SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM 10-K




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




For
the fiscal year ended July 31, 2009 or




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




For
the transition period from
                        
to




Commission
file No. 0-21019




PURE
BIOSCIENCE


(Exact
name of registrant as specified in 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 office, including zip code)




(619)
596-8600


(Registrant’s
telephone number, including area code)




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


None




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


Common
Stock, no par value





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




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




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





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


Yes o No o




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




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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).




Yes o   No x




As of
October 9, 2009, the registrant had 34,126,148 shares of its common stock, no
par value, issued and outstanding.


The aggregate market value of the registrant’s voting stock held by
non-affiliates, as of the last day of the registrant’s second quarter
of the fiscal year ended July 31, 2009, was approximately $72,332,800
(computed on the basis of the last trade of the common stock on the NASDAQ
Capital Market on January 30, 2009).








Documents
Incorporated by Reference




Portions
of the registrant’s Definitive Proxy Statement to be filed with the Securities
and Exchange Commission (“SEC”) pursuant to Regulation 14A in connection with
the Annual Meeting of Shareholders to be held on or about January 20, 2010 are
incorporated herein by reference into Part III of this Annual Report. Such
Definitive Proxy Statement will be filed with the Commission not later than 120
days after July 31, 2009.





As used
in this 10-K, the terms “we”, “us”, “our” and “the Company” refer to PURE
Bioscience, a California corporation, and its subsidiaries, on a consolidated
basis, unless otherwise stated.























PART
I




CAUTIONARY
STATEMENT




This
Annual Report contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this Annual Report. Additionally, statements
concerning future matters such as the development of new products, sales levels,
expense levels and other statements regarding matters that are not historical
are forward-looking statements.




Although
forward-looking statements in this Annual Report reflect the good faith judgment
of our management, such statements can only be based on facts and factors
currently known by us. Consequently, forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
under the heading “Risk Factors” in Item 1A, as well as those discussed
elsewhere in this Annual Report. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
Annual Report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this Annual Report. Readers are urged to carefully
review and consider the various disclosures made in this Annual Report, which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operations and
prospects.




Item
1.  Business




Overview


PURE
Bioscience (sometimes referred to herein as the “Company,” “we”, “us” or “our”)
was incorporated in the state of California on August 24, 1992.  We
began as a provider of pharmaceutical water purification products for the
pharmacy market.  In 2000, we commenced investments in the development
of novel bioscience technologies, and subsequent to the May 2005 sale of our
Water Treatment Division we have been exclusively focused on the development and
commercialization of our current and future bioscience products.




We are
expanding into markets with broad potential by developing new, proprietary
bioscience products based upon our patented silver ion antimicrobial
technologies.  We are developing technology-based bioscience products,
including our silver dihydrogen citrate-based antimicrobials, which we believe
can provide novel, non-toxic solutions to numerous global health challenges and
represent innovative advances in diverse markets. We believe that our
technologies are in a position to contribute significantly to today’s global
trend toward industrial and consumer use of environmentally friendly products,
while providing competitive advantages in efficacy and safety.




Bioscience
Technologies


Our
flagship bioscience technology is a patented, aqueous antimicrobial called
silver dihydrogen citrate (“SDC”). A 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, including as an active
pharmaceutical ingredient. In addition to SDC, we have obtained patent
protection for ionic silver-based molecular entities utilizing 14 organic acids
other than citric acid.




We also
own certain rights to 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 the
products RoachX and AntX, however these products are not currently being
actively marketed or developed.




Principal
Products and Markets




Silver Dihydrogen
Citrate.  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, through our distributors, 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 U.S. 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.  In
August 2009, we obtained EPA registration for an SDC-based sanitizer for food
contact surfaces. The new sanitizer was registered under the trade name Axen50
for sanitization of food contact surfaces and equipment in environments such as
farms, food processing plants, schools, hospitals, restaurants and
homes.




Our Axen30
EPA registration includes claims such as 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, a 10-minute kill time
on fungi, a 30-second kill time on HIV Type I, and a 3 to 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, Axen30, 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 including 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.


