our increased spending on research and development and ourincreased level of general and administrative cost as discussed above.

*Cash Flows from Investing Activities. *Cashflow used in investing activities for the six months ended March 31, 2007 was$1,288,600 compared to $335,846 for the six months ended March 31, 2006.  The cash flows used in investing activitiesconsist of $1,225,524 for the purchase of 

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property, plantand equipment, the majority of which was used for the purchase of a quintiplexfrac pump.  Also included in cash flowsused in investing activities are $63,076 for costs associated with filing newand protecting existing patents.  Weanticipate that our capital expenditures for the next year will continue to befully funded from our available cash and cash equivalents.

*Cash Flow from Financing Activities. *Net cash provided by (used in) financing activities forthe six months ended March 31, 2007 was $10,553,357 compared to ($72,892) forthe six months ended March 31, 2006.  OnOctober 19, 2006, we completed the sale of five million shares of our commonstock to institutional and other accredited investors at $2.35 per share. Wereceived gross proceeds of $11.75 million, which we intend to use tomanufacture additional PID Systems, to hire and train qualified personnel, tofund a new particle injection system, to fund additional research anddevelopment, for general corporate purposes and for expenses associated withthe offering.  In addition, the investorsreceived warrants to purchase 1.5 million shares of our common stock with anexercise price of $3.25 per share. The warrants will be exercisable commencingon April 22, 2007 and will expire on October 19, 2011. We have valued thesewarrants at $2,835,000 using the Black-Scholes option pricing model and thisamount was charged to shareholders equity.

*ContractualObligations*.  In April2006, we entered into a thirteen month lease agreement for our new corporateoffices at 11757 Katy Freeway, Suite 1300, Houston, Texas 77079, that commencedin May 2006. In connection with the execution of this new lease agreement, we deliveredto the lessor a security deposit of $9,400. Our future minimum lease paymentsunder this lease at March 31, 2007 are $22,560.

InJune 2006, we extended the lease for our commercial operating facilitythat expired June 30, 2006 for one additional year. The lease for ourcommercial operating facility will expire June 30, 2007. The futureminimum lease payments under this lease at March 31, 2007 are $15,000.

InApril 2007, the Company entered into a 60 month lease agreement for a newcorporate office and operating facility and delivered to the lessor a securitydeposit of $41,144.  The new facility will combine the corporate officepersonnel and the operations personnel into one location at 5611 Baird Court,Houston, TX 77041.  The total futureminimum lease payments under this lease are $1,927,456.
| ** **                                                                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                                    | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than 5  years** | ** ** |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt  Obligation and Short Term Notes Payable (including current portion) |       | $                                         | 50,124     |   | $ | 39,876 |   | $ | 10,248 |   | $ | — |   | $ | — |   |
| Purchase  Obligations                                                               |       | 92,555                                    |       | 92,555 |   |   |   |   |   |   |   |
| Operating Lease  Obligations*                                                       |       | 1,965,106                                 |       | 233,733 |   | 1,174,420 |   | 556,953 |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                                               |       | $                                         | 2,107,785  |   | $ | 366,320 |   | $ | 1,184,512 |   | $ | 556,953 |   | $ | — |   |

 

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* OperatingLease Obligations include the future minimum lease payments for the newcorporate office and operating facility that was executed in April 2007.

**Off-BalanceSheet Arrangements**

Inconnection with the acquisition of the PID technology in January 2004,PDTI entered into a Royalty Agreement with ProDril Services, Incorporated (“PSI”)pursuant to which we are obligated to pay PSI a royalty on a quarterly basisequal to 18% of our earnings before interest, income taxes, depreciation andamortization (“EBITDA”) derived from the use of the PID technology, until anaggregate of $67,500,000 has been paid. PDTI also entered into a RoyaltyAgreement in January 2004 with ProDril Services, International, Ltd. (“PSIL”)pursuant to which we are obligated to pay PSIL a royalty on a quarterly basisequal to 2% of our EBITDA derived from the use of the PID technology, until anaggregate of $7,500,000 has been paid. In addition, we are obligated to payCCORE Technology and Licensing, Ltd. (“CTL”), PSI and PSIL a royalty equal to1.6%, 1.2% and 1.2%, respectively, of our quarterly gross revenue, derived fromthe use of the PID technology.  As of March 31,2007, we had no revenues or EBITDA; therefore no royalties have been paid oraccrued.

**CriticalAccounting Policies**

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these consolidated financial statements requires us to makeestimates and judgments that affect 

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the reported amounts of assets, liabilities andexpenses. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect ourmost significant judgments and estimates used in the preparation of ourconsolidated financial statements.

