U.S. Securities and
Exchange Commission 
Washington, D.C. 20549

Form 10-KSB

(Mark One)

| | [X] | ANUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                    1934 For the period ended July 31, 2006
| | --- | ------------------------------------------------------------------------------------------------------------------------------------

| | [    ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from______ to _______
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------

Commission
File number 0-21019

PURE Bioscience (Name of small business
issuer in its charter)

|                                                                                         |                                  
|---------------------------------------------------------------------------------------- | ---------------------------------
|California                                                                               | 33-0530289                       
|(State or other jurisdiction of incorporation or     
                     organization) | (IRS Employer Identification No.)

1725 Gillespie Way, El
Cajon, California 92020(Address of principal
executive offices)

619 596 8600Issuers telephone
number

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [     ]

Check if there is no disclosure of
delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [X]

The issuers revenues for its
most recent fiscal year: $200,432

Aggregate market value of the voting
stock held by non-affiliates of the registrant: Approximately $42,800,000 as of October
23, 2006.

Indicate the number of shares
outstanding of each of the issuers classes of common stock: 23,882,002 common shares of
common stock as of October 23, 2006.

Documents incorporated by
reference: Certain Exhibits

---



# PART I

# ITEM 1. DESCRIPTION OF
BUSINESS

OverviewPURE Bioscience (formerly Innovative
Medical Services) began as a provider of pharmaceutical water purification products for
the pharmacy market. We later expanded from this niche market into other, broader markets
where we are developing technology-based bioscience products that provide non-toxic
solutions to numerous global health challenges. Our proprietary high efficacy/low toxicity
bioscience technologies, including our silver dihydrogen citrate-based antimicrobials and
boric acid-based pesticides, represent innovative advances in diverse markets and lead
todays global trend toward industry and consumer use of green products
while providing competitive advantages in efficacy and safety.

In May 2005, we sold the assets of
our Water Treatment Division and are now focused exclusively on the development and
commercialization of our current and future bioscience products.

Bioscience Technologies Our
flagship bioscience technology is an aqueous disinfectant, silver dihydrogen citrate
(SDC). A patented new molecular entity, SDC is an electrolytically generated source of
stabilized ionic silver that can serve as the basis for a broad range of products in
diverse markets. SDC liquid is colorless, odorless, tasteless, non-caustic and formulates
well with other compounds. As a platform technology, our SDC-based antimicrobial is
distinguished from competitors in the marketplace because of its superior efficacy
combined with reduced toxicity. We are producing and plan to expand the production of
pre-formulated, ready-to-use products for private label distribution, as well as varying
strengths of SDC concentrate as an additive or raw material for inclusion in other
companies products.

We are also developing a
patent-pending pesticide technology, Triglycylboride which, like SDC, provides
effective results without human toxicity and is an alternative to traditional poisons.
Triglycylboride has been formulated into EPA registered RoachX® and AntX, the
key products in our Innovex® line of pest control products.

Water Treatment Division (Sold in
May 2005) The financial results of our Water Treatment Division prior to its sale in
May 2005 are shown separately in our financial statements for the year ended July 31, 2005
as Discontinued Operations. The Division included Fillmaster®
pharmaceutical water purification, dispensing and measuring products, and the
Nutripure® line of water treatment and filtration systems.

HistoryPURE Bioscience was incorporated
under the name of Innovative Medical Services in the State of California on August 24,
1992, to pursue the business of manufacturing and marketing the Fillmaster and
subsequently other advanced technologies to the pharmacy industry, and later to other
healthcare markets and retail consumers.

In 1999, we began investigating
marketing opportunities for a new antimicrobial molecule, silver dihydrogen citrate (SDC).
The SDC patent application was owned at the time by NVID International. Early in 2000,
after concluding that we wished to pursue development and marketing of the SDC technology,
we engaged in a marketing and licensing agreement with NVID International for market
segments in specified geographical areas.

In 2001 we acquired the marketing
rights and patent to our boric acid pesticide technologies. The first of these products
developed, RoachX, launched in October 2001.

In March 2001, the first U.S. patent
covering the basic SDC formulation and the method of making was issued.

In June 2001, Environmental
Protection Agency (EPA) registration was obtained for the 2400-parts per million (ppm)
technical grade SDC concentrate (trade name Axenohl®) as well as for the initial
Axen® hard surface disinfectant product for commercial, industrial and consumer
applications including restaurants, homes and medical facilities.

In late 2001, as part of a legal
settlement with NVID regarding the marketing rights to SDC, we purchased the SDC patent
for 700,000 shares of our common stock plus certain expenses.

In 2002 we expanded our Innovex line
of pesticides to include RoachX, AntX75, TrapX and CleanKill, an SDC-based hard surface
disinfectant for use in the pest control industry.

In March 2003, we received
Environmental Protection Agency (EPA) registration for our new SDC-based Axen®30
formulated Category IV hard surface disinfectant product for commercial, industrial and
consumer applications. Axen30 is a 30 ppm use-dilution formula of our patented SDC
antimicrobial technology. The additional EPA registration allows us to expand our hard
surface disinfectant claims to include a 30-second kill time on standard indicator
bacteria, a 24 hour residual kill on standard indicator bacteria, a 2-minute kill time on
some resistant strains of bacteria, 10-minute kill time on fungi, 30-second kill time on
HIV Type I, and 10-minute kill time on other viruses. These claims distinguish the
efficacy of Axen30 from many leading commercial and consumer products currently on the
market, while maintaining lower toxicity ratings.

In July 2003 we received a second
U.S. patent granted for the unique disinfectant silver dihydrogen citrate. U.S. patent
6,583,176 was issued on June 24, 2003 and covers the formulation of the aqueous
disinfectant in combination with ethyl alcohol. U.S. patent 6,583,176 is a division of the
first U.S. patent 6,197,814 issued on March 6, 2001 covering the basic SDC formulation and
the method of making.

In September 2003, we announced the
first commercialization of our SDC-based hard surface disinfectant, Axen30, to be sold by
EnvirOx L.L.C. of Danville, Illinois, as Critical Care, a commercial
disinfectant-fungicide-virucide. In the same month, we announced an agreement with
Therapeutics, Incorporated, a drug development company based in La Jolla, California, for
the development and commercialization of Food and Drug Administration (FDA) regulated
SDC-based products. Under this agreement, Therapeutics, Incorporated absorbed the
responsibility for funding and directing development activities and FDA regulatory
filings, initially focusing on development of SDC-based products for the treatment of
bacterial, viral and fungal mediated diseases and conditions.

2

---



Also in September 2003, shareholders
approved a corporate name change from Innovative Medical Services to PURE Bioscience.

In November 2003, we announced that
we had signed an agreement to sell our water treatment business to Data Recovery
Continuum, Inc. (DRCI), a Delaware corporation based in California. The original buyer did
not perform on the contract and we began negotiations with a new party to sell the Water
Treatment Division assets and related liabilities.

In May 2004 we filed an additional
U.S. patent covering multiple potential uses for our SDC technology including the
treatment of specific types of bacteria, fungus and viruses, as well as medical treatment
and the preservation of consumable and non-consumable products. The additional
Disinfectant and Method of Use patent application was the seventh SDC related patent
application filed in the United States covering inventive aspects of manufacturing,
composition and formulations of our SDC technology.

Also in May 2004, Therapeutics,
Incorporated began development of SDC within the first two groups of products subject to
FDA regulation; womens health products and acne products.

In June 2004, we obtained EPA
registration of expanded claims for our Axen30 hard surface disinfectant to include use on
hard surfaces in childcare facilities. The EPA previously registered Axen30 for
disinfection of hard surfaces including those in restaurants, homes and medical
facilities. The expanded use claims for our Axen30 disinfectant include childrens
toys, toy boxes, play tables and activity centers, jungle gyms, playpens, child car seats,
strollers and diaper changing tables. The EPAs registration of such sensitive use
sites emphasizes the least-toxic characteristics of Axen30 while expanding its
versatility in the professional and consumer disinfection markets.

In August 2004, we filed a utility
patent application to protect our proprietary silver dihydrogen citrate disinfectant in
combination with other antimicrobial compounds, including quaternary ammonia, oxidizers or
halogens such as chlorine, bromine or iodine. In August 2004, we also filed a utility
patent application to protect anhydrous, or crystalline, silver dihydrogen citrate
antimicrobial compositions, processes of making and methods of use.

In December 2004, we received
registration of our silver dihydrogen citrate-based hard surface disinfectant from the
California Department of Pesticide Regulation. The product had been previously registered
in each of the 49 other states. Receiving the California registration allows the launch of
nationwide marketing, distribution and sales of our hard surface disinfectant.

In May 2005, we sold the assets of
our Water Treatment Division to Maryland-based Innovative Medical Services, LLC for
$2,375,000.

In June 2005 we filed a utility
patent application to protect our proprietary silver dihydrogen citrate technology in home
care and personal care products, and in September 2005 we filed the international patent
application through the Patent Cooperation Treaty.

In May 2006 we announced that we had
expanded our joint development initiative with Therapeutics, Inc. to include development
of SDC as an active pharmaceutical ingredient in products for treatment of dermatophytoses
such as Tinea pedis (athletes foot), onychomycosis (nail fungus), among others, as
well as development of antimicrobial skin wash products, beginning with a hand sanitizer.
This expansion is in addition to the ongoing SDC-based anti-acne and vaginal
anti-infective pharmaceutical development programs.

# 

Principal Products and
Markets 
Silver Dihydrogen Citrate  Our
flagship technology is a patented, aqueous antimicrobial called silver dihydrogen citrate
(SDC). SDC is an electrolytically generated source of stabilized ionic silver that can
serve as the basis for a broad range of products in diverse markets. Colorless, odorless,
tasteless and non-caustic, the aqueous SDC formulates well with other compounds. We
produce and have begun to market pre-formulated, ready-to-use product for private label
distribution, as well as varying strengths of SDC concentrate as an additive or raw
material for inclusion in other companies products.

We currently have Environmental
Protection Agency (EPA) registration for our 2400-parts per million (ppm) technical grade
SDC concentrate (trade name Axenohl) as well as for our Axen and Axen30 hard surface
disinfectant products for commercial, industrial and consumer applications including
restaurants, homes and medical facilities. The Axen30 EPA registration allows us to expand
the existing efficacy claims as a hard surface disinfectant to include a 30-second kill
time on standard indicator bacteria, a 24 hour residual kill on standard indicator
bacteria, a 2-minute kill time on some resistant strains of bacteria, 10-minute kill time
on fungi, 30-second kill time on HIV Type I, and 10-minute kill time on other viruses.
These claims distinguish the efficacy of Axen30 from many of the leading commercial and
consumer products currently on the market, while maintaining lower toxicity ratings. Based
on the EPA toxicity categorization of antimicrobial products that ranges from Category I
(high toxicity) down to Category IV, SDC, with its combination of the biocidal properties
of ionic silver and citric acid, is an EPA Category IV antimicrobial for which
precautionary labeling statements are normally not required. This compares with Category
II warning statements for most leading brands of antimicrobial products

The tests conducted to obtain the EPA
registration were performed by nationally recognized independent laboratories Nelson
Laboratories of Salt Lake City, Utah and AppTec ATS of St. Paul, Minnesota, under AOAC
protocol and GLP regulations in accordance with EPA regulations. Specific Axen test
results include:

| |  | 30-Second
Kill Time  At 30 ppm, Axen demonstrated a 30-second, 99.9999% kill of standard
indicator organisms including Staphylococcus aureus ATCC 6538, Pseudomonas aeruginosa
ATCC 15442 and Salmonella choleraesuis ATCC 10708. Each is regarded as ever present in
nearly every persons life and is also a frequent human pathogen.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

---



| |  | Residual
Kill Activity  The residual activity of Axen was tested at 0, 1, 6, and 24 hours after
application to a hard surface against standard indicator organisms (Staphylococcus aureus
ATCC 6538, Pseudomonas aeruginosa ATCC 15442 and Salmonella choleraesuis ATCC 10708).
Quantitative residual results at 24 hours after initial application show a 99.99%
reduction in all three bacteria tested.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Bacteria  Additional
testing of Axen against Methicillin Resistant Staphylococcus aureus ATCC 700698 (MRSA),
Vancomycin Resistant Enterococcus faecium ATCC 700221 (VRE) and Escherichia coli OH157
ATCC 43888 demonstrated a 99.9999% kill in 2 minutes. These specific bacteria are
especially problematic in hospitals because of their resistance to antibiotics. Further,
Axen showed a 99.9999% kill in 30-seconds against Listeria monocytogenes ATCC 19111. Food
processing operations are challenged to keep this bacterium under control.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fungus  Axen
demonstrated a 99.9999% kill in 10 minutes of the common athletes foot fungus,
Trichophyton mentagrophytes ATCC 9533. This data allows the Company to add a fungicidal
claim to its hard surface disinfectant label.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Viruses  Axen
also demonstrated 99.9999% virucidal efficacy against HIV Type 1 in 30 seconds, Herpes
simplex virus type 1 in one minute, and Influenza A virus ATCC VR-544, Rhinovirus type R
37 ATCC VR-1147, Strain 151-1 and Poliovirus type 2 ATCC VR-1022, Strain Lansing in 10
minutes. After review and registration by the EPA, this data allows the Company to add
these virucidal claims to its hard surface disinfectant label.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In June 2004, we received EPA
registration to expand claims made for our Axen30 hard surface disinfectant to include use
on hard surfaces in childcare facilities. The EPA previously approved Axen30 for
disinfection of hard surfaces including those in restaurants, homes and medical
facilities. Expanded use claims for our Axen30 disinfectant now feature childrens
toys, toy boxes, play tables and activity centers, jungle gyms, playpens, child car seats,
strollers and diaper changing tables. The EPAs registration of such sensitive use
sites emphasizes the least-toxic characteristics of Axen30 while expanding its
versatility in the professional and consumer disinfection markets. We believe that these
claims may open key market opportunities for us as our current and potential distributors
position their, or our, products to penetrate the childcare segment which includes daycare
centers, preschools, schools, gymnasiums and childrens activity centers.

We plan to pursue additional EPA and
FDA regulatory approvals for other applications. For example, in September 2003, we
announced an agreement with Therapeutics, Incorporated, a drug development company based
in La Jolla, California, for the development and commercialization of certain Food and
Drug Administration (FDA) regulated silver dihydrogen citrate-based products.
Therapeutics, Incorporated funds and directs all development activities and FDA regulatory
filings under the agreement, initially focusing on development of silver dihydrogen
citrate-based products for the treatment of bacterial, viral and fungal mediated diseases
and conditions. In May 2004, Therapeutics, Incorporated began development of SDC within
the first two groups of products subject to FDA regulation; womens health products
and acne products. In May 2006 we announced that we had expanded our joint development
initiative with Therapeutics, Inc. to include development of SDC as an active
pharmaceutical ingredient in products for treatment of dermatophytoses such as Tinea pedis
(athletes foot), onychomycosis (nail fungus), among others, as well as development
of antimicrobial skin wash products, beginning with a hand sanitizer. Therapeutics,
Incorporated expects its development work will result in multiple Investigational New Drug
(IND) filings with the U.S. FDA.

Triglycylboride Our
bioscience division also includes a line of pesticide technologies. Like the silver
dihydrogen citrate antimicrobial technology, we believe the boric acid based pesticides
may offer competitive advantages in the market place with regard to efficacy when compared
to leading brands, while maintaining lower toxicity ratings.

Branded as Innovex, the product
line launched in October 2001 with our EPA-approved, patent-pending RoachX®.
Subsequently, we have developed additional products in the Innovex product line, including
the EPA-approved AntX75®, EPA-exempt non-toxic TrapX rodent lure and EPA approved
CleanKill, the SDC-based hard surface disinfectant for the pest control industry.
Marketing efforts behind these products to date, and resulting sales, have been limited.
During the year ending July 31, 2007 we intend to develop additional formulations of these
products to subsequently be sold, subject to evaluation of market potential, with wider
distribution and increased marketing efforts.

United States Department of
Agriculture testing confirms that RoachX is over 96% effective in three to four days with
one application for indoor and outdoor eradication of cockroaches, and can be used near
children and food preparation areas. Boric acid is a well-known and effective deterrent of
cockroaches and will kill them on contact, but cockroaches do not naturally eat the
repellent. Although many pesticide products contain boric acid as the listed active
ingredient, we believe RoachX to be new because of the endothermic reaction caused by the
combination of boric acid and polyglycol that produces three unique results: 1) The
formula protects the boric acid from water and humidity, 2) When combined with an
attractant, the cockroaches perceive the formulation as food and will actually eat the
polyglycol-encapsulated boric acid, and 3) The formula acts as a time-released pesticide,
allowing the cockroach to return to the nest before it dies and then becomes a bait
station for other roaches in the colony. We believe the product line, containing
particular formulas and attractants for specific pests, is effective against cockroaches,
ants, palmetto bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests.