·
            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.  In November 2007, we obtained expanded
      EPA-registered claims to include  claims against two additional
      resistant strains of Staphylococcus, Community Associated MRSA (CA-MRSA)
      and Community Associated PVL Positive MRSA (CA-MRSA, PVL Positive),
      eliminating both organisms in just two minutes. Also added to the expanded
      label are two-minute kill claims on Campylobacter jejuni
      and Acinetobacter
      baumannii.


·
            Fungus Axen demonstrated
      a 99.9999% kill in 10 minutes of the common athlete’s foot fungus,
      Trichophyton mentagrophytes ATCC 9533.  This data allows us to
      add a fungicidal claim to Axen’s 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 us to add these virucidal claims
      to Axen’s hard surface disinfectant label.  The recently
      expanded EPA-registered viral efficacy claims include a three-minute kill
      against Human Corona virus and Rotavirus and a ten-minute kill against
      Norovirus and Avian Influenza A.




We have
received EPA registration to expand claims for our Axen30 hard surface
disinfectant to include use on hard surfaces in childcare facilities,
restaurants, homes and medical facilities.  Expanded use claims for
our Axen30 disinfectant also 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.  With our partners, we are investigating market opportunities
for products in the childcare segment which includes daycare centers,
preschools, schools, gymnasiums and children’s activity centers.




We expect
the new Axen50 sanitizer approval to open new markets for our technology, as
food borne illnesses create significant health and economic problems in the U.S.
and internationally.  The Axen50 registration will enable our
distributors to apply for state registrations to sell both new food surface
sanitizers and to add the new food contact sanitization claims to existing
disinfectant product registration claims.  Additionally, we expect
that this registration will help add to our product offerings additional direct
food contact applications of SDC-based formulations as antimicrobial processing
aids, predominantly  through the U.S. Department of
Agriculture.




When
requested by our partners, we may utilize our expertise to source, assemble and
build SDC blending systems for sale to our distributors.  These
systems allow our distributors to blend our SDC concentrate into lower
concentrations, thereby significantly reducing the cost of shipping products,
particularly for overseas markets.  No information regarding the
method of making SDC is passed to our distributors as in all of our third party
agreements we are, and intend to continue to be, the sole manufacturer and sole
source of SDC concentrate.




We plan
to pursue additional EPA and U.S. Food and Drug Administration (“FDA”)
regulatory approvals for other applications. In September 2003, we entered into
an agreement with Therapeutics, Incorporated (“Therapeutics”), a drug
development company based in La Jolla, California, for the development and
commercialization of certain FDA-regulated SDC-based products (the “Therapeutics
Agreement”).  Products under development in our collaboration with
Therapeutics included women’s health products, acne products, products for
treatment of dermatophytoses such as tinea pedis (athlete's foot), onychomycosis
(nail fungus), and antimicrobial skin wash products, beginning with a hand
sanitizer.  In December 2006, Therapeutics submitted an
Investigational New Drug (IND) application to the FDA for an SDC-based hand
sanitizer, to enable initiation of the first clinical trial of a product
containing SDC as an active pharmaceutical ingredient.  After
reviewing the submission the FDA determined that the product testing in man may
begin as proposed.  Multiple hand sanitizer formulations containing
SDC have been tested for safety and efficacy in proof of concept
studies.




In July
2008, we added a new development and licensing partner for SDC-based products
for human use, FTA Therapeutics, LLC (“FTA”).  To facilitate the
contract with FTA, we structured an agreement in which Therapeutics transferred
its development and license rights for FDA-regulated SDC-based products,
including the in-process IND for a skin sanitizer, back to us.  We
purchased from Therapeutics all data and other materials generated by
Therapeutics related to the licenses being returned.  We intend to
subsequently license development rights for these indications to multiple third
parties, the first being FTA.











FTA has
begun formulation and clinical projects for FDA-regulated dermatology products
containing SDC.  Under our agreement with FTA, FTA will fund and
direct all development activities and FDA regulatory filings.  In July
2009, the Cleveland Clinic, which has one of the largest biomedical engineering
departments in the United States, acquired an equity stake in FTA and will work
with FTA on their SDC development projects.