*ReverseAcquisition.  *The acquisition of PDTI inJanuary 2005 was accounted for as a reverse acquisition. Pursuant to theguidance in Appendix B of SEC Accounting Disclosure Rules andPractices Official Text, we believe the acquisition of PDTI was a merger of aprivate operating company into a non-operating public shell corporation withnominal net assets which typically results in the owners and management of theprivate company having actual or effective operating control of the combinedcompany after the transaction, with the shareholders of the former public shellcontinuing only as passive investors. These transactions are considered by thestaff of the Securities and Exchange Commission to be capital transactions insubstance, rather than business combinations. That is, the transaction isequivalent to the issuance of stock by the private company for the net monetaryassets of the shell corporation, accompanied by a recapitalization.Accordingly, the reverse acquisition has been accounted for as arecapitalization. For accounting purposes, PDTI is considered the acquirer inthe reverse acquisition. The historical financial statements are those of PDTI.Net loss per share for periods prior to the merger in January 2005 isrestated to reflect the number of equivalent shares received by the acquiringcompany.

*Impairmentof Long-Lived Assets.  *We evaluate our long-livedassets for indicators of possible impairment by comparison of the carryingamounts to future net undiscounted cash flows expected to be generated by suchassets when events or changes in circumstances indicate the carrying amount ofan asset may not be recoverable.  Should an impairment exist, theimpairment loss would be measured based on the excess carrying value of theasset over the asset’s fair value or discounted estimates of future cashflows.  We also evaluate the capitalized costs for patents and patentapplications filed but not issued for possible impairments. We have notidentified any such impairment losses to date. The evaluation of capitalized costs for patents and patent applicationsis based on a subjective cash flow forecast which is subject to change.  We will reassess our cash flow forecast eachtime there are fundamental changes in the underlying potential use of thepatents or patent applications in terms of performance, customer acceptance orother factors that may affect such cash flow forecasts.

*Stock-BasedCompensation.  *In December 2004, theFinancial Accounting Standards Board (“FASB”) issued a revision to SFAS No. 123,*Share-Based Payment*. Thisstatement establishes standards for the accounting for transactions in which anentity exchanges its equity instruments for goods or services. It alsoaddresses transactions in which an entity incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equity instruments.This statement focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. Thisstatement does not change the accounting guidance for share-based paymenttransactions with parties other than employees provided in SFAS No. 123 asoriginally issued. This statement is effective for new awards and those modified,repurchased or cancelled in interim or annual reporting periods beginning afterJune 15, 2005. We early adopted this standard upon inception.

*Researchand Development.  *The costs of materials andequipment or facilities that are acquired or constructed for research anddevelopment activities and that have alternative future uses are capitalized astangible assets when acquired or constructed. The cost of such materialsconsumed in research and development activities and the depreciation of suchequipment or facilities used in those activities are research and developmentcosts. However, the costs of materials, equipment, or facilities acquired orconstructed for research and development activities that have no alternativefuture uses are considered research and development costs and are expensed atthe time the costs are incurred.

*IncomeTaxes.  *The Company reports its income taxes inaccordance with SFAS No. 109, *Accountingfor Income Taxes*, which calls for the utilization of the asset andliability method of accounting for income taxes. Under this method, deferredtaxes are determined based on differences between financial reporting and taxbases of assets and liabilities and are measured using the enacted marginal taxrates and laws that will be in effect when the differences reverse. Temporarydifferences have been created for all stock option plans and are included inour SFAS No. 109 computation. For the six months ended March 31, 2007,there were permanent and temporary differences of approximately $12,000 and$908,000, respectively. At March 31, 2007, we had cumulative net operating losscarryforwards of approximately $21,891,000, which expire in years 2007 through2025. No effect has been shown in the consolidated financial statements for thenet operating loss carryforwards as the likelihood of future tax benefit fromsuch net operating loss carryforwards is not determinable at this time.Accordingly, the potential tax benefits of the net operating losscarryforwards, estimated based upon tax rates at March 31, 2007, have beenoffset by valuation reserves of the same amount.

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*NetLoss per Share.  *The Company has presented basicand diluted net loss per share pursuant to SFAS No. 128, *Earnings Per Share*. In accordance withSFAS No. 128, basic and diluted net loss per share has been computed usingthe weighted-average number of shares of common stock outstanding during theperiod. Dilutive net loss per share would give affect to the dilutive effect ofcommon stock equivalents consisting of options and warrants. Potentiallydilutive securities have been excluded from the net loss per common sharecalculation as the effects would be antidilutive. Potentially dilutivesecurities not included in the computation of weighted average diluted sharesof common stock because the impact of these potentially dilutive securitieswere antidilutive were 2,901,623 and 2,547,858 shares for the three monthsended March 31, 2007 and 2006, respectively, and 2,294,032 and 2,577,151 sharesfor the six months ended March 31, 2007 and 2006, respectively.

**Forward-LookingStatements**

Statements in thisquarterly report on Form 10-Q that are not historical facts (including anystatements concerning plans and objectives of management for future operationsor economic performance, or assumptions or forecasts related thereto) areforward-looking statements subject to Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Thesestatements can be identified by the use of forward-looking terminology including“forecast,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue” orother similar words. These statements discuss future expectations, containprojections of results of operations or of financial condition or state other “forward-looking”information. We and our representatives may from time to time make other oralor written statements that are also forward-looking statements.