CompetitionThe markets for silver dihydrogen
citrate and pesticide products are highly competitive. The markets in which we will sell
any such products are dominated by a number of large, well-capitalized corporations, which
may impact our ability to successfully market our products or maintain any technological
advantage we might develop. We, or our distributors, would need to invest significant
resources in order to attempt to displace traditional technologies sold by what are in
many cases well-known international industry leaders. Alternatively, we may pursue
strategies in selective markets of encouraging existing competitors to incorporate our
products into their existing brands, thereby reducing the proportion of end-use revenues
that would accrue to us. We recognize that innovative marketing methods are required in
order to establish our products, and that such methods may not be successful.

4

---



Patents and Intellectual
PropertyWe own and have several patents
pending related to the silver dihydrogen citrate technology, and we have a patent pending
for RoachX and related pesticide products.

The first U.S. patent for silver
dihydrogen citrate was issued on March 6, 2001, and a supplemental patent has been filed
to cover the substitution of 14 other organic acids for citric acid in the formulation. In
June 2003, we received a second U.S. patent granted for silver dihydrogen citrate that
covers the formulation of the aqueous disinfectant in combination with ethyl alcohol. In
addition, PURE has received patents in Australia and New Zealand as well as in the EAPC
(Eurasian Patent Community) and the OAPI (Organisation Africaine de la Propriete
Intellectuelle). Patent applications are pending in Brazil, Canada, China, Japan, Mexico,
the EPO (European Patent Office) and the ARIPO (African Regional Industrial Property
Organization). These foreign patent applications were filed through the Patent Cooperation
Treaty and were published by the World Intellectual Property Organization (www.wipo.org)
as Number WO 99/18790 on April 22, 1999.

In May 2004, we filed an additional
U.S. patent covering multiple potential uses for our SDC technology including the
treatment of specific types of bacteria, fungus and viruses, as well as medical treatment
and the preservation of consumable and non-consumable products. The additional
Disinfectant and Method of Use patent application was the seventh SDC related patent
application filed in the United States covering inventive aspects of manufacturing,
composition and formulations of our SDC technology.

In August 2004, we filed a utility
patent application to protect our proprietary silver dihydrogen citrate disinfectant in
combination with other antimicrobial compounds, including quaternary ammonia, oxidizers or
halogens such as chlorine, bromine or iodine. In addition, we filed the foreign patent
application for this utility patent through the Patent Cooperation Treaty. In February
2006, we entered the international application into national phase in Australia, Canada,
China, Europe, Japan, Israel, India, Mexico, New Zealand, Norway, South Korea, Singapore,
and South Africa.

In August 2004, we filed a utility
patent application to protect anhydrous, or crystalline, silver dihydrogen citrate
antimicrobial compositions, processes of making and methods of use. In addition, we filed
the international patent application for this utility patent through the Patent
Cooperation Treaty. In February 2006, we entered the international application into
national phase in Australia, Canada, China, Europe, Japan, Israel, India, Mexico, New
Zealand, Norway, South Korea, Singapore, and South Africa.

In June 2005, we filed a utility
patent application to protect our proprietary silver dihydrogen citrate technology in home
care and personal care products. In September 2005, we filed the international patent
application through the Patent Cooperation Treaty. The patent is scheduled to enter
national phase in March 2007, at which time we will determine in which countries we will
file national phase applications.

A patent application for RoachX and
related products was filed in February 1998 to protect a nonaqueous form of insecticide
consisting of a desiccant, preferably boric acid, with additional ingredients for binding,
stability and target insect attraction.

We own the registered trademarks or
trademark applications for PURE Bioscience, Powered by SDC Ag+, Staph
Attack, Staphacide, Axenohl®, Axen®, Silvérion®,
Kinderguard, Innovex, RoachX®, AntX®, TrapX® and Medifier®.

ManufacturingWe manufacture and blend the silver
dihydrogen citrate products in our manufacturing facility at our corporate headquarters.
During the year ended July 31, 2006, we chose to outsource some blending and packaging
operations, and may continue to outsource such operations to one or potentially multiple
third parties; however, we plan to maintain the manufacturing operation for our silver
dihydrogen citrate concentrate. Silver, the primary active ingredient, is a readily
available commodity, and the other active and inactive ingredients of silver dihydrogen
citrate are readily available from chemical supply companies.

We manufacture RoachX, AntX and TrapX
in our manufacturing facility at our corporate offices, and outsource some of the
packaging functions. In future periods we may outsource manufacturing operations for the
production of these products. The active and inactive ingredients are readily available
through multiple manufacturers in the U.S. and overseas.

Research and DevelopmentAll in-house Research and Development
(R&D) costs, and third party costs for maintaining approved patents, are
charged to operations when incurred and are included in operating expenses. Third party
R&D costs for pending patents are capitalized as incurred until such time as the
associated patents are approved or abandoned. The cumulative cost of acquiring approved
patents is amortized on a straight-line basis over the remaining lives of the patents.
Licenses are amortized on a straight-line basis over periods ranging from 17 to 20 years.
The weighted average amortization period for all patents and licenses is 18 years. The
total amounts capitalized, under patents and licenses, were $111,000 and $118,900 in the
fiscal years ended July 31, 2006 and 2005, respectively. Expense charged to R&D was
$1,193,900 and $1,357,100 in the fiscal years ended July 31, 2006 and 2005, respectively.

Government RegulationWe manufacture and sell pesticide and
antimicrobial products that are regulated by the U.S. Environmental Protection Agency
(U.S. EPA) under Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). We have five
products registered by the U.S. EPA; two pesticides, AntX and RoachX, and three
antimicrobial pesticides, Axen, Axen30 and Axenohl. As we continue to develop new
products, we will require a registration from the US EPA in order to market our products
in the United States. There is no guarantee that the US EPA will grant a registration for
the products we submit.

5

---



In addition, each of the 50 United
States has its own government agency that regulates pesticide sales into their state.
Prior to distributing a product into any of these states, a registration from the state is
required. We market our pesticide and

antimicrobial products to third party
distributors who are responsible for obtaining these state registrations. Should we begin
to directly market our own brands, we would first need to obtain a registration for each
state to which we will distribute product.

We have chosen to pursue certain
approvals through the U.S. Food and Drug Administration (FDA) by partnering with
Therapeutics, Incorporated, which has assumed responsibility for the testing and
regulatory process for selected potential FDA regulated silver dihydrogen citrate-based
products. The process of obtaining FDA and other required regulatory approvals is lengthy,
expensive and uncertain. There is no guarantee that either Therapeutics, Incorporated, any
other potential partner, or ourselves will be able to obtain the resources necessary to
obtain such approvals, or that the products will meet the strict criteria imposed by the
FDA.

In addition, if we should begin to
sell our products internationally, we or our partners will have to gain all necessary
regulatory approvals or registrations in each specific country in which our products would
be sold. We are not currently selling product outside of the US and have not begun to
undertake obtaining any international regulatory approvals or registrations.

EmployeesAs of October 23, 2006, we employed
thirteen people, of whom twelve are full-time employees.

ITEM 2. PROPERTIESOur business operates in a 13,067
square foot facility located in a light industrial/office park in El Cajon, California.
This location houses all administrative, manufacturing and warehousing functions. In May
1996, we entered into an operating lease agreement for the premises, with an unaffiliated
third party, which expired under extension in October 2006.

As part of the agreement to sell the
assets of the Water Treatment Division to Innovative Medical Services, LLC, in May 2005 we
entered into a sublease agreement with IMS LLC, under which IMS LLC occupied approximately
28% of the square footage of the facility and paid us approximately $3,800 per month in
rent. IMS LLC vacated the space in September 2006 and we are now operating in the full
13,067 square feet of the facility.

In October 2006 we entered into a new
sixty month operating lease for the facility. During the year ending July 31, 2007, we
intend to make improvements to the facility to develop and expand our manufacturing and
warehousing operations.

ITEM 3. LEGAL PROCEEDINGSEffective October 18, 2006, PURE
Bioscience, Falken, Nickel and related parties entered into an agreement styled
Global Settlement Agreement. The agreement calls for the dismissal of all
lawsuits and arbitrations and any related appeals between or among the parties. On October
25, 2006, U.S. Magistrate Judge Nita L. Stormes so ordered compliance with
said Global Settlement Agreement.

This Global Settlement Agreement has
no effect on our November 2004 $14.2 million award resulting from a binding arbitration
proceeding against NVID International, Inc. through the American Arbitration Association
International Centre for Dispute Resolution.

ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to
shareholders in the fourth quarter of the fiscal year.

6

---



# PART II

# ITEM 5. MARKET FOR THE
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

| | (1) | Market
Information: PURE Biosciences common stock is traded on the           Bulletin
Board under the symbol PURE.
| | --- | ---------------------------------------------------------------------------------------------------------------------

| | (2) | High
and Low Bid Prices: The following table sets forth high and low bid prices           for
each fiscal quarter, for the last two fiscal years as reported on Yahoo!
          Finance. Such quotations reflect inter-dealer prices without retail mark-up,
          mark-down, or commissions and may not represent actual transactions.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fiscal 2006      | Fiscal 2005
|---------------- | -----------
|
|July 31, 2006    |            
|April 30, 2006   |            
|January 31, 2006 |            
|October 31, 2005 |            

| | (3) | Security
Holders: As of October 23, 2006, we had approximately 270 holders of           record of
our common stock. This does not include beneficial owners holding           common stock
in street name. The closing price per share on October 23, 2006 was           $1.90.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Dividend
Plans: We have paid no common stock cash dividends and have no current           plans to
do so.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (5) | Preferred
Stock: There are no shares of preferred stock presently outstanding.
| | --- | ------------------------------------------------------------------------------

| | (6) | Recent
Sales of Unregistered Securities: None.
| | --- | ----------------------------------------------

| | (7) | Securities
Authorized for Issuance under Equity Compensation Plans
| | --- | ------------------------------------------------------------------

|Plan Category         | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|--------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation   |                                                                                                 |                                                                                 |                                                                                                                                                
|plans approved by     |                                                                                                 |                                                                                
|security holders      |                                                                                                 |                                                                                 |                                                                                                                                                
|                     
|Equity compensation   |                                                                                                 |                                                                                
|plans not approved by |                                                                                                 |                                                                                
|security holders      |                                                                                                 |                                                                                 |                                                                                                                                                
|                     
|Total                 |                                                                                                 |                                                                                 |                                                                                                                                                
|                     

The following equity compensation
plans were not approved by security holders:

| | 1. | 2001
ETIH2O Stock Option Plan: Adopted by the Board in January 2001, there are
                    1,000,000 shares authorized under this Plan. The options have a
five-year term                     with vesting ratably over a five-year period.
Executive Officers and Directors                     are not eligible participants under
this plan.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | 2001
Consultants and Advisors Stock Option Plan: Adopted by the Board in January
                    2001, there are 500,000 shares authorized under this Plan. The
options have a                     five-year term with vesting ratably over a five-year
period. Executive Officers                     and Directors are not eligible
participants under this plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | 2004
Consultants and Advisors Stock Option Plan: Adopted by the Board in April
                    2004, there are 2,000,000 shares authorized under this plan. The
options have a                     five-year term with vesting ratably over a five-year
period. Executive Officers                     and Directors are not eligible
participants under this plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---



ITEM 6. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSExcept for
the historical information contained herein, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual results may
differ substantially from those referred to herein due to a number of factors, including
but not limited to risks described in the section entitled Competition and
elsewhere in this Form 10KSB. Our consolidated financial data includes Export Company of
America, Inc., Ampromed Comercia Importacao e Exportacao Ltda., ETI-H2O Corporation, and
Nutripure Water Corporation. The following discussion and analysis should be read in
conjunction with the audited financial statements of PURE Bioscience.

RESULTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2006 VERSUS YEAR ENDED JULY 31, 2005PURE Bioscience (formerly Innovative
Medical Services) began as a provider of pharmaceutical water purification products. Our
historical revenues were primarily derived from the Water Treatment business prior to its
sale in May 2005; however, our business is now focused on investing in broader markets
with novel, proprietary bioscience products based upon our patented silver ion
antimicrobial technologies and patent pending boric acid based pesticide technologies.

In November 2001, we acquired the
patent (the Axenohl patent) for silver dihydrogen citrate, a silver ion based
technology which is the basis for our silver ion products. We purchased the patent for
700,000 shares of common stock plus certain expenses, valuing the patent at $1,540,600
based on the market price of the stock exchanged, and agreed to make certain royalty
payments to NVID. In October 2003, we filed an arbitration action against NVID
International and Falken Industries to demand a cease and desist from continued and
ongoing public dissemination of false, misleading and disparaging statements and complete
cooperation in enforcing and defending the silver dihydrogen citrate patent and related
technology, pursuant to the Core Settlement Agreement between PURE Bioscience and NVID
International. In November 2004, we won a $14.2 million award resulting from the action
against NVID. We believe it is unlikely that we will ever be able to collect any part of
this award, and we have therefore not recorded any amount as an asset on the balance
sheets as at July 31, 2005 or 2006. However, in addition to the $14.2 million award
against NVID, the arbitrator also clarified that PUREs royalty obligations to NVID
were legally terminated by NVIDs material breach of the Core Settlement Agreement,
resulting in the elimination of approximately $17 million in potential future royalty
payments from PURE to NVID over the life of the Axenohl patent.

In October 2005, we received a $3.4
million award from American Arbitration Association International Center for Dispute
Resolution, plus costs of $241,000, resulting from a binding arbitration proceeding
against Falken Industries. No part of this award has been recorded as an asset on our
balance sheets as at July 31, 2005 or 2006 due to the uncertainty of our ability to
collect any part of the award. Effective October 18, 2006, PURE Bioscience, Falken, Nickel
and related parties entered into an agreement styled Global Settlement
Agreement. The agreement calls for the dismissal of all lawsuits and arbitrations
and any related appeals between or among the parties. On October 25, 2006, U.S. Magistrate
Judge Nita L. Stormes so ordered compliance with said Global Settlement
Agreement.

This Global Settlement Agreement has
no effect on our November 2004 $14.2 million award resulting from a binding arbitration
proceeding against NVID International, Inc. through the American Arbitration Association
International Centre for Dispute Resolution.

Effective May 25, 2005, we sold the
assets of the Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. In the financial statements included in this Report
on Form 10K-SB, the Water Treatment Division is included as a Discontinued Operation in
the Consolidated Statements of Operations and Cash Flows.

Upon the sale, IMS LLC assumed all
liabilities associated with the Division. At the closing of the sale, we received
$1,950,000 in cash and a promissory note in the amount of $425,000. In June, we received a
cash payment of $225,000, and in August, subsequent to the end of the fiscal year, we
received the balance of $200,000 plus interest on the promissory note.

Subsequent to the sale of the Water
Treatment Division we agreed to continue to fund the working capital of IMS LLC for a
limited period of time. At July 31, 2005, we had funded $132,521 of working capital on IMS
LLCs behalf. In August, during the fiscal year ended July 31, 2006, in addition to
the payment of the promissory note, IMS LLC reimbursed us for the working capital we had
provided subsequent to the sale. We are no longer providing any working capital for IMS
LLC.

During the year ended July 31, 2006,
we derived no income or expense from the Water Treatment Division. During the prior fiscal
year, we received the benefit from the revenues and incurred the expenses of the Water
Treatment Division through the date of the sale of the Division on May 25, 2005. Income
from this operation for the year ended July 31, 2005 (effectively through May 25, 2005)
consisted of revenues of $1,699,955, cost of sales of $937,958 and other costs of
$251,586, resulting in a net income from discontinued operations before taxes of $510,411.
Income tax related to the operation of the Division through May 25, 2005 was estimated to
be approximately $230,500; however, this amount was offset by the realization of a
corresponding tax benefit from current year losses and available net operating loss
carry-forwards relating to our continuing operations.

The realized gain to us on the sale
of the Water Treatment Division, as shown in our statement of operations for the year
ended July 31, 2005, was $2,187,136 before the effect of taxes. The sale of the Water
Treatment Division assets to Innovative Medical Services, LLC was a transaction taxable
for United States federal and California income tax purposes. The estimated tax liability
of $937,500 related to the sale was offset by other losses and carry-forwards for the year
ended July 31, 2005. For the year ended July 31, 2005, the total estimated tax liability
of $1,167,500 related to the discontinued operation was shown on the face of the Income
Statement as Income taxes on discontinued operations, with a corresponding and
offsetting Income tax benefit to continuing operations. During the year ended
July 31, 2006, we determined the actual income tax on the operation and sale of the
Division for the year ended July 31, 2005 to be $1,037,497. An adjustment of $129,990 is
therefore shown on the face of the Income Statement for the year ended July 31, 2006 as
Income taxes on discontinued operations, with a corresponding and offsetting
Income tax benefit to continuing operations. See Note 12 to the financial
statements included in this Report on Form 10K-SB for a more detailed discussion of the
tax consequences of the sale of the Water Treatment Division.