Our SDC
technology also shows promise as a broad-spectrum antimicrobial for multiple
other medical indications, including wound and burn care, as well as for dental
and veterinary indications, for which we are actively seeking development
partners.




In
September 2007, we announced that we had developed a new SDC-based antimicrobial
product that provides what we believe to be the first 24-hour residual
protection against norovirus.  The highly concentrated product is
designed to be mixed with water at the point of use to create a low toxicity
hard surface antimicrobial.  In 2007, we commissioned an independent,
third-party study entitled "Residual Virucidal Efficacy of a Disinfectant for
Use on Inanimate Environmental Surfaces Utilizing Feline Calicivirus as a
Surrogate Virus for Norovirus."  The study was conducted by the
nation's leading third party microbiology and virology testing laboratory in
accordance with EPA Good Laboratory Practice regulations. The testing laboratory
modified an existing EPA protocol for testing bacterial residual efficacy to a
protocol that appropriately evaluated the residual efficacy of our new
formulation against the Feline Calicivirus. Our new disinfectant demonstrated
greater than 99.9999% reduction in viral titer of Feline Calicivirus after 12
hours and at least a 99.98% reduction after 24 hours.  We intend to
initially market the product through distributor relationships to the cruise
ship industry under the name Cruise Control, subject to significant testing and
evaluation of the product by potential purchasers.




In July
2008, we suspended the development and marketing efforts for our Triglycylboride
boric acid-based pesticides in order to focus on the development of our SDC and
related technologies.  If we decide not to make additional future
investments in the Triglycylboride technology ourselves, we may pursue
alternatives such as selling or licensing our rights to the technology, however
the value of the technology, if any, is unknown at this time.




Customers


We rely
on third parties to market and distribute our products.  Our partners
and distributors are marketing our novel antimicrobial silver ion technology to
industrial and consumer markets, however these products have not yet been widely
accepted into the marketplace.




We sell,
or plan to sell, SDC in a variety of concentrations and
formulations.  We sell SDC concentrate to certain partners who in turn
(i) resell the concentrate as an active ingredient or preservative in other
companies’ products; (ii) blend the product into hard surface disinfectant
products for sale to retail, commercial and institutional customers; and/or
(iii) develop novel formulations under a license granted by us.  In
addition, we sell both bulk and individually bottled hard surface disinfectant
products to distributors that in turn sell the product to retail, commercial and
institutional customers.




We have a
strategic agreement with Ciba, under which we have granted Ciba the right to
resell our SDC concentrate within the global personal care, household and
institutional markets.  During the year ended July 31, 2009 (“Fiscal
2009”) Ciba was acquired by BASF, a chemical company with global annual revenues
in 2008 of approximately $90 billion.  All contractual rights under
our agreements with Ciba have been assigned to BASF, and the integration of Ciba
into BASF is complete (for all subsequent references to the strategic
relationship in this Annual Report, we will refer to our partner as
“BASF”).  BASF’s customers include many global, well established
corporations with powerful existing brands.  In February 2009, the
first name brand personal care products containing SDC as the active ingredient
were launched in Europe by a customer of BASF.  We expect other such
product launches in future periods through our agreement with BASF.




In July
2008, we entered into an agreement with FTA Therapeutics, LLC for the
development of FDA-regulated dermatology products containing
SDC.  Under the agreement, FTA will fund and direct all development
activities and FDA regulatory filings.  We would receive payments on
the achievement of certain milestones for each licensed indication; royalties on
commercial sales of any products developed and sold under the agreement; and a
transfer price for any SDC Active Pharmaceutical Ingredient manufactured by us
for incorporation into products developed and sold under the
agreement.




We have
entered into distribution agreements with multiple distributors in the United
States to market our EPA-approved hard surface disinfectant under their own
labels, and a number of such products have recently been launched, or we expect
to be launched in future periods.  As our disinfectant contains a
novel, patented molecule, the market adoption of such products can take
significantly longer than for a reformulation of a product under an existing
brand name.  However, we are hopeful that our distributors will
successfully achieve market acceptance of our products as a result of the novel
selling points of SDC, such as its broad spectrum efficacy, low toxicity and
lack of evidence of pathogenic resistance.