Theseforward-looking statements are made based upon our management’s current plans,expectations, estimates, assumptions and beliefs concerning future eventsimpacting us and therefore involve a number of risks and uncertainties.  We caution that forward-looking statementsare not guarantees and that actual results could differ materially from thoseexpressed or implied in the forward-looking statements as a result of certainfactors, including but not limited to dependence upon energy industry spending,the volatility of oil and gas prices, weather interruptions, the results oftesting of our products, the availability of capital resources and the otherfactors described under “Item 1A. Risk Factors” in our annual report on Form10-K for the year ended September 30, 2006 filed with the SEC on December 14,2006.  We undertake no obligation toupdate any forward-looking statements except as required by law.

**Item 3.****                          Quantitativeand Qualitative Disclosures about Market Risk**

We believe that we do nothave any material exposure to financial market risk and we do not enter intoforeign currency or interest rate transactions.

**Item 4.****                          Controlsand Procedures**

As required byRule 13a-15(b) of the Securities Exchange Act of 1934, an evaluation wasperformed under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer of the effectiveness of thedesign and operation of our “disclosure controls and procedures” (as definedunder Rule 13a-15(e) and Rule 15d-15(e)) as of the end of the period covered bythis Quarterly Report on Form 10-Q filed with the SEC. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of March 31,2007.

There was no change inour internal control over financial reporting during our second quarter offiscal 2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Part II—Other Information**

**Item 4.****                          Submissionof Matters to a Vote of Security Holders**

On March 5, 2007, at the 2007 Annual Meeting ofShareholders, our shareholders voted to elect six directors to our board ofdirectors, to ratify the selection of UHY, LLP as our independent accountantsand to approve the 2007 Stock Incentive Plan.

The results of the election of the directors by the shareholderswere as follows:

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| Name                   | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|------------------------|------------|--------------------|------------|-------------------------|------------|
| Kenneth R.  LeSuer     |       | 23,575,404         |       | 19,495                  |       |
| Jim B. Terry           |       | 23,575,349         |       | 19,550                  |       |
| John D.  Schiller, Jr. |       | 23,575,849         |       | 19,050                  |       |
| Michael S.  Mathews    |       | 23,577,849         |       | 17,050                  |       |
| Hugh A. Menown         |       | 23,575,849         |       | 19,050                  |       |
| Steve A. Weyel         |       | 23,555,849         |       | 39,050                  |       |

 

The results of the vote by the shareholders on theproposal to ratify the selection of UHY, LLP as the Company’s independentaccountants were as follows:

| Votes For: 23,562,312 | Votes Against: 21,197 | Abstentions:  11,390 |
|-----------------------|-----------------------|----------------------|

 

The results of the vote by the shareholders on theproposal to approve the 2007 Stock Incentive Plan were as follows:
| Votes For: 15,299,406 |   | Votes Against:  630,266 |   | Abstentions:  38,175 |   | Broker  Non-Votes: 7,627,052 |
|-----------------------|--------|-------------------------|--------|----------------------|--------|------------------------------|

 

**Item 6.****                          Exhibits**

Exhibits:
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                            |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                       |
| 10.1         |       | Bonus Plan for fiscal 2007 (Incorporated by  reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with  the SEC on February 7, 2007)                                     |
|         |       |                                                                                                                                                                                       |
| 10.2         |       | Particle Drilling Technologies, Inc. 2007 Stock  Incentive Plan (Incorporated by reference from Exhibit 10.2 to our Quarterly  Report on Form 10-Q filed with the SEC on February 7, 2007) |
|         |       |                                                                                                                                                                                       |
| 31.1         |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934.*                                                     |
|         |       |                                                                                                                                                                                       |
| 31.2         |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934.*                                                     |
|         |       |                                                                                                                                                                                       |
| 32.1         |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.**                       |
|         |       |                                                                                                                                                                                       |
| 32.2         |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.**                       |

 

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*                    Filed herewith

**             Furnished herewith

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                          | PARTICLE DRILLING TECHNOLOGIES, INC.                                                                                                |
|--------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                     | (Registrant)                                                                                                                             |
|                     |                                                                                                                                     |
|                     |                                                                                                                                     |
| Date:  May 10, 2007 | /s/ J. CHRIS BOSWELL                                                                                                                     |   |
|                     | J. Chris Boswell                                                                                                                         |
|                     | Senior Vice President and Chief Financial Officer   (authorized officer, principal financial officer and   principal accounting officer) |

 

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**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                            |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                       |
| 10.1         |       | Bonus Plan for fiscal 2007 (Incorporated by  reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the  SEC on February 7, 2007)                                     |
|         |       |                                                                                                                                                                                       |
| 10.2         |       | Particle Drilling Technologies, Inc. 2007 Stock  Incentive Plan (Incorporated by reference from Exhibit 10.2 to our Quarterly  Report on Form 10-Q filed with the SEC on February 7, 2007) |
|         |       |                                                                                                                                                                                       |
| 31.1         |       | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934.*                                                     |
|         |       |                                                                                                                                                                                       |
| 31.2         |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act  of 1934.*                                                     |
|         |       |                                                                                                                                                                                       |
| 32.1         |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.**                       |
|         |       |                                                                                                                                                                                       |
| 32.2         |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.**                       |

 

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*                    Filedherewith

**             Furnishedherewith

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