8

---



For the year ended July 31, 2006,
revenues were $200,400, a 29% increase from comparable bioscience segment revenues of
$155,800 in the prior year, primarily due to sales of silver dihydrogen concentrate to
strategic partners for evaluation and development purposes. The antimicrobial and
pesticide markets are highly competitive, and we anticipate that market acceptance of our
novel technologies may be a long term achievement.

Each formulation of our SDC based
products requires regulatory approval for each respective jurisdiction in which the
products are to be sold, and in addition to competitive challenges, we believe that the
investment necessary to pursue research, testing and regulatory approval for such products
will continue to be significant. However, now that we have prevailed in our arbitration
proceedings and have sold our Water Treatment Division, we believe we are in a position to
accelerate additional regulatory approvals and negotiate distribution agreements for the
inclusion of silver dihydrogen citrate into multiple global products.

Gross profit for the year ended July
31, 2006 was $94,700 versus $104,200 in the prior year, a decline of 9.1%. Our gross
profit percentage declined from 67% in 2005 to 47% in 2006, primarily as we are now
absorbing the overhead costs of our manufacturing facility over a smaller number of
products. In the prior fiscal year we absorbed such costs over the products of the Water
Treatment Division in addition to our bioscience products.

Operating costs increased from
$3,115,400 in the year ended July 31, 2005, to $3,807,400 in the year ended July 31, 2006.
Of these totals, selling expenses increased by $142,700, to $570,200 in the current period
compared with the prior fiscal year, primarily due to costs associated with the
introduction of silver dihydrogen citrate products to new partners and to pending product
launches. General and administrative expenses increased by $712,500, to $2,043,300 in year
ended July 31, 2006, compared with the year ended July 31, 2005. The increase in expense
is primarily due to expenses for investor relations and investment consulting services
associated with our March 2006 private placement, investments in corporate infrastructure,
and to a lesser extent, increases in insurance and accounting fees. Research and
development expense declined by $163,200 or 12% over the same period, to $1,193,900 for
the year ended July 31, 2006, primarily due to a reduction in patent related legal fees.

Our net loss from operations before
taxes, excluding earnings from the Water Treatment Division prior to its sale, increased
by $668,700, from a net loss of $3,011,800 for the year ended July 31, 2005 to a net loss
of $3,680,500 for the year ended July 31, 2006. Of the loss before taxes in the period
ending July 31, 2006, $1,001,100 is attributable to non-cash items: $743,800 of services
and interest paid with stock and options, and $257,300 of amortization and depreciation.
Of the loss in the prior year, $1,076,469 was attributable to non-cash items: $808,139 of
services and interest paid with stock and warrants and $268,330 of amortization and
depreciation.

Earnings from the Water Treatment
Division for the year ended July 31, 2005 prior to its sale in May 2005, shown in the
Statements of Operations as Income from discontinued operations, were $510,400
before the effect of taxes. After the gain on the sale of the Water Treatment Division of
$2,187,136, the estimated tax liability for which was offset by a corresponding tax
benefit from losses from continuing operations, the consolidated net loss for the year
ended July 31, 2005 was $317,100. After the effect of taxes, our net loss for the year
ended July 31, 2006 was $3,682,900.

The net effect of taxes on the
Consolidated Statements of Operations for the year ended July 31, 2006 is a tax liability
of $2,400, the minimum franchise taxes paid to the State of California regardless of
income or loss. As discussed above, the estimated tax liability on the sale of the assets
of the Water Treatment Division and on the income from the operation of the Division
through May 25, 2005, were $230,500 and $937,500 respectively; a total of approximately
$1,167,500. This amount was offset by a tax benefit of approximately $1,167,500 from
losses arising in the respective fiscal year, and available net operating loss
carry-forwards relating to our continuing operations. During the year ended July 31, 2006,
we determined the actual income tax on the operation and sale of the Division for the year
ended July 31, 2005 to be $1,037,500. An adjustment of approximately $130,000 is therefore
shown on the face of the Statement of Operations for the year ended July 31, 2006 as a
reduction to Income taxes on discontinued operations, with a corresponding and
offsetting reduction to the Income tax benefit to continuing operations. See
Note 12 to the financial statements included in this Report on Form 10K-SB for a more
detailed discussion of the tax consequences of the sale of the Water Treatment Division.

LIQUIDITY AND CAPITAL
RESOURCESFrom inception through the present,
we have financed our operations primarily through our initial public offering in August of
1996, by subsequent private placement stock sales, through lines of credit and the
issuance of debentures, and in May 2005 by the sale of our Water Treatment Division. We
currently have no long-term debt.

In August 2003, we completed a
financing arrangement which included the acquisition of a $2,000,000 Note and Trust Deed
bearing a rate of interest of 10% with principal and all interest due and payable on or
before June 12, 2004. In addition to the Trust Deed, the arrangement included a $435,000
unsecured offsetting loan payable. The Trust Deed, offset by the loan, was acquired in
exchange for 2,000,000 unregistered shares of our common stock, at a fair value of $0.80
per share, issued to a party unrelated to the grantor. Later in that year we entered into
an agreement to sell substantially all of the assets and certain related liabilities of
our Water Treatment Division to Data Recovery Continuum, Inc. (DRCI) for $2.75 million in
cash at closing to include the purchase of the Trust Deed at face value, and additional
amounts one year after closing based on certain criteria relating to sales of water
treatment systems. At this time, DRCI paid to us a deposit of $100,000 in cash, secured by
a promissory note for that amount. Prior to the due date on the Trust Deed, the debtors
requested an extension to complete an in-process financing plan for the payment of the
principal and interest, which we granted, however the debtor failed to perform during the
term of the extension.

9

---



In March 2005, we reached a partial
settlement with Lee Brukman of Next9, LLC and Data Recovery Continuum, Inc. in which we
reacquired the 2,000,000 shares of our common stock in exchange for our conditional
transfer to Brukman of the Trust Deed receivable. In addition, Brukman forgave the
$535,000 in loans to us, plus accrued interest of $61,377. The net result on the
consolidated balance sheet was a reduction in assets of approximately $2,327,700, a
reduction in liabilities of approximately $596,000, and an increase in common stock of
$1,735,700, or $0.87 per share, based on an estimate of fair value.

Effective May 25, 2005, we sold the
assets of our Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. IMS LLC also assumed all liabilities associated with the
Division. At closing, we received $1,950,000 in cash and a promissory note in the amount
of $425,000, which was fully paid by August 2005. We agreed to continue to fund the
working capital of IMS LLC for a limited period of time subsequent to the sale of the
Water Treatment Division, in order to enable the continuation of payroll and an
uninterrupted supply of materials and components. At July 31, 2005, we had funded $132,521
of working capital on IMS LLCs behalf, which was reimbursed to us in August 2005.

The sale of the Water Treatment
Division assets to Innovative Medical Services, LLC was a transaction taxable for United
States federal and California state income tax purposes, however the tax liability was
offset by losses from the respective fiscal year, and available net operating loss
carry-forwards relating to our continuing operations. See Note 12 to the financial
statements included in this Report on Form 10K-SB for a more detailed discussion of the
tax consequences of the sale of the Water Treatment Division.

As at July 31, 2006, we had current
assets of $5,066,600, an increase of $4,127,700 from July 31, 2005. During the year ended
July 31, 2006, cash provided by financing activities was $7,132,800, including $5,911,600
received from our March 2006 private placement. Under the private placement, we issued
3,952,209 shares of common stock at $1.65 per share to accredited investors, for a total
of $6,521,145. Net proceeds to us, after fees and expenses, were $5,911,608. The placement
agent also received a warrant to purchase 355,698 shares of our common stock at an
exercise price of $2.556. On April 24, 2006, we filed a registration statement with the
Securities and Exchange Commission (SEC) as required under the placement agreement, for
the resale of shares issued in the private placement. The registration statement included
all shares of common stock issued in the private placement, as well as the shares to be
issued upon the exercise of the warrants. Under the terms of the placement agreement, as
amended on April 21, 2006, if the registration statement had not been declared effective
within 150 days of the filing date (April 24, 2006), we would have been subject to
liquidated damage penalties; however, the registration statement was declared effective by
the SEC with an effectiveness date of July 7, 2006. See Note 7 to the financial statements
included in this Report on Form 10K-SB for further details regarding the March 2006
private placement.

In addition to the cash received from
our March 2006 private placement, during the year ended July 31, 2006 we sold 39,999
shares of common stock in November 2005 in a private placement to an accredited investor,
for $0.75 per share (a total value of $30,000), and in January 2006, we sold 500,000
shares of unregistered common stock in a private placement to an unaffiliated, accredited
investor at $0.75 per share (a total of $375,000). In February 2006, we sold 500,000
shares of unregistered common stock in a private placement to a director of the Company,
at $0.90 per share (a total of $450,000). During the year ended July 31, 2006, we also
received $366,200 from the exercise of options on 554,333 shares of common stock. See Note
8 for further details regarding stock option activity for the years ended July 31, 2006
and 2005.

In the year ended July 31, 2005 cash
provided by financing activities was $781,000. This included $1,360,000 received from the
sale of common stock in private placements and $321,000 from the exercise of options and
warrants to acquire common stock, partially offset by a net repayment of $900,000 of notes
and short-term loans.

The $7,132,800 of cash provided by
financing activities was partially offset during the year ended July 31, 2006 by cash used
in our operations. Excluding the receivables associated with the sale of the Water
Treatment Division as discussed above, net operating cash outflows were $2,769,000. Net
operating cash outflows for the previous fiscal year, excluding cash generated from the
operation of the Water Treatment Division, were $2,897,300. In the year ended July 31,
2005, accounts payable and accrued liabilities grew by $1,229,500, whereas during the
current fiscal year they declined by $59,000. Inventory in the year ended July 31, 2006
increased by $119,900, as we have built up our quantities of silver dihydrogen citrate
concentrate on hand based on expected needs.

During the year ended July 31, 2006,
property, plant and equipment increased by $201,300 to $353,300, including cash invested
during the year of $270,800. Subsequent to our private placement in March 2006, we have
commenced planned investments in our manufacturing and information technology
infrastructure. Other assets increased during the year ended July 31, 2006 by $322,200,
primarily due to the recording of unvested options as a prepaid asset (Prepaid
consulting) which will be amortized over the life of associated consulting
agreements. See Note 10 to the financial statements included in this Report on Form 10K-SB
for further details of this transaction. The $398,900 of prepaid consulting on the balance
sheet as at July 31, 2006 was partially offset by an excess of patent amortization over
patent capitalization during the year. The capitalized value of patents and licenses at
July 31, 2006, primarily related to our silver dihydrogen citrate technology, was
$2,136,700. At July 31, 2006, we had current liabilities of $411,900, an increase of
$58,600 from July 31, 2005, primarily due to the timing of the payment of accounts
payable.

RISKS RELATED TO OUR
CAPITAL RESOURCESAt July 31, 2006 we had current
assets of $5,066,600, current liabilities of $411,900 and no outstanding debt; however we
do not yet have significant cash inflows from product sales to offset our ongoing planned
investments in infrastructure, manufacturing capacity, product launches, research and
development projects and regulatory submissions, among other investments.

In future periods we may need to seek
additional capital through the issuance of debt, equity, convertible securities or through
other means, any one of which could reduce the value to us, perhaps substantially, of the
commercialization of our bioscience technology. The issuance of debt or equity, or
convertible securities, could lead to the dilution of our existing shareholders. There is
no guarantee that we would be able to obtain capital on terms acceptable to us, or at all.
Insufficient funds could require us to delay, scale back or eliminate some or all of our
research and product development programs, license to third parties the right to
commercialize products or technologies that we would otherwise commercialize ourselves, or
to reduce or cease operations.

10

---



RISKS RELATED TO OUR
OPERATIONSWe had a loss of $3,680,500 from
continuing operations before taxes in the fiscal year ending July 31, 2006, and loss of
$3,011,800 from continuing operations before taxes in the fiscal year ending July 31,
2005. We may continue to have losses in the future. If our revenue growth is slower than
anticipated or operating expenses exceed expectations, it may take an unforeseen period of
time to achieve or sustain profitability and we may never achieve or sustain
profitability. Slower than anticipated revenue growth from new products would force us to
scale back research, testing, product development and marketing of new products, at which
time we would reduce the size and scope of our operations, or cease operations.

By selling our Water Treatment
Division, we lost the most significant contributor to our historical revenue stream and
became less diversified. We are now a bioscience company focused on the marketing, selling
and continued development of silver dihydrogen citrate antimicrobial technology and
Triglycylboride pesticide technology. While the rewards in these fields are potentially
great, the risks, the regulatory hurdles and the costs of doing business are also high.
Our silver dihydrogen citrate is a platform technology rather than a single use applied
technology. As such, products developed from the platform fall under the jurisdiction of
multiple U.S. and international regulatory agencies. We currently have Environmental
Protection Agency (the EPA) registration for our 2400-parts per million (ppm)
technical grade SDC concentrate (trade name Axenohl), as well as for our Axen and Axen30
hard surface disinfectant products for commercial, industrial and consumer applications
including restaurants, homes and medical facilities. We intend to fund and manage
additional EPA regulated product development internally and in conjunction with current
regulatory consultants; however the introduction of additional EPA regulated antimicrobial
products could take several months.

Our technology also shows promise as
a broad-spectrum antimicrobial for use in human and veterinary healthcare products. We
have chosen to pursue certain approvals through the U.S. Food and Drug Administration
(FDA) by partnering with Therapeutics, Incorporated, which has assumed responsibility for
the testing and regulatory process for selected potential FDA regulated silver dihydrogen
citrate-based products. We expect that Therapeutics experience with drug development
and FDA processing, especially with regard to dermal pharmaceuticals, could lead to IND,
NDA and/or 510-K filings for silver dihydrogen citrated-based healthcare products with the
FDA. The FDA and comparable agencies in many foreign countries impose substantial
limitations on the introduction of new products through costly and time-consuming
laboratory and clinical testing and other procedures. The process of obtaining FDA and
other required regulatory approvals is lengthy, expensive and uncertain. There is no
guarantee that either Therapeutics, Incorporated, any other potential partner, or
ourselves will be able to obtain the resources necessary to obtain such approvals, or that
the products will meet the strict criteria imposed by the FDA. It may be several years
before we are able to introduce any FDA regulated antimicrobial pharmaceutical products,
if at all.

We have begun marketing our new
antimicrobial silver ion technology to industrial markets, including healthcare, dental,
veterinary and food processing, as well as to consumer products markets. We also have
begun marketing our environmentally safe pesticides. These products have not yet been
accepted into the marketplace. Risks involved in introducing these new products include
liability for product effectiveness and safety, and competition from existing or emerging
sources. Additionally, Government regulation in the United States and in other countries
is a significant factor in the development, manufacturing and marketing of many of our
products and in our ongoing research and development activities. Complying with applicable
government regulations and obtaining necessary clearances or approvals can be time
consuming and expensive, and there can be no assurance that regulatory review will not
involve delays or other actions adversely affecting the marketing and sale of our
products. We also cannot predict the extent or impact of future legislation or regulation.
Some of our new bioscience applications for the healthcare markets and food preparation
markets will require approval by government agencies prior to marketing or sale in the
United States. We have not yet applied for Food and Drug Administration or Department of
Agriculture approval. If these applications are not approved, we will not be able to
market or sell such products, which would limit the revenues which may be realized from
these products. Even after approval, we will remain subject to changing governmental
policies regulating antimicrobial products. We also intend to take these technologies to
the international marketplace, and international business carries a great deal of risk
with regard to foreign governments, banking and markets.

Our silver ion, pesticide and other
products will be competing in markets dominated by extremely large, well financed and
internationally recognized chemical and pharmaceutical companies. Our ability to compete
will depend upon developing brand recognition and distribution methods. Many of our
competitors already have well established brands and distribution, as well as many times
our financial ability. Focused competition by such chemical and pharmaceutical giants
could substantially limit our potential market and ability to profit from these products.