During
Fiscal 2009, we signed a distribution agreement with BioTech Medical LLC, a
U.S.-based division of privately-held Suarez Corporation Industries, a leading
international marketing company. This agreement allows BioTech Medical
LLC the non-exclusive right to market our Axen30 hard surface disinfectant
and our Cruise Control concentrated product globally, with the exception of
Brazil.  Additionally, we have a strategic agreement with Rockline
Industries for the development of wet wipes containing our SDC technology, which
Rockline would market if successful product development and EPA approval were
achieved.




To date,
with the exception of BASF, BioTech Medical LLC and Rockline, our partners have
been, and are, small distributors to whom we have granted primarily
non-exclusive rights to market our EPA approved Axen30 hard surface
disinfectant, which is sold under multiple brand names owned by the
distributors. However, we continue to develop new products and formulations
utilizing our SDC technology.  Potential products may include cleaner
disinfectants, field dilutable disinfectants and sanitizers, hospital grade
disinfectants  and sporicides, cold process sterilants, and medical
device applications.  If we are successful in developing any such new
formulations and obtaining regulatory approvals, we expect be able to attract
additional established partners and distributors of our technology.











In August
2009, we obtained EPA registration for an SDC-based sanitizer for food contact
surfaces. This registration will enable applications for state registrations to
sell both new food surface sanitizers and to add the new food contact
sanitization claims to existing disinfectant product registration
claims.  We also have other pending EPA applications, for additional
uses and for new formulations.  For example, SDC is currently in
various trials by third parties in the transportation and agriculture
industries, both of which we consider to be significant market
opportunities.  While we cannot predict the timing or scale of any of
these opportunities, and we are competing in highly competitive markets, we
believe that our SDC technology has significant advantages over existing
technologies.  With the additional food contact claims, and
additionally if we are successful in gaining approvals for additional uses and
for new formulations, we expect to be able to attract new, well capitalized
partners and distributors.




During
Fiscal 2009, we signed a number of distribution agreements for the distribution
of Axen30 as a hard surface disinfectant, including, among others, agreements
with Global Endeavor for India; Harmony Bioscience, Inc. worldwide excluding
Brazil, Markus Group Ltd. for Thailand, Indonesia Australia, New Zealand and
Vietnam; PT Kurnia Sarana Abadi for Indonesia; and Sterifide Laboratories Inc.
for the United States.




During
Fiscal 2009, sales to each of the three following customers comprised 10% or
more of our revenues: CIBA/BASF, PureGreen LLC, a U.S. sub-registrant and
distributor of our hard surface disinfectant products, and Eco-Safe Solutions
Inc., also a U.S. sub-registrant and distributor of our hard surface
disinfectant products.




During
Fiscal 2009, 98% of sales were made to U.S. domestic customers.  The
balance of future revenues by territory is unknown at this time, however we
expect the United States market to continue to be our largest market for the
foreseeable future.




Segment
Information


We
believe that based upon the end use of our products, the value added
contributions made by us, the regulatory requirements, our customers and
partners, and the strategy required to successfully market finished products, we
are operating in a single segment.  See Note 13 to the consolidated
financial statements (“Business Segment and Sales Concentrations”) elsewhere in
this 10-K for more information regarding our business segments.




Competition


The
markets for SDC and each of its potential channels are highly
competitive.  We have a number of competitors that vary in size and
scope and breadth of products offered.  Such competitors include some
of the largest corporations in the world, and many of our competitors have
greater financial resources than we do in the areas of sales, marketing,
branding and product development.  We expect to face additional
competition from other competitors in the future.




Because
SDC is a new technology, our success will depend, in part, upon our ability to
achieve market share at the expense of existing, established and future products
in our relevant target markets.  Even where SDC may have technological
competitive advantages over competing products, we, our partners or our
distributors, will 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.  To the extent
that we were to grant any existing competitor exclusivity to any field and/or
territory, we would risk having our technology marketed in a manner that may be
less than optimal for us.  We recognize that innovative marketing
methods are required in order to establish our products, and that such methods
may not be successful.