We expect that sales of SDC will
constitute a substantial portion of our revenues during the fiscal year ending July 31,
2007 and in future periods. Any material decrease in the overall level of sales of, or the
prices for SDC, whether as a result of competition, change in consumer demand, or any
other factor, would have a material adverse effect on our business, financial condition
and results of operations.

LEGAL RISKS RELATED TO
OUR BUSINESSWe rely and may in the future rely on
a combination of patent, trademark, trade secret and copyright law and contractual
restrictions to protect the proprietary aspects of our technology and business. These
legal protections afford only limited protection for our intellectual property and trade
secrets. Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our proprietary technology or otherwise obtain and use
information that we regard as proprietary.

11

---



We have filed for U.S. and foreign
patent applications and trademark registrations for our patents and trademarks. It is
possible that competitors or others will create and use products in violation of our
patents and/or adopt service names similar to our service names. Such patent infringement
could have a material, adverse effect on our business. Adopting similar names and
trademarks by competitors could lead to customer confusion. Any claims or customer
confusion related to our trademarks could negatively affect our business.

Litigation may be necessary to
enforce our intellectual property rights and protect our trade secrets. If third parties
prepare and file applications in the United States or other countries that claim
trademarks used or registered by us, we may oppose those applications and may be required
to participate in proceedings before the regulatory agencies who determine priority of
rights to such trademarks. Any litigation or adverse priority proceeding could result in
substantial costs and diversions of resources, and could seriously harm our business and
operating results.

To the extent that we operate
internationally, the laws of many countries may not protect our proprietary rights to as
great an extent as do the laws of the United States. Many countries have a
first-to-file trademark registration system. As a result, we may be prevented
from registering or using our trademarks in certain countries if third parties have
previously filed applications to register or have registered the same or similar
trademarks. Our means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.

As a business which manufactures and
markets products for use by consumers, we may become liable for any damage caused by our
products when used in the manner intended. Any such claim of liability, whether
meritorious or not, could be time-consuming and/or result in costly litigation. Although
we maintain general liability insurance, our insurance may not cover potential claims of
the types described above and may not be adequate to indemnify for all liabilities that
may be imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could harm our business and operating results.

OTHER RISKS RELATED TO
INVESTING IN OUR SECURITIESAs of October 23, 2006, Michael L.
Krall, our President and Chief Executive Officer, beneficially owned, including
exercisable options, approximately 9% of our common stock. As of the same date, our
directors and officers as a group beneficially owned, including exercisable options and
warrants, approximately 26% of the common stock. As a result, our management, and Mr.
Krall in particular, are in a position to significantly influence the direction and
policies of the Company, the election of the Board of Directors of the Company and the
outcome of any other matters requiring stockholder approval.

Since going public in August 1996,
the price and trading volume of our common stock has been highly volatile. The price has
ranged from below $1 per share to over $7 per share. In addition, the monthly trading
volume has varied from under 200,000 shares to over 3,000,000 shares. Since the beginning
of the fiscal year ended July 31 2005, the daily closing price of our common stock has
ranged from $0.68 to $2.95, and the monthly trading volume has varied from approximately
330,000 shares to approximately 4,350,000 shares. This volatility could adversely affect
an investors ability to sell shares of our common stock, and the available price for
such shares, including resulting in lower prices being available to an investor if the
investor desires to sell their shares at any given time.

Our common stock may be characterized
as a penny stock under SEC regulations. As such, broker-dealers dealing in the
common stock may be subject to the disclosure rules for transactions involving penny
stocks, which generally require that, prior to a purchase, the broker-dealer determine if
purchasing the common stock is suitable for the applicable purchaser. The broker-dealer
must also obtain the written consent of the applicable purchasers to purchase the common
stock and disclose the best bid and offer prices available for the common stock and the
price at which the broker-dealer last purchased or sold the common stock. These additional
burdens imposed upon broker-dealers may discourage them from effecting transactions in the
common stock, which could make it difficult for an investor to sell his, her or its Shares
at any given time.

We have reserved approximately
11,940,698 shares of common stock reserved for issuance which includes shares under equity
compensation plans, vested and unvested options, and warrants. These shares have a
weighted-average exercise price of approximately $1.15. Approximately 14,177,330 shares of
common stock remain available for future issuance under equity compensation plans or
otherwise. The exercise of options and common stock purchase warrants, and the sale of
underlying shares, could have an adverse effect on the market for the Shares.

We have never paid any cash dividends
on the common stock and do not anticipate paying cash dividends on the common stock in the
foreseeable future. The payment of dividends on the common stock will depend on our
earnings, financial condition and other business and economic factors affecting us at such
time as the Board of Directors of the Company may consider relevant.

Investors may experience dilution in
the net tangible book value of their investment upon the exercise of outstanding options
and warrants granted under our stock option plans and other options, warrants and
outstanding convertible securities.

Certain provisions of our charter and
by-laws may delay or frustrate the removal of incumbent directors and may prevent or delay
a merger, tender offer or proxy contest involving the Company that is not approved by the
Board of Directors of the Company, even if such events may be beneficial to the interests
of stockholders. For example, our Board of Directors, without stockholder approval, has
the authority and power to issue all authorized and unissued shares of common stock and
preferred stock which have not otherwise been reserved for issuance. Thus, assuming the
sale of the Maximum Amount of common stock, our Board of Directors could issue
approximately 14,177,300 shares of common stock (assuming offer and sale of the Maximum
Amount of common stock) on such terms as the Board of Directors determines. The Board of
Directors could also issue 5,000,000 shares of preferred stock and such preferred stock
could have voting or conversion rights which could adversely affect the voting power of
the holders of common stock. In addition, California law may contain provisions that have
the effect of making it more difficult or delaying attempts by others to gain control of
the Company.

12

---



VALUATION OF INTANGIBLE
ASSETS
SFAS 142 requires that goodwill and
other intangible assets be tested for impairment on an annual basis and between annual
tests in certain circumstances. Recoverability of assets to be held for use is based on
expectations of future discounted cash flows from the related operations, and when
circumstances dictate, we adjust the asset to the extent the carrying value exceeds the
fair value of the asset. Our impairment review process is based on the discounted future
cash flow approach that uses our estimates of revenue driven by assumed market segment
share and estimated costs. Also included in our analysis is an estimate of revenues
expected from our agreement with Therapeutics, Incorporated. We have entered into an
agreement with Therapeutics Inc. for the development and commercialization of certain FDA
regulated silver dihydrogen citrate based products, where Therapeutics is responsible for
development activities and regulatory filings. In the agreement, Therapeutics Inc. has
agreed to reimburse the Company for certain pre-contract acquisition and development costs
of the silver dihydrogen citrate intellectual property, as well as reimbursement for
ongoing intellectual property costs associated with silver dihydrogen citrate. Following
the reimbursement of both Therapeutics and our costs, depending on the type of
product we will receive a minimum of 40% of all sales proceeds, licensing fees, royalty
payments and all other forms of cash and non-cash consideration received by the two
parties. We will also realize revenues from the sale of silver dihydrogen citrate raw
material as an active ingredient.

Judgments made by us related to the
expected useful lives of long-lived assets and our ability to realize discounted cash
flows in excess of the carrying amounts of such assets are affected by factors such as the
ongoing maintenance and improvements of the assets and changes in economic and market
conditions. As we assess the ongoing expected cash flows and carrying amounts of our
long-lived assets, these factors could cause us to realize a material impairment charge,
which would result in decreased results of operations and a decrease in the carrying value
of these assets on our consolidated balance sheet.

13

---



The Board of DirectorsPURE
 Bioscience

We have audited the accompanying
consolidated balance sheets of PURE Bioscience as of July 31, 2006 and 2005, and the
related statements of operations, stockholders equity and cash flows for the years
ended July 30, 2006 and 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of PURE Bioscience and the results of its operations and its cash flows
for the years ended July 31, 2006 and 2005, in conformity with generally accepted
accounting principles in the United States of America.

/s/ MILLER AND McCOLLOM
MILLER AND McCOLLOM Certified Public
Accountants4350 Wadsworth Boulevard, Suite 300 Wheat Ridge, Colorado 80033 October 25,
2006

14

---



CONSOLIDATED BALANCE
SHEETS

---

|                                                        | July 31 | 
|------------------------------------------------------- | ------- | 
|
|ASSETS                                                  |         | 
|Current Assets                                          |         | 
|Cash and cash equivalents                               |         | 
|Accounts receivable, net of allowance for doubtful      |         | 
|accounts of $ 8,000 at July 31, 2005 and                |         | 
|$0.00 at July 31,2006                                   |         | 
|Other receivables                                       |         | 
|Notes receivable                                        |         | 
|Inventories                                             |         | 
|Prepaid expenses                                        |         | 
|Interest receivable                                     |         | 
|                                                        |         | 
|Total current assets                                    |         | 
|                                                        |         | 
|Property, Plant and Equipment                           |         | 
|Property, plant and equipment                           |         | 
|                                                        |         | 
|Total property, plant and equipment                     |         | 
|                                                        |         | 
|Other Assets                                            |         | 
|Prepaid consulting                                      |         | 
|Deposits                                                |         | 
|Patents and licenses                                    |         | 
|                                                        |         | 
|Total other assets                                      |         | 
|                                                        |         | 
|Total assets                                            |         | 
|                                                        |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY                     |         | 
|Current Liabilities                                     |         | 
|Accounts payable                                        |         | 
|Accrued liabilities                                     |         | 
|Taxes payable                                           |         | 
|                                                        |         | 
|Total current liabilities                               |         | 
|                                                        |         | 
|Total liabilities                                       |         | 
|                                                        |         | 
|Stockholders' Equity                                    |         | 
|Preferred Stock                                         |         | 
|Class A common stock, no par value:                     |         | 
|50,000,000 shares authorized                            |         | 
|17,713,306 issued and outstanding at July 31, 2005, and |         | 
|23,983,002 issued and outstanding at July 31, 2006      |         | 
|Warrants:                                               |         | 
|640,929 issued and outstanding at July 31, 2005, and    |         | 
|391,698 issued and outstanding at July 31, 2006         |         | 
|Accumulated deficit                                     |         | 
|                                                        |         | 
|Total stockholders' equity                              |         | 
|                                                        |         | 
|Total liabilities and stockholders' equity              |         | 
|                                                        |         | 

The
accompanying notes are an integral part of these financial statements

15

---



CONSOLIDATED STATEMENTS
OF OPERATIONS

---

|                                                      | For the Years Ended July 31 | 
|----------------------------------------------------- | --------------------------- | 
|
|Net revenues                                          |                             | 
|Cost of sales                                         |                             | 
|                                                      |                             | 
|Gross profit                                          |                             | 
|                                                      |                             | 
|Selling expenses                                      |                             | 
|General and administrative expenses                   |                             | 
|Research and development                              |                             | 
|                                                      |                             | 
|Total operating costs                                 |                             | 
|                                                      |                             | 
|Loss from operations                                  |                             | 
|                                                      |                             | 
|Other income and (expense):                           |                             | 
|Interest income                                       |                             | 
|Interest expense                                      |                             | 
|Other                                                 |                             | 
|                                                      |                             | 
|Total other income (expense)                          |                             | 
|                                                      |                             | 
|Loss from continuing operations  before taxes         |                             | 
|Income tax benefit                                    |                             | 
|Income tax benefit (See Note 12)                      |                             | 
|                                                      |                             | 
|Loss from continuing operations                       |                             | 
|                                                      |                             | 
|Discontinued operations:                              |                             | 
|Gain on sale of Water Treatment Division              |                             | 
|Income from operation of Water Treatment Division     |                             | 
|Income taxes on discontinued operations (See Note 12) |                             | 
|                                                      |                             | 
|Income from discontinued operations                   |                             | 
|                                                      |                             | 
|Net loss after taxes                                  |                             | 
|                                                      |                             | 
|Net loss per common share, basic and diluted          |                             | 
|Continuing operations                                 |                             | 
|Discontinued operations                               |                             | 
|                                                      |                             | 
|Net loss                                              |                             | 
|                                                      |                             | 

CONSOLIDATED STATEMENTS
OF ACCUMULATED DEFICITS

---

|                             | Year-to-Date
Ended
July 31
2006 |  | Year
Ended
July 31
2005 |            
|---------------------------- | ------------------------------- |  | ----------------------- | -----------
|Balance, beginning of period |                                 |  | $                       | (16,554,736
|                             |                                 |  |                         |            
|Net income (loss)            |                                 |  |                         | (3,682,926 
|                             |                                 |  |                         |            
|Balance, end of period       |                                 |  | $                       | (20,237,662
|                             |                                 |  |                         |            

The
accompanying notes are an integral part of these financial statements

16

---



CONSOLIDATED STATEMENTS
OF CASH FLOWS

---

|                                                            | For the Years Ended July 31 | 
|----------------------------------------------------------- | --------------------------- | 
|
|Cash flows from operating activities:                       |                             | 
|                                                            |                             | 
|Net loss                                                    |                             | 
|                                                            |                             | 
|Adjustments to reconcile net income to net cash             |                             | 
|provided by operating activities:                           |                             | 
|Amortization                                                |                             | 
|Depreciation                                                |                             | 
|Services and interest paid for with stock and options       |                             | 
|Pre-tax income from discontinued operations                 |                             | 
|Pre-tax gain on sale of discontinued operations             |                             | 
|Changes in assets and liabilities:                          |                             | 
|Accounts receivable                                         |                             | 
|Other receivables                                           |                             | 
|Notes receivable                                            |                             | 
|Prepaid expense                                             |                             | 
|Interest receivable                                         |                             | 
|Inventory                                                   |                             | 
|Accounts payable                                            |                             | 
|Accrued cash liabilities                                    |                             | 
|Income tax payable                                          |                             | 
|                                                            |                             | 
|Net cash (used) in operating activities                     |                             | 
|                                                            |                             | 
|Cash flows from investing activities                        |                             | 
|Investment in capitalized patents and licenses              |                             | 
|Purchase of property, plant and equipment                   |                             | 
|                                                            |                             | 
|Net cash (used) in investing activities                     |                             | 
|                                                            |                             | 
|Cash flows from financing activities                        |                             | 
|Payment of notes payable                                    |                             | 
|Proceeds from short-term loans                              |                             | 
|Payment of short-term loans                                 |                             | 
|Proceeds from sale of common stock                          |                             | 
|                                                            |                             | 
|Net cash provided by financing activities                   |                             | 
|                                                            |                             | 
|Cash flows from discontinued operations:                    |                             | 
|Proceeds from sale of Water Treatment Division              |                             | 
|Cash flows from operation of Water Treatment Division       |                             | 
|                                                            |                             | 
|Net cash from discontinued operations                       |                             | 
|                                                            |                             | 
|Net increase (decrease) in cash and cash equivalents        |                             | 
|                                                            |                             | 
|Cash and cash equivalents at beginning of period            |                             | 
|Cash and cash equivalents at end of period                  |                             | 
|                                                            |                             | 
|Supplemental disclosures of cash flow information           |                             | 
|Cash paid for interest                                      |                             | 
|Cash paid for taxes                                         |                             | 
|Issue / (reacquisition) of stock in exchange for trust deed |                             | 
|Non-cash investing and financing activities:                |                             | 
|Value of options issued in exchange for services - prepaid  |                             | 

The
accompanying notes are an integral part of these financial statements

17

---



# Notes to Consolidated
Financial Statements See Independent
Accountants Report

# Note 1. Organization and
Summary of Significant Accounting Policies

This summary of significant
accounting policies of PURE Bioscience (formerly Innovative Medical Services) is presented
to assist in understanding the Companys financial statements. The financial
statements and notes are representations of the Companys management, who are
responsible for their integrity and objectivity. These accounting policies conform to
Generally Accepted Accounting Principles in the United States of America and have been
consistently applied in the preparation of the financial statements. The financial
statements are stated in United States of America dollars.

Organization
and Business Activity

PURE Bioscience was incorporated as
Innovative Medical Services in San Diego, California on August 24, 1992 as a provider of
pharmaceutical water purification products. In September 2003, the Companys
shareholders approved a change in the name of the corporation, to PURE Bioscience.

In October 1998, the Company formed a
subsidiary, EXCOA Nevada to purchase the assets of Export Company of America, Inc.
(EXCOA), a privately held Fort Lauderdale, Florida-based distributor of disposable
medical, dental and veterinary supplies. The major asset of this company was its 45%
interest in Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary supplies and water
filtration products to practitioners, retail outlets and government agencies. We acquired
the remaining 55% interest in AMPROMED from a private individual and transferred it to
EXCOA Nevada.

In November 2000, PURE Bioscience
acquired 100% of the stock of ETIH2O, Inc., a privately held technology corporation that
developed silver dihydrogen citrate and its associated brands, Axenohl and Axen.

Subsequent to the acquisition of
ETIH2O, our business activity was divided into two basic business segments, the Bioscience
Division and the Water Treatment Division. In May 2005, we sold the assets of our Water
Treatment Division to Maryland-based Innovative Medical Services, LLC, and since this time
our business has consisted of a single Bioscience Division, engaged in the development,
production, sale and licensing of silver ion bioscience technologies and boric acid based
pesticides.

Basis
of Presentation and Principles of Consolidation

The accompanying financial statements
include the consolidated accounts of PURE Bioscience and its subsidiaries. All
inter-company balances and transactions have been eliminated.

Revenue
Recognition

Generally, we recognize income based
upon concluded arrangements with customers and when all events have occurred by delivery
or performance. Bioscience product revenue is recognized as product is shipped to
customers, free on board from either our facility or third party packagers. During the
year ended July 31, 2005, revenue was recognized for products and Customer Service Plans
within the Water Treatment Division, prior to its divestiture in May 2005, as revenue from
discontinued operations. Subsequent to the sale of the Division to Innovative Medical
Services LLC (IMS LLC), we no longer recognized any revenue for Fillmaster or Scanmaster
products or Customer Service Plans, and on the date of the sale IMS LLC assumed all
liabilities for existing warranties and potential product returns.

Accounts
Receivable

We generally sell on terms of cash or
net 30 days. Invoices not paid within stated terms are considered delinquent. We analyze
our accounts receivable periodically and recognize an allowance for doubtful accounts
based on estimated collectibility, however at July 31, 2006 we deemed all customer
accounts to be collectable and therefore recorded no such allowance.

Stock-Based
Compensation

We follow FASB Statement No. 123(R),
Accounting for Stock-Based Compensation (FAS 123(R)). The
provisions of FAS 123(R) allow us to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in APB Opinion 25,
Accounting for Stock Issued to Employees (APB 25) but disclose the
pro forma effects on net income (loss) had the fair value of the options been expensed. We
have elected to continue to apply the methods of APB 25 in accounting for our stock option
plans. For awards that generate compensation expense as defined under APB 25, we calculate
the amount of expenses and recognize the expense over the vesting period of the award. We
expect to begin expensing stock-based compensation using the estimated fair value method
proscribed in FAS 123(R) commencing with our 10Q-SB for the first quarter of our fiscal
year ending July 31, 2007.

Research
and Development / Amortization of Intangible Assets

All in-house Research and Development
(R&D) costs, and third party costs for maintaining approved patents, are
charged to operations when incurred and are included in operating expenses. Third party
R&D costs for pending patents are capitalized as incurred until such time as the
associated patents are approved or abandoned. The cumulative cost of acquiring approved
patents is amortized on a straight-line basis over the remaining lives of the patents.
Licenses are amortized on a straight-line basis over periods ranging from 17 to 20 years.
The weighted average amortization period for all patents and licenses is 18 years.

18

---



Depreciation
Method

The cost of property, plant and
equipment is depreciated on a straight-line basis over the estimated useful lives of the
related assets. The useful lives of property, plant, and equipment for purposes of
computing depreciation are:

| |                                                                   |                                
| | ----------------------------------------------------------------- | -------------------------------
| | Computers and equipment
Computer Software 
Furniture and fixtures | 7.0 years
 5.0 years
10.0 years

Leasehold improvements are
depreciated over the life of the lease. See Note 6 for details of the current lease term
of our facility.

Long-Lived
Assets

In accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for Impairment of Long-Lived Assets, and for
Long-Lived Assets to be Disposed, we periodically analyze our intangible assets and
long-lived assets for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted operating cash
flows on a basis consistent with Generally Accepted Accounting Principles.

Inventory

Inventories are stated at the lower
of cost or net realizable value using the average cost method.

Use
of Estimates

The preparation of the financial
statements in conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Fair
Value of Financial Instruments

The carrying amounts for receivables
and payables are the approximate fair value because of their short maturity, generally
less than three months. Whenever shares are issued for assets, services or interest, we
use market prices of our common stock to estimate the fair value of the shares issued.
Whenever options or warrants are issued for assets, services or interest, we use the Black
Scholes Option Pricing Model to estimate the fair value of the equity instrument, using
historical market prices of our common stock and prevailing risk-free interest rates.

Advertising
and Promotional Costs

The cost of advertising and
promotion is expensed as incurred.

Net
Income (Loss) Per Common Share

We have adopted FASB Statement No.
128, Earnings Per Share (SFAS 128), which is effective for periods ending
after December 15, 1997. Entities that have both common stock and other equity instruments
outstanding, such as options and warrants, are required to present both basic and diluted
per share amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock instruments, including options and warrants, unless the
effect is to reduce a loss or increase the income per common share from continuing
operations. Both the basic and diluted loss per common share for the years ended July 31,
2006 and July 31, 2005 are based on the weighted average number of shares of our common
stock outstanding during the periods.

The following is a reconciliation of
the weighted average number of shares actually outstanding with the number of shares used
in the computations of loss per common share:

|                                                       | For the Years Ended | 
|------------------------------------------------------ | ------------------- | 
|
|Shares outstanding                                     |                     | 
|                                                       |                     | 
|Weighted average number of shares actually outstanding |                     | 
|Stock Options                                          |                     | 
|Warrants                                               |                     | 
|                                                       |                     | 
|Total weighted average shares                          |                     | 
|                                                       |                     | 
|Loss from continuing operations                        |                     | 
|Income from discontinued operations                    |                     | 
|                                                       |                     | 
|Net loss                                               |                     | 
|                                                       |                     | 
|Net income / (loss) per common share, basic and        |                     | 
|diluted                                                |                     | 
|Continuing operations                                  |                     | 
|Discontinued operations                                |                     | 
|                                                       |                     | 
|Net loss                                               |                     | 
|                                                       |                     | 

Income
Taxes

We record deferred taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The Statement requires recognition of deferred
tax assets and liabilities for temporary differences between the tax basis of assets and
liabilities and the amounts at which they are carried in the financial statements, based
upon the enacted tax rates in effect for the year in which the differences are expected to
reverse. A valuation allowance is established when necessary to reduce deferred tax assets
to the amount expected to be realized.

19

---



Other

| |  | Our
fiscal year end is July 31st of each year.
| | - | ----------------------------------------------

| |  | We
paid no cash dividends during the periods presented.
| | - | -------------------------------------------------------

| |  | Shipping
and handling costs payable by us are charged to cost of sales.
| | - | -----------------------------------------------------------------------

| |  | Certain
comparative figures for prior periods have been reclassified to conform to the current
year presentation.
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | All
of our tangible assets are located in the United States.
| | - | ------------------------------------------------------------

| |  | We
have no elements of comprehensive income other than net income.
| | - | ------------------------------------------------------------------

| |  | For
purposes of the consolidated balance sheet and statement of cash flows, we consider all
highly liquid investments with a maturity of three months or less when purchased to be
cash equivalents. At July 31, 2006 and at July 31, 2005, all cash deposits were invested
in either U.S. FDIC insured bank accounts or U.S. Institutional Money Market Mutual Funds
with the highest investor service ratings (A-1, P-1, F1).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2. Research and
DevelopmentAll in-house Research and Development (R&D)
costs, and third party costs for maintaining approved patents, are charged to operations
when incurred and are included in operating expenses. Such expense was $1,193,900 and
$1,357,100 in the fiscal years ended July 31, 2006 and 2005, respectively.

Third party R&D costs for pending
patents are capitalized as incurred until such time as the associated patents are approved
or abandoned. The total amounts capitalized, under patents and licenses, were $111,100 and
$118,900 in the fiscal years ended July 31, 2006 and 2005, respectively. The cost of
patents acquired and the capitalized cost of approved patents is amortized on a
straight-line basis over the remaining lives of the patents. Licenses are amortized on a
straight-line basis over periods ranging from 17 to 20 years. The weighted average
amortization period for all patents and licenses is currently 18 years. Amortization
expense for the years ended July 31, 2006 and July 31, 2005 was $157,400 and $158,100
respectively, and the estimated amortization expense over each of the next five years is
approximately $160,000.

Note 3. InventoryInventories are stated at the lower
of cost or net realizable value using the average cost method. Inventories at July 31,
2006 consisted of:

|                 | 2006 |  | 2005 |        
|---------------- | ---- |  | ---- | -------
|Raw Materials    |      |  | $    | 59,843 
|Work in Progress |      |  |      |       
|Finished Goods   |      |  |      | 112,096
|                 |      |  |      |        
|                 |      |  | $    | 171,939
|                 |      |  |      |        

Note 4. Property, Plant
and EquipmentThe following is a summary of
property, plant, and equipment  at cost less accumulated depreciation:

|                               | July 31, 2006 |  | July 31, 2005 |          
|------------------------------ | ------------- |  | ------------- | ---------
|Computers and equipment        |               |  | $             | 997,861  
|Furniture and fixtures         |               |  |               | 86,490   
|Leasehold improvements         |               |  |               | 309,830  
|                               |               |  |               |          
|                               |               |  |               | 1,394,181
|Less: accumulated depreciation |               |  |               | 1,040,909
|                               |               |  |               |          
|Total                          |               |  | $             | 353,272  
|                               |               |  |               |          

Included in computers and equipment
at July 31, 2006 is $142,700 of capitalized enterprise software. The investment in this
software was made during the year ended July 31, 2006, and will be depreciated commencing
in the year ended July 31, 2007.

Depreciation charged to general and
administrative expense for the years ended July 31, 2006 and July 31, 2005 was $69,500 and
$137,700, respectively.

Note 5. Advertising,
Selling and Promotional CostsThe cost of advertising, selling and
promotion is expensed as incurred. Such costs were $570,200 and $427,500 for the years
ended July 31, 2006 and July 31, 2005, respectively.

Note 6. Commitments and
ContingenciesIn May 1996, we entered into an
operating lease agreement for our home office which expired under extension in October
2006. The rental expense recorded in general and administrative expenses for the years
ended July 31, 2006 and July 31, 2005 was $137,024 and $152,295, respectively.

20

---



As part of the agreement to sell the
assets of the Water Treatment Division to Innovative Medical Services, LLC, in May 2005 we
entered into a sublease agreement with IMS LLC under which IMS LLC occupied approximately
28% of the square footage of the facility and paid us approximately $3,800 per month in
rent. IMS LLC vacated the space in September 2006 and we are now operating in the full
13,067 square feet of the facility.

In October 2006, we entered into a
new sixty month operating lease for the facility. Future minimum rental payments under the
lease for each of the next five fiscal years, excluding variable and therefore currently
unknown costs for the maintenance of common areas, are as follows:

| | Year Ended July 31                                                                               | Amount                                                                                              | 
| | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------- | 
| | 2007          
         2008          
         2009          
         2010      
         2011 | $           141,500
$           147,100
$           153,000
$           159,100
$           165,500 | 

The Company has an employment
contract with its Chief Executive Officer/President which includes a provision for him to
be paid an amount equal to 3% of the Companys net income before taxes, if any.

Note 7. Private PlacementOn March 27, 2006, we conducted a
private placement in which we issued 3,952,209 shares of common stock at $1.65 per share
to accredited investors, for a total of $6,521,145. Net proceeds to us, after fees and
expenses, were $5,911,608. Taglich Brothers, Inc. acted as placement agent and in
accordance with the placement agent agreement, Taglich Brothers, Inc. received a cash fee
of $469,522 and a five year warrant to purchase 355,698 shares of our common stock at an
exercise price of $2.556. The fair value of the warrants at the time of the private
placement was $351,459 (based on the Black Scholes Option Pricing Model assuming no
dividend yield, volatility of 72.35% and a risk-free interest rate of 5.00%). Other cash
fees paid to third parties, for legal and other fees associated with the private
placement, were $140,014.

On April 24, 2006, we filed a
registration statement with the Securities and Exchange Commission as required under the
placement agreement, for the resale of shares issued in the private placement. The
registration statement included all shares of common stock issued in the private
placement, as well as the shares to be issued upon the exercise of the warrants. Under the
terms of the placement agreement, as amended on April 21, 2006, if the registration
statement were not declared effective within 150 days of the filing date (April 24, 2006),
we would have been subject to liquidated damage penalties. We would have been obligated to
pay to each investor a cash penalty of two percent (2%) of their purchase price for each
thirty (30) day period, or any part thereof, beyond the 150 day period, until the
registration statement were declared effective; however the maximum cash payment to each
investor would have been thirty-six percent (36%) of such investors purchase price.
Under the terms of the placement agreement, as amended on April 21, 2006, there were no
potential liquidated damage penalties associated with the warrants.

Following the guidance set forth in
EITF D-98, Classification and Measurement of Redeemable Securities, we initially
determined that the maximum potential liquidated damage payment of 59.4 cents per share,
or $2,347,612, should be classified as temporary equity on the balance sheet, as EITF D-98
requires the classification outside of permanent equity because the registration of the
common shares was not solely within our control. The registration statement was declared
effective by the Securities and Exchange Commission with an effectiveness date of July 7,
2006, and as the common shares issued in the private placement are therefore no longer
subject to liquidated damages, the full amount of $2,347,612 was reclassified to permanent
equity on the consolidated balance sheet as at July 31, 2006.

Note 8. Equity and
common stockWhenever shares are issued for
assets, services or interest, we use market prices of our common stock to estimate the
fair value of the shares issued. Whenever options or warrants are issued for assets,
services or interest, we use the Black Scholes Option Pricing Model to estimate the fair
value of the equity instrument, using market prices of our common stock and prevailing
risk-free interest rates.

In November 2005, we sold 39,999
shares of common stock in a private placement to an accredited investor, for $0.75 per
share (a total value of $30,000). In December 2005, we issued 25,000 shares of common
stock valued at $19,250 ($0.77 per share, based on the market price of the stock at the
time services were rendered) in exchange for regulatory and consulting services. In the
same month we issued options on 50,000 shares in exchange for investor relations and
investment banking consulting services, at an exercise price of $0.75, valued at $17,229
(based on the Black Scholes Option Pricing Model assuming no dividend yield, volatility of
82.23% and a risk-free interest rate of 4.25%). Additionally, in December 2005, we issued
options on 50,000 shares in exchange for business development consulting services, at an
exercise price of $0.80, valued at $15,426 (based on the Black Scholes Option Pricing
Model assuming no dividend yield, volatility of 82.23% and a risk-free interest rate of
4.25%).

In January 2006, we sold 500,000
shares of unregistered common stock in a private placement to an unaffiliated, accredited
investor at $0.75 per share (a total value of $375,000). In the same month, we issued
options on 300,000 shares in exchange for investor relations and investment banking
consulting services, at an exercise price of $1.00, valued at $154,390 (based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 82.23% and a
risk-free interest rate of 4.25%).

Also during the quarter ended January
31, 2006, we agreed to issue an aggregate of 2,300,000 options to two newly elected
directors of the Company, related to two-year consulting agreements for domestic and
international business development, with vesting of all options in future periods subject
to performance under the consulting agreements. See Note 10 for more detail on the
accounting treatment of these option agreements.

21

---



In February 2006, we sold 500,000
shares of unregistered common stock in a private placement to a director of the Company,
at $0.90 per share. In the same month, there was a net exercise of an option on 15,000
shares of common stock that resulted in the issuance of 5,196 shares of common stock, and
we received $10,000 from the exercise of an option to purchase 33,333 shares of
unregistered common stock. Additionally, we issued options on 100,000 shares in exchange
for formulation, blending and packaging services, at an exercise price of $1.18, valued at
$64,060 (based on the Black Scholes Option Pricing Model assuming no dividend yield,
volatility of 72.35% and a risk-free interest rate of 5.00%), and we issued options on
25,000 shares in exchange for chemistry and formulation consulting services, at an
exercise price of $0.80, valued at $20,881 (based on the Black Scholes Option Pricing
Model assuming no dividend yield, volatility of 72.35% and a risk-free interest rate of
5.00%). Also in February 2006, we agreed to issue 2,000 shares of common stock in exchange
for retail marketing consulting services valued at $2,900.

In March 2006, we conducted a private
placement in which we issued 3,952,209 shares of common stock at $1.65 per share to
accredited investors, for a total of $6,521,145, resulting in net proceeds to us of
$5,911,608. In addition, the placement agent received a five year warrant to purchase
355,698 shares at an exercise price of $2.556. See Note 7 for further details of this
transaction.

Also in March 2006, we received an
aggregate of $87,500 from the exercise of options on 75,000 shares of common stock, and
additionally we received $41,040 from the exercise of an option on 72,000 shares of common
stock issued under an employee option plan.