Patents
and Intellectual Property


Our goal
is to obtain, maintain and enforce patent protection for our products,
compounds, formulations, processes, methods and other proprietary technologies
invented, developed, licensed or acquired by us, preserve our trade secrets, and
operate without infringing on the proprietary rights of other parties, both in
the U.S. and in other countries. Our policy is to actively seek to obtain, where
appropriate, intellectual property protection for our products, proprietary
information and proprietary technology through a combination of contractual
arrangements and laws, including patents, both in the U.S. and elsewhere in the
world.




We also
depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as that of our advisors, consultants and other contractors.
To help protect our proprietary know-how that is not patentable, and for
inventions for which patents may be difficult to enforce, we rely on trade
secret protection and confidentiality agreements to protect our interests. To
this end, we require our employees, consultants, advisors and certain other
contractors to enter into confidentiality agreements in order to prohibit the
disclosure of confidential information and, where applicable, require disclosure
and assignment to us of the ideas, developments, discoveries and inventions
important to our business. Additionally, these confidentiality agreements
require that our employees, consultants and advisors do not bring to us, or use
without proper authorization, any third party’s proprietary
technology.




We own
patents, or have patents pending, related to our SDC technology in the U.S. and
in certain other countries covering (i) the disinfectant and its method of
making, (ii) the formulation of the aqueous disinfectant in combination with
ethyl alcohol, (iii) multiple potential uses for our SDC technology, including
water treatment, home care and personal products, the treatment of specific
types of bacteria, fungus and viruses, medical treatment and the preservation of
consumable and non-consumable products, (iv) the combination of SDC with other
antimicrobial compounds, including quaternary ammonia, oxidizers or halogens
such as chlorine, bromine or iodine, (v) anhydrous, or crystalline, SDC
antimicrobial compositions, processes of making and methods of use, and (vi) our
process of manufacturing complexes of electrolytically generated stabilized
ionic silver with other organic acids.  In addition, we have a patent
pending for RoachX and related pesticide products, although such pesticide
products are not currently in active development.  We intend to
continue to apply for patent protection for new technology we develop whenever
we determine that the benefit of patent protection outweighs the cost of
obtaining patent protection.











We own
the registered trademarks or trademark applications for PURE Bioscience®,
Powered by SDC Ag+TM, Staph Attack®, Staphacide®, Axenohl®, Axen, Silvérion®,
Kinderguard®, Cruise Control®, NutripureTM, ElderguardTM, CritterguardTM, Innovex®,
RoachX®, AntXTM, TrapX® and MedifierTM.




Manufacturing


We
manufacture and blend SDC products in our manufacturing facility at our
corporate headquarters in El Cajon, California.  We manufacture SDC
concentrate, and all SDC concentrated products, exclusively in our facility and
intend to maintain all concentrate manufacturing in our own facility and under
our own control.  In 2007, we completed a redevelopment of our
manufacturing facility, and significantly expanded our SDC manufacturing
capacity.  Also in 2007, our manufacturing facility and process for
the production of pharmaceutical-grade SDC concentrate as an Active
Pharmaceutical Ingredient received Current Good Manufacturing Practice (cGMP)
certification.




In 2007,
we invested in manufacturing equipment, including a new automated blending and
packaging operation that allows us to produce finished, labeled, diluted end-use
products.  If necessary, we are able to outsource some blending and
packaging operations to one or more third parties, and may do so where it is
economically advantageous to us and to our customers, particularly in regard to
the reduction of shipping costs.  We did not outsource any
manufacturing operations during the year ended July 31, 2008 (“Fiscal 2008”) or
Fiscal 2009.




Silver,
the primary active ingredient in SDC, is a readily available commodity, and the
other active and inactive ingredients in our concentrated and ready-to-use
products are readily available from multiple chemical supply
companies.




Research
and Development


We
conduct our primary Research and Development (“R&D”) activities in-house,
and use third-party laboratories to conduct independent testing.  In
addition, a number of our international and domestic strategic partners perform
R&D at their own cost under our mutual agreements in order to develop and
expand markets for SDC.