In April 2006, there was a net
exercise of an option on 100,000 shares that resulted in the issuance of 63,640 shares of
common stock. We also received $40,810 from the exercise of an option on 77,000 shares of
common stock. In the same month, there was a net exercise of an option on 47,500 shares
under an employee stock option plan that resulted in the issuance of 41,496 shares of
common stock, and we received an aggregate of $26,710 from the exercise of 49,500 options
under employee option plans. Additionally, there were net exercises of options which were
due to expire and which were issued under the 1996 Directors and Officers Stock Option
Plan (See Note 9 for a description of this plan). Options on 418,460 shares under this
plan were exercised in April 2006, resulting in the issuance of 337,823 shares of common
stock. We also, in the same month, received $15,900 from the exercise by a director of the
Company of an option on 30,000 shares of common stock under the same plan.

In May 2006, we received $16,250 from
the exercise of an option on 32,000 shares of common stock issued under an employee option
plan.

In July 2006, there was a net
exercise of 300,000 warrants, valued in a prior period at $119,487, which resulted in the
issuance of 200,000 shares of common stock. The adjustment related to this event is
recorded in the equity schedule below as Exercised Warrants. We also issued
50,000 shares of common stock valued at $117,000 (based on the market price of our common
stock) in exchange for financial services. In addition, in the same month we received an
aggregate of $75,000 from the exercise of options on 85,000 shares of common stock. Also
in July 2006, we issued a three-year option at an exercise price of $1.65, on 200,000
shares of common stock, in exchange for investor relations services valued at $133,269
(based on the Black Scholes Option Pricing Model assuming no dividend yield, volatility of
73.89% and a risk-free interest rate of 5.25%).

During the year ended July 31, 2006,
604,929 warrants valued in prior years at $69,013 expired. The adjustment related to this
event is recorded in the equity schedule below as Expired / Terminated
Warrants.

The following schedule summarizes the
change in equity for the fiscal years ended July 31, 2006 and 2005:

|                                | Common
Stock
(Shares) |  | Common
Stock
($) |            | Warrants
Issued |   | Warrant
Valuation
($) |   | Accumulated
Deficit |           | Total ($) |  
|------------------------------- | --------------------- |  | ---------------- | ---------- | --------------- | - | --------------------- | - | ------------------- | --------- | --------- | -
|Balance, July 31, 2004          |                       |  |                  | 15,547,310 |                 | $ | 17,834,139            |   |                     | 1,385,223 |           | $
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|Shares Returned re. Trust Deed  |                       |  |                  | (2,000,000 | )               |   | (1,735,700            | ) |                     |          |           |  
|Private Placement               |                       |  |                  | 2,739,996  |                 |   | 1,337,779             |   |                     | 112,500   |           |  
|Shares Issued for Patent Rights |                       |  |                  | 200,000    |                 |   | 90,000                |   |                     |          |           |  
|Shares Issued for Services      |                       |  |                  | 896,000    |                 |   | 936,486               |   |                     | 142,000   |           |  
|Options Exercised               |                       |  |                  | 330,000    |                 |   | 169,500               |   |                     |          |           |  
|Expired / Terminated Warrants   |                       |  |                  |           |                 |   | 684,797               |   |                     | (998,794  | )         |  
|Net Income / (Loss)             |                       |  |                  |           |                 |   |                      |   |                     |          |           |  
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|Balance, July 31, 2005          |                       |  |                  | 17,713,306 |                 | $ | 19,317,001            |   |                     | 640,929   |           | $
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|Private Placement               |                       |  |                  | 4,992,208  |                 |   | 6,530,755             |   |                     | 355,698   |           |  
|Shares Issued for Services      |                       |  |                  | 75,000     |                 |   | 139,130               |   |                     |          |           |  
|Options Issued for Services     |                       |  |                  |           |                 |   | 1,003,627             |   |                     |          |           |  
|Options Exercised               |                       |  |                  | 1,002,488  |                 |   | 366,210               |   |                     |          |           |  
|Expired / Terminated Warrants   |                       |  |                  |           |                 |   | 69,013                |   |                     | (304,929  | )         |  
|Exercised Warrants              |                       |  |                  | 200,000    |                 |   | 119,487               |   |                     | (300,000  | )         |  
|Net Income / (Loss)             |                       |  |                  |           |                 |   |                      |   |                     |          |           |  
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|Balance, July 31, 2006          |                       |  |                  | 23,983,002 |                 | $ | 27,545,223            |   |                     | 391,698   |           | $
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  

The Company also has 5,000,000 shares of
preferred stock authorized; no preferred stock has been issued.

22

---



The following schedule summarizes the
outstanding warrants:

|Issued For        | Date
Issued | # of
Warrants | Warrant
Valuation
($) | Weighted
Average
Exercise
Price | Expiration
Date
|----------------- | ----------- | ------------- | --------------------- | ------------------------------- | ---------------
|
|Services          |             |               |                       | 11/29/04                        |                
|Private Placement |             |               |                       | 3/24/06                         |                
|                  |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                
|Total             |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                

See Note 7 for further detail of
warrants issued during Fiscal Year 2006.

Note 9. Stock Option
PlansThe Company has, or has had during
the fiscal years presented herein, the following stock option plans (the Plans) pursuant
to which options to acquire common stock have been granted.

1996 Directors And Officers Stock
Option Plan: On April 17, 1996, the Companys Board of Directors approved a Directors
and Officers Stock Option Plan, to be administered by the entire Board of Directors. The
Plan became effective on April 17, 1996 and was not subject to Shareholder approval. The
Plan terminated on April 17, 2006.

1998 Directors And Officers Stock
Option Plan: On December 19, 1998, the Companys Shareholders approved the Amended
PURE Bioscience 1998 Officers and Directors Stock Option Plan.

2001 Directors And Officers Stock
Option Plan: On January 8, 2001, the Companys Shareholders approved the PURE
Bioscience 2001 Officers and Directors Stock Option Plan.

2001 ETIH2O Stock Option Plan:
Adopted by the Board in January 2001, there are 1,000,000 shares authorized under this
Plan. Executive Officers and Directors are not eligible participants under this plan.

2001 Consultants and Advisors Stock
Option Plan: Adopted by the Board in January 2001, there are 500,000 shares authorized
under this Plan. Executive Officers and Directors are not eligible participants under this
plan.

2002 Non-Qualified Stock Option Plan:
On March 11, 2002, the Companys Shareholders approved the PURE Bioscience 2002
Non-Qualified Stock Option Plan. Eligible Plan Participants include the Directors and
Officers of the Company, consultants, advisors and other individuals deemed by the
Compensation Committee to provide valuable services to the Company but who are not
otherwise eligible to participate in the Employee Incentive Stock Option Plan.

2002 Employee Incentive Stock Option
Plan: On March 11, 2002, the Companys Shareholders approved the PURE Bioscience 2002
Employee Incentive Stock Option Plan. Eligible Plan Participants include employees and
non-employee Directors for the Company.

2004 Consultants and Advisors Stock
Option Plan: Adopted by the Board in April 2004, there are 2,000,000 shares authorized
under this plan. Executive Officers and Directors are not eligible participants under this
plan.

Non-employee directors are eligible
to receive stock option grants under the Companys 1996, 1998 and 2001 Directors and
Officers Stock Option Plans and the 2002 Non-Qualified and Employee/Incentive Stock Option
Plans. Employee Directors are eligible to receive stock option grants under the
Companys 1996, 1999 and 2001 Directors and Officers Stock Option Plans and the 2002
Non-Qualified Stock Option Plan. The Plans are administered by an Administrative
Committee. The exercise price for Options shall be set by the Administrative Committee but
shall not be for less than the fair market value of the shares on the date the Option is
granted. Fair market value is defined under the Plans as being the average of the closing
price for five consecutive trading days ending on the day prior to the date the option is
granted, with the exception of the 2002 Employee Incentive Stock Option Plan where the
number of consecutive trading days is thirty. The period in which Options can be exercised
is set by the Administrative Committee but is not to exceed five years from the date of
Grant. Options granted to new executive officers or directors vest one year from date of
appointment or election. Shares issuable under options granted to continuing officers or
directors are immediately exercisable and vest upon exercise. The Board may at any time
terminate the Plans. The approval of the majority of shareholders is required to increase
the total number of shares subject to the Plans, change the manner of determining the
option price or to withdraw the administration of the Plans from the Administrative
Committee.

In accordance with Statement of
Financial Accounting Standards No. 123(R), Accounting for Stock-Based
Compensation (SFAS 123), we have chosen to continue to account for employee
stock-based compensation utilizing the intrinsic value method. As permitted by SFAS 123,
we have applied the methods of APB 25 and related interpretations in accounting for stock
options issued to employees. The value of the stock-based award is determined using a
pricing model whereby compensation cost is the excess of the fair value of the stock as
determined by the model at grant date, or other measurement date, over the amount an
optionee must pay to acquire the stock. We account for stock-based compensation to third
parties for services by recording the fair value of the stock options granted over the
anticipated service period.

Had compensation cost for employee
stock options been determined based upon the fair value at the grant date for awards,
consistent with the methodology proscribed under FAS 123(R), our net loss in the years
ended July 31, 2006 and 2005 would have been approximately $7,354,400 and $1,631,400 or
$(0.37) per share and $(0.10) per share, respectively, on a diluted basis. The effect of
applying FAS 123(R) on the years ended July 31, 2006 and 2005 pro forma net loss is not
necessarily representative of the effects on reported net loss for future years due to,
among other things, the vesting period of the stock options and the fair value of
additional stock options that may be granted in future years to current or new employees.
As at July 31, 2006, we had no unvested employee stock options outstanding, however we
expect that future employee options granted after July 31, 2006 will be expensed using the
estimated fair value of the respective grant, as proscribed in FAS 123(R), which we expect
to begin using commencing with our 10Q-SB for the first quarter of our fiscal year ending
July 31, 2007.

23

---



Compensation cost of $743,843 for
stock-based compensation to third parties for services was charged to income in the twelve
months ended July 31, 2006, including the amortization of prepaid options as discussed in
Note 10. The weighted average fair value of all outstanding options and warrants issued to
third parties for services during the twelve months ended July 31, 2006 is estimated at
$0.33 per share, using the Black-Scholes option-pricing model.

The weighted average fair value for
all options and warrants granted during the twelve months ended July 31, 2006 is estimated
at $0.72 per share based on the date of grant, using the Black-Scholes option-pricing
model. Assumptions used in calculating the fair value for options and warrants using the
Black-Scholes model during the twelve months ended July 31, 2006 were: no dividend yield,
volatility of between 72.35% and 82.23%, and a risk-free interest rate of between 4.25%
and 5.25%.

A summary of stock option activity
during the period ended July 31, 2006 is as follows:

|                         | Number of
Shares |  | Weighted-Average
Exercise Price ($)
|------------------------ | ---------------- |  | -----------------------------------
|Balance at July 31, 2004 |                  |  |                                    
|Granted                  |                  |  |                                    
|Exercised                |                  |  |                                    
|Forfeited                |                  |  |                                    
|                         |                  |  |                                    
|Balance at July 31, 2005 |                  |  |                                    
|                         |                  |  |                                    
|Granted                  |                  |  |                                    
|Exercised                |                  |  |                                    
|Forfeited                |                  |  |                                    
|                         |                  |  |                                    
|Balance at July 31, 2006 |                  |  |                                    
|                         |                  |  |                                    

|               |  | Outstanding | Exercisable
|-------------- |  | ----------- | -----------
|
|$0.35 to $0.57 |  |             |            
|$0.75 to $1.25 |  |             |            
|$1.50 to $2.00 |  |             |            
|               |  |             |            
|               |  |             |            
|               |  |             |            

Note 10. Prepaid
ConsultingDuring the quarter ended January 31,
2006, we entered into a two-year consulting agreement with Mr. Michael Sitton for domestic
and international business development, the compensation for which is a fee of $12,500 per
month and an option on two million shares of unregistered common stock, which vest over
three years. We also entered into a two-year consulting agreement with Secretary Tommy
Thompson, for domestic and international business development, the compensation for which
is a fee of $12,500 per month and an option on three hundred thousand shares of
unregistered common stock, which vest over three years. Mr. Sitton has subsequently
transferred the rights to 700,000 options to Secretary Thompson. Mr. Sitton is now
therefore the beneficial owner of 1,300,000, and Secretary Thompson is the beneficial
owner of 1,000,000 of these options.

Under the option agreements, unvested
options will not be issued if the associated consulting agreements are terminated prior to
their two year term. Mr. Sitton and Secretary Thompson were each elected to our Board of
Directors during the quarter ended January 31, 2006, however in October 2006 Mr. Sitton
resigned from the Board of Directors in order to create a vacancy so that our Board of
Directors may be restructured to consist of a sufficient number of independent directors
to be able to meet the listing requirements of a national stock exchange. Mr.
Sittons consulting agreement is not affected by his resignation from our Board of
Directors.

During the quarter ended January 31,
2006, we recorded the value of Mr. Sittons and Secretary Thompsons aggregate
of 2,300,000 unvested options as a prepaid asset which will be amortized over the life of
the consulting agreements. The options were valued at an aggregate of $598,372 based on
their weighted average exercise prices of between $1.00 to $2.75, and the Black Scholes
Option Pricing Model assuming no dividend yield, volatility of 82.23% and a risk-free
interest rate of 4.25%. This amount is being amortized over the two year life of the
consulting agreements at $24,932 per month. During the year ended July 31, 2006 we
amortized eight months of expense, or $199,457, and as a result, we reported a prepaid
asset of $398,915 as Prepaid consulting on the face of the consolidated
balance sheet as at July 31, 2006.

Note 11. Pension PlanWe participate in a Small SEP program
under which we are entitled to make contributions on an employees behalf. The
program includes a salary reduction arrangement (SARSEP), which may be used only in years
in which the SEP meets requirements that the IRS may impose to ensure distribution of
excess contributions. Annual contributions made by employers under a SEP may be excluded
from the participating employees gross income, however we made no contributions
during the years ending July 31, 2006 or July 31, 2005.

24

---



Note 12. Taxes
We file federal and California
consolidated tax returns with our subsidiaries. Taxable income is different to the income
reported in our financial statements due to temporary tax differences and certain other
differences between tax laws and generally accepted accounting principles.

The sale of the Water Treatment
Division to Innovative Medical Services, LLC (IMS LLC) was a transaction taxable for
United States federal and California income tax purposes. We recognized taxable income
equal to the amount realized on the sale, consisting of the cash received plus the amount
of related liabilities assumed by IMS LLC, in excess of the tax basis in the assets sold.
The realized gain to us on the sale was $2,187,136, giving rise to an estimated tax
liability at July 31, 2005 of $937,500. In addition, income tax related to the operation
of the Division through May 25, 2005 was estimated to be $230,500. The total estimated
taxes relating to the discontinued operation were therefore approximately $1,167,500. This
amount was offset by the realization of a tax benefit of approximately $1,167,500 from
losses incurred during the fiscal year ended July 31, 2005 and available net operating
loss carry-forwards relating to our continuing operations. During the year ended July 31,
2006, we determined the actual income tax on the operation and sale of the Division for
the year ended July 31, 2005 to be $1,037,497. An adjustment of $129,990 is therefore
shown on the face of the Income Statement for the year ended July 31, 2006 as a reduction
to Income taxes on discontinued operations, with a corresponding and
offsetting reduction to the Income tax benefit to continuing operations.

The net tax effect of our tax
liabilities gives rise to the current provision for income taxes of $2,400 for the year
ended July 31, 2006 and $2,800 for the year ended July 31, 2005, which is the minimum
franchise tax paid to the State of California regardless of income or loss.

At July 31, 2006, we had federal and
California tax net operating loss carry-forwards of approximately $15,170,200 and
$5,565,500 respectively. At July 31, 2005, we had federal and California tax net operating
loss carry-forwards of approximately $14,460,600 and $3,683,800 respectively. The
difference between federal and California tax loss carry-forwards is primarily due to
limitations on California loss carry-forwards. The federal tax loss carry-forwards will
begin expiring in the year ending July 31, 2016 unless previously utilized, and will
completely expire in the year ending July 31, 2024. The California tax loss carry-forwards
began to expire in the year ended July 31, 2005 and will completely expire in the year
ending July 31, 2016.

Significant components of our
deferred tax assets are as follows:

|                                            | July 31, 2006 |  | July 31, 2005 |          
|------------------------------------------- | ------------- |  | ------------- | ---------
|Net operating loss carry-forward            |               |  | $             | 6,948,200
|Stock options and warrants                  |               |  |               | 101,000  
|Other timing differences and allowances     |               |  |               | (164,100 
|                                            |               |  |               |          
|Total deferred tax assets                   |               |  |               | 6,885,100
|Valuation allowance for deferred tax assets |               |  |               | 6,885,100
|                                            |               |  |               |          
|Net deferred tax assets                     |               |  | $             |         
|                                            |               |  |               |          

Realization of our deferred tax
assets, which relate to operating loss carry-forwards and timing differences, is dependant
on future earnings. The timing and amount of future earnings are uncertain and therefore a
valuation allowance has been established. The increase in the valuation allowance on the
deferred tax asset during the year ended July 31, 2006 was $1,193,400.

A reconciliation of income taxes
computed using the statutory income tax, compared to the effective tax rate is as follows:

|                                                   | 2006 |  | 2005 |    
|-------------------------------------------------- | ---- |  | ---- | ---
|Federal tax benefit at the expected statutory rate |      |  |      | 34 
|State income tax, net of federal tax benefit       |      |  |      | 9  
|Valuation allowance                                |      |  |      | (43
|                                                   |      |  |      |    
|Income tax benefit - effective rate                |      |  |      | 0  
|                                                   |      |  |      |    

Note 13. Sale of Water
Treatment Division and Discontinued OperationsEffective May 25, 2005, we sold the
assets of our Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. IMS LLC also assumed all liabilities associated with the
Division. At closing, we received $1,950,000 in cash and a promissory note in the amount
of $425,000. In June 2005, we received a cash payment of $225,000. The balance on the
promissory note of $200,000 is shown as Notes Receivable on the balance sheet
as at July 31, 2005. In August, subsequent to the end of the fiscal year, we received the
balance of $200,000 plus interest on the promissory note.

We agreed to continue to fund the
working capital of IMS LLC subsequent to the sale of the Water Treatment Division, until
such time as IMS LLC had in place their appropriate legal and tax registrations, in order
to enable the continuation of payroll and an uninterrupted supply of materials and
components for the business. At July 31, 2005, we had funded $132,521 of working capital
on IMS LLCs behalf. This amount is shown as Other receivables on the
consolidated balance sheet as at July 31, 2005. In August 2005, in addition to the payment
of the promissory note and after the end of our fiscal year, IMS LLC reimbursed us for the
working capital we had provided subsequent to the sale. We are no longer providing any
working capital for IMS LLC.

The realized gain to us on the sale
of the Water Treatment Division was $2,187,136 before the effect of taxes. The sale of the
Water Treatment Division assets to Innovative Medical Services, LLC was a transaction
taxable for United States federal and California income tax purposes. The estimated tax
liability related to the sale was $1,167,487, however this was offset by losses incurred
in the respective fiscal year, and available net operating loss carry-forwards relating to
our continuing operations. During the year ended July 31, 2006, we determined the actual
income tax on the operation and sale of the Division for the year ended July 31, 2005 to
be $1,037,497. An adjustment of $129,990 is therefore shown on the face of the Income
Statement for the year ended July 31, 2006 as a reduction to Income taxes on
discontinued operations, with a corresponding and offsetting reduction to the
Income tax benefit to continuing operations. For a further discussion of the
tax consequences of the sale, see Note 12.

25

---



The Water Treatment Division was
reported as a discontinued operation from October 2003 when we made the decision to
dispose of the segment, although we continued to operate and retain the profits from that
division until its sale on May 25, 2005. For details of the results of operations for the
Water Treatment Division for the year ended July 31, 2005 through the sale of the Division
on May 25, 2005, see Note 14.

Note 14. Business
Segment and Sales ConcentrationsIn accordance with the provisions of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we
review on a periodic basis the management structure reporting to our chief operating
decision-maker (CODM) and analyze the information the CODM receives to
allocate resources and measure performance. SFAS No. 131 requires segmentation based upon
our internal organization and disclosure of revenue and operating income based upon
internal accounting methods. Our financial reporting systems present various data for
management to run the business, including internal profit and loss statements prepared on
a basis not consistent with U.S. Generally Accepted Accounting Principles. Reconciling
amounts consist of unallocated general and administrative expenses.

Our business activity was
historically divided into two distinct business segments, the Water Treatment segment and
the Bioscience segment. These two segments were determined by management based upon the
inherent differences in the end use of the products, the inherent differences in the value
added processes made by the Company, the differences in the regulatory requirements, and
the inherent differences in the strategies required to successfully market finished
products. The Water Treatment segment included Commercial Water and Residential Retail
products and the Nutripure Water Dealer program. Bioscience includes the silver dihydrogen
citrate antimicrobial and the Innovex line of pest control products.

For the year ended July 31, 2006, we
operated as a single segment and therefore no longer report segment information.

For the year ended July 31, 2005,
earnings for the discontinued Water Treatment Division are presented separately, and
relate to the period from August 1, 2004 to May 25, 2005, the date on which the Division
assets were sold. Subsequent to the sale, we retained no interest in the assets,
liabilities or earnings of Innovative Medical Services LLC, the acquiring Company. Segment
information for the year ended July 31, 2005 is presented below.

|2005                                    |  | Water
Treatment
(Discontinued) |   | Bioscience |   | Reconciling
Amounts |            | Consolidated |  
|--------------------------------------- |  | ------------------------------ | - | ---------- | - | ------------------- | ---------- | ------------ | -
|
|Commercial Water Treatment              |  |                                |   |            |   |                     |            |              |  
|Fillmaster Products                     |  |                                | $ | 985,187    |   | $                   |           |              | $
|Replacement Filters (Includes CSP 2000) |  |                                |   | 717,257    |   |                     |           |              |  
|Residential Water Treatment             |  |                                |   | (2,489     | ) |                     |           |              |  
|Water Dealer Program                    |  |                                |   |           |   |                     |           |              |  
|Silver Dihydrogen Citrate               |  |                                |   |           |   |                     | 91,333     |              |  
|Pesticide                               |  |                                |   |           |   |                     | 64,473     |              |  
|                                        |  |                                |   |            |   |                     |            |             
|Total Revenues                          |  |                                | $ | 1,699,955  |   | $                   | 155,806    |              | $
|                                        |  |                                |   |            |   |                     |            |             
|Operating Income/(Loss) before taxes    |  |                                | $ | 510,411    |   | $                   | (2,819,664 | )            | $
|                                        |  |                                |   |            |   |                     |            |             
|Segment Assets                          |  |                                | $ |           |   | $                   | 2,508,012  |             
|                                        |  |                                |   |            |   |                    

Sales of silver dihydrogen citrate
and pesticide products are made to a small number of partners who formulate products for
sale to multiple diversified third parties. The number of partners and third party
end-users and retailers is expected to increase as Axenohl (silver dihydrogen citrate) is
introduced into new markets.

Note 15. Trust Deed
In March 2005, we reacquired
2,000,000 shares of our common stock in exchange for our conditional transfer to a third
party of a Trust Deed receivable. The third party also forgave $535,000 in loans to us,
plus accrued interest of $61,377. The net result of the transaction during the year ended
July 31, 2005 on the consolidated balance sheet was a reduction in assets of approximately
$2,327,700, a reduction in liabilities of approximately $596,000, and an increase in
common stock of $1,735,700, or $0.87 per share, based on an estimate of fair value.

Note 16. Arbitration
AwardsIn 2001 we acquired the patent (the
Axenohl patent) for silver dihydrogen citrate, a silver ion based technology
which is the basis for our silver ion products. We purchased the patent for 700,000 shares
of common stock plus certain expenses, and valued the patent at $1,540,600 based on the
market price of the stock exchanged.

We originally agreed to make certain
royalty payments to NVID, however, in October 2003, we filed an arbitration action against
NVID International and Falken Industries to demand a cease and desist from continued and
ongoing public dissemination of false, misleading and disparaging statements, and complete
cooperation in enforcing and defending the silver dihydrogen citrate patent and related
technology, pursuant to a Core Settlement Agreement between PURE Bioscience and NVID
International. In November 2004, we won a $14.2 million award resulting from the action
against NVID. We believe it is unlikely that we will ever be able to collect any part of
this award, and we have therefore not recorded any amount as an asset on the balance
sheets as at July 31, 2005 or 2006. However, in addition to the $14.2 million award
against NVID, the arbitrator also clarified that PUREs royalty obligations to NVID
were legally terminated by NVIDs material breach of the Core Settlement Agreement,
resulting in the elimination of approximately $17 million in potential future royalty
payments from PURE to NVID over the life of the Axenohl patent.

26

---



In October 2005, we received a $3.4
million award plus costs of $241,000 resulting from a binding arbitration proceeding
against Falken Industries. No part of this award has been recorded as an asset on our
balance sheets as at July 31, 2005 or 2006 due to the uncertainty of our ability to
collect any part of the award. Effective October 18, 2006, PURE Bioscience, Falken, Nickel
and related parties entered into an agreement styled Global Settlement
Agreement. The agreement calls for the dismissal of all lawsuits and arbitrations
and any related appeals between or among the parties. On October 25, 2006, U.S. Magistrate
Judge Nita L. Stormes so ordered compliance with said Global Settlement
Agreement.

This Global Settlement Agreement has
no effect on our November 2004 $14.2 million award resulting from a binding arbitration
proceeding against NVID International, Inc. through the American Arbitration Association
International Centre for Dispute Resolution.

Note 17. Subsequent
EventsSubsequent to July 31, 2006, we
received $49,000 from the exercise of options on 49,000 shares of common stock, issued in
prior periods for services provided to the Company.

Note 18. Recent
Accounting PronouncementsIn December 2004, the FASB issued
Statement No. 123(R) (revised 2004) (FAS 123(R)). In addition, in March 2005
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
Topic 14, Share-Based Payment (SAB 107) which provides interpretations
regarding the interaction between FAS 123(R) and certain SEC rules and regulations and
provided the staffs views regarding the valuation of share-based payment
arrangements for public companies. FAS 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions, including stock option awards. FAS 123(R) revises FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25. FAS 123(R) will
require us to measure the cost of employee services received in exchange for stock option
awards based on the grant-date fair value of such awards. That cost will be recognized
over the period during which an employee is required to provide service in exchange for
the award, which is usually the vesting period. We will report such costs as part of our
general and administrative expenses. FAS 123(R) will be effective for us as of the
beginning of the first annual reporting period that begins after December 15, 2005, which
will be our fiscal year ending July 31, 2007.

In May 2005, the FASB issued
Statement No. 154, Accounting Changes and Error Correctionsa replacement of APB
Opinion No. 20 and FASB Statement No. 3 (FAS 154), which changes the
requirements for the accounting for and reporting of a change in accounting principle,
requires retrospective application to prior periods financial statements of changes
in accounting principle and carries forward without change the guidance contained in
Opinion 20 for reporting the correction of an error in previously issued financial
statements and a change in accounting estimate. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005
(our fiscal year commencing August 1, 2006. We do not currently know of any circumstances
that would, subsequent to the adoption of FAS 154, affect future reporting or disclosures.

ITEM 8. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   None.

# ITEM 8A. CONTROLS AND
PROCEDURES

We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of disclosure controls and
procedures in Rule 13a-14(c). In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation,
under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective. Effective July 1, 2005, our Chief Financial Officer, Gary
Brownell, retired for health reasons. Mr. Brownell will continue to serve as a Director on
the Board of Directors. We appointed Andrew J. Buckland as our new Chief Financial
Officer.

There have been no significant
changes in our internal controls or in other factors that could significantly affect the
internal controls subsequent to the date we completed our evaluation of the effectiveness
of our controls.

ITEM 8B. OTHER INFORMATION:  None.

27

---



# PART III

ITEM 9. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANTThe executive officers and directors
of PURE Bioscience and their ages are as follows:

|Name                                                                                                                                                                                                                                | Age                     | Position                                                                                                                                                                                                                                                      | Held Position Since                     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | 
|Michael L. Krall     
        Andrew J. Buckland   
        Donna Singer         
        Gary Brownell, CPA   
        Dennis Atchley, Esq. 
        Greg Barnhill        
        Dennis Brovarone     
        Tommy G. Thompson | 54
43
36
54
56
51
50
64 | President, CEO, Chairman, Director
CFO, Principal Accounting Officer 
Executive Vice President, Director
Director                          
Secretary                         
Director                          
Director                          
Director | 1992
2005
1998
1996
1996
2001
1996
2006 | 

The Directors serve until their
successors are elected by the shareholders. Vacancies on the Board of Directors may be
filled by appointment of the majority of the continuing directors. The executive officers
serve at the discretion of the Board of Directors except as subject to the employment
agreement with Mr. Krall.

Business ExperienceDENNIS B. ATCHLEY, ESQ.   Mr. Atchley
is the Secretary of PURE Bioscience and currently practices as a sole practitioner in
Oceanside, California handling corporate and business related litigation matters. A 1973
graduate of Loyola Marymount University in Los Angeles and a 1976 graduate of California
Western School of Law in San Diego, California, Mr. Atchley is a member of the California
Bar, the San Diego County Bar Association, and the Consumer Attorneys of San Diego.

GREGORY H. BARNHILL   Mr. Barnhill is a
Partner and member of the Board of Brown Advisory Securities, LLC. Previously, Mr.
Barnhill served as Managing Director of North American Equity Sales at Deutsche Banc
Alex.Brown Inc., Baltimore, MD. He joined the firm in 1975, following his graduation from
Brown University with an AB degree in economics.

DENNIS BROVARONE   Mr. Brovarone has
been practicing corporate and securities law since 1986 and as a sole practitioner since
1990. He was elected to the Companys Board of Directors in April 1996. From January
2002 to the present, Mr. Brovarone serves on the Board of Directors of Shannon
International, Inc., a publicly held Nevada corporation.

GARY W.  BROWNELL    Mr.  Brownell
 served as the CFO for PURE  Bioscience  from 1996  through  June 2005 and has been a
Director of PURE Bioscience since 1996.

ANDREW J. BUCKLAND   Mr. Buckland
joined PURE Bioscience as its Chief Financial Officer in 2005. Prior to joining PURE, Mr.
Buckland served as Vice President of Finance at Cardionet, Inc. Previous to that, Mr.
Buckland served as Chief Financial Officer and as Chief Accounting Officer of Advanced
Tissue Sciences, a public biotechnology company based in San Diego. He earned an MBA from
the University of California, Irvine and a BA (with Honors) from the University of the
West of England Business School.

MICHAEL L. KRALL   Mr. Krall is the
President, CEO and Chairman of the Board of Directors of PURE Bioscience, a position he
has held since 1993.

DONNA M. SINGER   Ms. Singer is the
Executive Vice President of PURE Bioscience and has been a director since 1997. From
1996-1998, Ms. Singer served as Vice President of Operations for the Company.

TOMMY G. THOMPSON   Secretary Thompson
is currently the Independent Chairman of the Deloitte Center for Health Solutions, a
partner at the law firm of Akin Gump Strauss Hauer & Feld, and President of Logistics
Health Incorporated. Secretary Thompson served as HHS Secretary from 2001 to 2005 and as
Governor of Wisconsin from 1987-2001. Secretary Thompson also serves as a director on the
boards of Centene Corporation and CR Bard, Inc.

Family RelationshipsThere is no family relationship
between any Director, executive or person nominated or chosen by PURE Bioscience to become
a Director or Executive Officer.

Audit CommitteeThe Board of Directors does not have
an audit committee. The functions of the audit committee are currently performed by the
entire board of directors. PURE Bioscience is under no legal obligation to establish an
audit committee and has elected not to do so at this time so as to avoid the time and
expense of identifying independent directors willing to serve on the audit committee. PURE
Bioscience may establish an audit committee in the future if the board determines it to be
advisable or we are otherwise required to do so by applicable law, rule
or regulation.

As the board of directors does not
have an audit committee, it therefore has no audit committee financial expert
within the meaning of Item 401(e) of Regulation S-B. In general, an audit committee
financial expert is an individual member of the audit committee who understands
Generally Accepted Accounting Principles and financial statements; is able to assess the
general application of such principles in connection with accounting for estimates,
accruals and reserves; has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity to our financial statements;
understands internal controls over financial reporting, and understands audit committee
functions.

Board of Directors
IndependenceTwo of our directors, Gregory
Barnhill and Dennis Brovarone, are independent within the meaning of
definitions established by the Securities and Exchange Commission or any self-regulatory
organization. PURE is not currently subject to any law, rule or regulation requiring that
all or any portion of its board of directors include independent directors.

28

---



Compliance with Section
16(a) of Securities Exchange Act of 1934To our knowledge, during the fiscal
year ended July 31, 2006, our Directors and Officers complied with all applicable Section
16(a) filing requirements. This statement is based solely on a review of the copies of
such reports that reflect all reportable transactions furnished to us by our Directors and
Officers and their written representations that such reports accurately reflect all
reportable transactions.

Code of EthicsUnder the Sarbanes-Oxley Act of 2002
and the Securities and Exchange Commissions related rules, PURE Bioscience is
required to disclose whether it has adopted a code of ethics that applies to PUREs
principal executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. We have adopted a code of ethics that
applies to our chief executive officer, chief financial officer and other officers, legal
counsel and to any person performing similar functions. We have made the code of ethics
available and intend to provide disclosure of any amendments or waivers of the code within
five business days after an amendment or waiver on our website, www.purebio.com.

# 

ITEM 10. EXECUTIVE
COMPENSATIONSummary Compensation TableThe following table shows for the
fiscal years ending July 31, 2006, 2005 and 2004, the compensation awarded or paid by the
Company to its Chief Executive Officer and any of the Executive Officers of the Company
whose total salary and bonus exceeded $100,000 during such years (The Named
Executive Officers):

|SUMMARY COMPENSATION TABLE                 
|-------------------------------------------
|
|
|
|Michael L. Krall President and CEO         
|                                           
|                                           
|                                           
|Andrew J. Buckland, Chief Financial Officer
|                                           
|Donna M. Singer, Executive Vice President  
|                                           

No other Executive Officer earned
more than $100,000 during any of the fiscal years presented.

Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year End Option ValuesThe following table sets forth, for
each of the Named Executive Officers, the number and value of option exercises during the
year ended July 31, 2006, and the number and value of unexercised options held at July 31,
2006:

|Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
|-----------------------------------------------------------------------
|
|Michael L. Krall
  President and CEO                                   
|                                                                       
|Andrew J. Buckland
  Chief Financial Oficer                            
|                                                                       
|Donna M. Singer
  Executive Vice President                             
|                                                                       

| | (1) | Value
realized is based as applicable on a) the difference between the exercise
                    price of options exercised and the closing market price of our common
stock on                     the date of exercise; or b) the market value of shares
acquired via net exercise                     based on the closing market price of our
common stock on the date of exercise.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Option
values are based on the difference between the exercise price of
                    unexercised options and the closing price of our common stock of
$1.50 at July                     31, 2006, for options where the exercise price is less
than $1.50.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements
and Executive CompensationIn April 1996, the Board of Directors
approved a five-year employment agreement for Michael Krall, its President and Chief
Executive Officer. Mr. Krall received a salary of $168,000 per year plus an amount equal
to 3% of PURE Biosciences net income before taxes, if any, plus other benefits. The
Board of Directors has extended Mr. Kralls employment agreement each year subsequent
to the original term. In May 2005, the Board of Directors approved a salary increase to
$200,000 per year for Mr. Krall.

29

---



Compensation of DirectorsDirectors are entitled to receive
$300 plus reimbursement for all out-of-pocket expenses incurred for attendance at Board of
Directors meetings. Directors, upon joining the Board, each receive an option on 100,000
shares at fair market value. Upon each subsequent anniversary thereof, each such Director
will receive an option to purchase 50,000 shares of common stock at fair market value. The
Plans also give the Administrative Committee discretion to award additional options.

Other Arrangements:  None

Termination of
Employment and Change of Control ArrangementThere is no compensatory plan or
arrangement with respect to any individual named above which results or will result from
the resignation, retirement or any other termination of employment with the Company, or
from a change in the control of the Company.

30

---



# ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the number
of shares of the Companys common stock beneficially owned as of October 23, 2006 by
individual directors and executive officers and by all directors and executive officers of
the Company as a group. Based upon a review of the Companys shareholders list as of
October 23, 2006, there are no registered holders of five percent or more of the
Companys common stock. As of October 23, 2006, there were 23,882,002 shares
outstanding.

|Name and Address of
Beneficial Owner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Title                                                                                                                                                                            | Common Stock
Ownership                                                                                                              | Percentage of Shares
Outstanding (%)                         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | 
|Dennis Atchley                   
 1725 Gillespie Way
 El Cajon, CA  92020
 Gregory Barnhill                 
 1725 Gillespie Way
 El Cajon, CA  92020
 Dennis Brovarone                 
 1725 Gillespie Way
 El Cajon, CA  92020
 Gary Brownell                    
 1725 Gillespie Way
 El Cajon, CA  92020
 Andrew J. Buckland               
 1725 Gillespie Way
 El Cajon, CA  92020
 Michael L. Krall                 
 1725 Gillespie Way
 El Cajon, CA  92020
 Donna Singer                     
 1725 Gillespie Way
 El Cajon, CA  92020
 Tommy G. Thompson                
 1725 Gillespie Way
 El Cajon, CA  92020
 Directors and Officers as a Group
 (9 individuals) | Secretary              
Director               
Director               
Director               
Chief Financial Officer
President, CEO/Chairman
Executive VP, Director 
Director | 558,301 (1)
   994,000 (2)
 1,121,067 (3)
 1,064,905 (4)
   400,000 (5)
 2,362,122 (6)
 1,272,758 (7)
   422,220 (8)
 8,183,753 (9) | 2.28
  3.95
  4.48
  4.27
  1.65
  9.00
  5.06
  1.74
 25.52 | 

|(1) | Includes
presently exercisable options to acquire up to 440,000 shares.
|--- | -----------------------------------------------------------------------

|(2) | Includes
presently exercisable options to acquire up to 789,000 shares.
|--- | -----------------------------------------------------------------------

|(3) | Includes
presently exercisable options to acquire up to 985,000 shares.
|--- | -----------------------------------------------------------------------

|(4) | Includes
presently exercisable options to acquire up to 950,000 shares.
|--- | -----------------------------------------------------------------------

|(5) | Includes
presently exercisable options to acquire up to 400,000 shares.
|--- | -----------------------------------------------------------------------

|(6) | Includes
presently exercisable options to acquire up to 1,650,000 shares.
|--- | -------------------------------------------------------------------------

|(7) | Includes
presently exercisable options to acquire up to 1,200,000 shares.
|--- | -------------------------------------------------------------------------

|(8) | Includes
presently exercisable options to acquire up to 422,220 shares.
|--- | -----------------------------------------------------------------------

|(9) | Includes
presently exercisable options held by all of the above officers and directors to acquire
up to 6,836,200 shares.
|--- | -------------------------------------------------------------------------------------------------------------------------

The  following  table sets forth
 information  about our common  stock that may be issued  upon  exercise  of options
 under our equity compensation plans.

|Plan Category         | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|--------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation   |                                                                                                 |                                                                                 |                                                                                                                                                
|plans approved by     |                                                                                                 |                                                                                
|security holders      |                                                                                                 |                                                                                 |                                                                                                                                                
|                     
|Equity compensation   |                                                                                                 |                                                                                
|plans not approved by |                                                                                                 |                                                                                
|security holders      |                                                                                                 |                                                                                 |                                                                                                                                                
|                     
|Total                 |                                                                                                 |                                                                                 |                                                                                                                                                
|                     

31

---



The following equity compensation
plans were not approved by security holders:

| | 1. | 2001
ETIH2O Stock Option Plan: Adopted by the Board in January 2001, there are
                    1,000,000 shares authorized under this Plan. The options have a
five-year term                     with vesting ratably over a five-year period.
Executive Officers and Directors                     are not eligible participants under
this plan.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | 2001
Consultants and Advisors Stock Option Plan: Adopted by the Board in January
                    2001, there are 500,000 shares authorized under this Plan. The
options have a                     five-year term with vesting ratably over a five-year
period. Executive Officers                     and Directors are not eligible
participants under this plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | 2004
Consultants and Advisors Stock Option Plan: Adopted by the Board in April
                    2004, there are 2,000,000 shares authorized under this plan. The
options have a                     five-year term with vesting ratably over a five-year
period. Executive Officers                     and Directors are not eligible
participants under this plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONSDuring the quarter ended January 31,
2006, we entered into a two-year consulting agreement with Mr. Michael Sitton for domestic
and international business development, the compensation for which is a fee of $12,500 per
month and an option on two million shares of unregistered common stock, which vest over
three years. We also entered into a two-year consulting agreement with Secretary Tommy
Thompson, for domestic and international business development, the compensation for which
is a fee of $12,500 per month and an option on three hundred thousand shares of
unregistered common stock, which vest over three years. Mr. Sitton has subsequently
transferred the rights to 700,000 options to Secretary Thompson. Mr. Sitton is now
therefore the beneficial owner of 1,300,000, and Secretary Thompson is the beneficial
owner of 1,000,000 of these options. Mr. Sitton and Secretary Thompson were each elected
to our Board of Directors during the quarter ended January 31, 2006; however, in October
2006 Mr. Sitton resigned from the Board of Directors in order to create a vacancy so that
our Board of Directors may be restructured to consist of a sufficient number of
independent directors to be able to meet the listing requirements of a national stock
exchange. Mr. Sittons consulting agreement is not affected by his resignation from
our Board of Directors.

# 

ITEM 13. EXHIBITS
A.    
          The following Exhibits are filed as part of this registration statement pursuant
          to Item 601 of Regulation S-B:

|3.1 (1) |  Articles of Incorporation, Articles of Amendment and Bylaws
|------- | -------------------------------------------------------------

|3.1.1(13) |  Articles
of Amendment dated March 11, 2002
|--------- | --------------------------------------------

|4.1 (1) |  Form of Class A Warrant
|------- | -------------------------

|4.2 (1) |  Form
of Class Z Warrant
|------- | -------------------------

|4.3 (1) |  Form
of Common Stock Certificate
|------- | ----------------------------------

|4.4 (1) |  Warrant
Agreement
|------- | -------------------

|4.5 (2) |  March
2000 Warrant
|------- | --------------------

|4.6 (3) |  January
2001 Warrant
|------- | ----------------------

|4.7 (4) | Convertible
Debenture
|------- | ----------------------

|4.8 (5) |  Convertible
Debenture Purchase Agreement
|------- | ------------------------------------------

|4.9 (6) | Convertible
Debenture Warrant
|------- | ------------------------------

|10.1 (1) | Employment
Contract/Michael L. Krall
|-------- | -------------------------------------

|10.2 (7) |   Manufacturing, Licensing and Distribution Agreement dated March 26, 2001
|-------- | ---------------------------------------------------------------------------

|10.3 (8) |  Axenohl License Agreement
|-------- | ---------------------------

|10.4 (9) |  Weaver  Roach X Assignment
|-------- | -----------------------------

|10.5 |   Dodo  Agreement   [CONFIDENTIAL   TREATMENT  REQUESTED  FOR  CERTAIN  OMITTED
 INFORMATION  FILED                 SEPARATELY]
|---- | --------------------------------------------------------------------------------------------------------------------------------

|10.6 (8) | Promissory Note of Michael Krall
|-------- | ---------------------------------

|10.7 (8) |  Promissory Note of Gary Brownell
|-------- | ----------------------------------

|10.8  (9) |  Nutripure Dealer Agreement
|--------- | ----------------------------

|10.9 (9) |  Sales Finance Agreement
|-------- | -------------------------

|10.10 (10) |  ETIH2O, Inc., Acquisition Agreement
|---------- | -------------------------------------

|10.11 (11) |  NVID Litigation Settlement Agreement
|---------- | --------------------------------------

|10.12 (12) |  Addendum #1 to NVID Settlement Agreement
|---------- | ------------------------------------------

|10.13(14) |    Therapeutics,  Incorporated  Agreement  [CONFIDENTIAL  TREATMENT  REQUESTED FOR
CERTAIN  OMITTED                 INFORMATION FILED SEPARATELY]
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 (15) |   Promissory Note dated November 2003 $4,750,000
|---------- | -------------------------------------------------

|10.15 (15) |   Promissory Note dated January 26, 2004 $100,000
|---------- | --------------------------------------------------

|13 (13) |  Subsidiaries of the Registrant
|------- | --------------------------------

|14.1 (16) |  Code of Ethics
|--------- | ----------------

|31.1 |  Section
302 Certification
|---- | ---------------------------

|31.2 |  Section
302 Certification
|---- | ---------------------------

|32.1 |  Section
906 Certification
|---- | ---------------------------

|32.2 |  Section
906 Certification
|---- | ---------------------------

|(1) | Incorporated
by reference from Form SB-2 registration statement SEC File
                    #333-00434 effective August 8, 1996
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference from S-3 registration statement, SEC File #333-36248
                    effective on May 17, 2000
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
by reference from S-3 registration statement, SEC File #333-55758
                    effective on February 26, 2001
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
by reference from S-3 registration statement, SEC File #333-61664
                    filed on May 25, 2001
|--- | ------------------------------------------------------------------------------------------------------------------------

32

---



|(5) | Incorporated
by reference from pre-effective amendment no. 1 to S-3 registration
                    statement, SEC File #333-61664 filed on July 10, 2001
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
by reference from pre-effective amendment no. 2 to S-3 registration
                    statement, SEC File #333-61664 filed on August 13, 2001
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
by reference from Current Report on Form 8-K filed on May 24, 2001                     as
amended on October 19, 2001
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
by reference from the Amended Annual Report on Form 10KSB for the
                    fiscal year ended July 31, 2000 filed on October 19, 2001
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
by reference from Amended Form 10QSB for the nine month period                     ended
April 30, 2001 filed on October 19, 2001
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated
by reference from the Amended Annual Report on Form 10KSB for the
                    fiscal year ended July 31, 2001 filed on November 13, 2001
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated
by reference from Current Report on Form 8-K filed on December 6,
                    2001
|---- | -------------------------------------------------------------------------------------------------------

|(12) | Incorporated
by reference from Amended Current Report on Form 8-K filed on
                    December 7, 2001
|---- | ---------------------------------------------------------------------------------------------------------------

|(13) | Incorporated
by reference from the Annual Report on Form 10KSB for the fiscal                     year
ended July 31, 2002 filed on October 29, 2003
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated
by reference from the Amended Annual Report on Form 10KSB for the
                    fiscal year ended July 31, 2003 filed on January 30, 2004
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated
by reference from the Amended Quarterly Report for the three month
                    period ended October 31, 2003 filed on February 27, 2004
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Incorporated
by reference from the Annual Report on Form 10KSB for the fiscal                     year

ended July 31, 2004 filed on October 29, 2004
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

B.     Reports on Form 8-K:

| | 1. | Current
Report Items 5.02 and 9.01 Departure of Directors or Principal Officers; Election of
Directors; Appointment of          Principal Officers filed on October 11, 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 14. PRINCIPAL
ACCOUNT FEES AND SERVICES

Audit FeesMiller & McCollom, Certified
Public Accountants, have been our independent auditors for the fiscal years ending July
31, 2006 and 2005. We incurred aggregate fees payable to Miller & McCollom of $56,200
for the fiscal year ended July 31, 2006 and paid them $59,900 for the fiscal year ended
July 31, 2005 for professional services rendered for the audit of our annual financial
statements; for review of the financial statements included in our quarterly reports on
Form 10QSB during these fiscal years, and for review of the financial statements included
in our SB-2 filed on April 24, 2006 and subsequently amended.

Audit-Related FeesMiller & McCollom was not paid
any additional fees for the fiscal years ended July 31, 2006 or 2005 for services related
to the performance of the audit or review of our financial statements.

Tax FeesNo fees were paid for tax related
services to any independent advisors during the year ended July 31, 2006. Deloitte &
Touche USA LLP was paid fees of $2,500 during the fiscal year ended July 31, 2005 for
professional services rendered for tax compliance, tax advice and tax planning. No other
independent advisors were paid fees for such services during the year ended July 31, 2005.

Other FeesNeither Miller & McCollom nor
Deloitte & Touche USA LLP was paid other fees for professional services during the
fiscal years ended July 31, 2006 or 2005.

33

---



# SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|PURE BIOSCIENCE                                                                                                                                                |  | DATE                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------
|/s/ MICHAEL L. KRALL
Michael L. Krall, Chairman/President/CEO/s/ ANDREW J. BUCKLAND
Andrew J. Buckland, Chief Financial Officer
(Principal Accounting Officer) |  | October 26, 2006
October 26, 2006

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

|NAME                                                                                                                                                                                                               | TITLE                                                                                                                                                                                                  | DATE                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------
|/s/ GREGORY BARNHILL
Gregory Barnhill/s/ DENNIS BROVARONE
Dennis Brovarone/s/ GARY BROWNELL
Gary Brownell/s/ MICHAEL L. KRALL
Michael L. Krall/s/ DONNA SINGER
Donna Singer/s/ TOMMY G. THOMPSON
Tommy G. Thompson | Director                             
Director                             
Director                             
President/CEO and Director           
Executive Vice President and Director
Director | October 26, 2006
October 26, 2006
October 26, 2006
October 26, 2006
October 26, 2006
October 26, 2006

---