Government
Regulation


The
SDC-based antimicrobial products that we manufacture and sell in the United
States are regulated by the EPA under the Federal Insecticide, Fungicide and
Rodenticide Act (“FIFRA”). We have four such products currently registered by
the EPA under FIFRA: our 2400-parts per million (ppm) technical grade SDC
concentrate (trade name Axenohl); our Axen and Axen30 hard surface disinfectant
products; and an SDC-based sanitizer for sanitization of food contact surfaces
registered under the trade name Axen50.  As we continue to develop new
products, we will require a registration from the EPA in order to market our
products in the U.S. Each new formulation of an SDC-based product will require
such a registration.  There is no guarantee that the EPA will grant
any registration for the products we submit to them for approval.




In
addition to the Federal EPA, each of the 50 U.S. states has its own agency that
regulates pesticide sales into their state. Prior to distributing a product into
any of these states, a registration from the applicable agency is required. We
market our 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 into which we intend to distribute such products.




We have
chosen to pursue certain approvals through the FDA by partnering with other
companies who have assumed, or will assume, responsibility for the testing and
regulatory process for selected potential FDA regulated SDC-based
products.  In July 2008, we entered into a development and licensing
agreement for SDC-based products for human use, FTA Therapeutics, LLC
(FTA).  FTA has begun formulation and clinical projects for
FDA-regulated dermatology products containing SDC.  Under our
agreement with FTA, we will be responsible for providing pharmaceutical-grade
SDC concentrate as an Active Pharmaceutical Ingredient (“API”).  Our
SDC technology also shows promise as a broad-spectrum antimicrobial for multiple
other medical indications, including wound and burn care, and we expect that
under future collaboration agreements for such indications, if any, we will also
provide pharmaceutical-grade SDC concentrate as an API.  As a
manufacturer of an API, we are or will be required to register with the FDA and
will be subject to periodic inspection by the FDA for compliance with the FDA’s
Quality System Regulation requirements, which require manufacturers of API’s to
adhere to certain regulations, including testing, quality control and
documentation procedures. In 2007, our manufacturing facility and process for
the production of pharmaceutical-grade SDC concentrate as an API received
Current Good Manufacturing Practice (cGMP) certification, however there is no
guarantee that we will be able to maintain this certification, or otherwise meet
FDA regulations for the production of an API.  Compliance with
applicable regulatory requirements is subject to continual review and is
rigorously monitored through periodic inspections by the FDA.




The
process of obtaining FDA and other required regulatory approvals is lengthy,
expensive and uncertain.  There is no guarantee that either FTA, any
other potential partner, or we 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.











Outside
the U.S., we, our distributors or our partners are obligated to obtain and
maintain all necessary regulatory approvals or registrations in each specific
country, to enable SDC-based products to be manufactured, formulated and/or sold
in, or into, that country.  Regulations for antimicrobial products and
products for human use vary significantly from country to
country.  Our technology may also face import or export restrictions
or burdens, which may change from time to time.




Employees


As of
October 9, 2009, we employed twenty-four people, twenty-three of whom were
full-time employees.  We believe that the success of our business will
depend, in part, on our ability to attract and retain qualified personnel. None
of our employees are covered by a collective bargaining agreement.




Company
Website


We
maintain a website at www.purebio.com.  We make our periodic and
current reports available on our website free of charge.  Information
contained on, or accessible through, our website is not part of this report or
our other filings with the SEC.  You can also read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site (www.sec.gov) that contains our
periodic reports, proxy and information statements, and other
information.




Executive
Officers of the Registrant


The
following table and information below sets forth information with respect to
each of our current executive officers:





Name
              Age
              Position
              Held Position SinceMichael
      L. Krall
              57
              President,
      CEO, Chairman, Director
              1992Andrew
      J. Buckland
              46
              CFO,
      Principal Accounting Officer
              2005Donna
      Singer
              39
              Executive
      Vice President, Director
              1998


The
executive officers serve at the discretion of the Board.




Business
Experience




MICHAEL L.
KRALL    Mr. Krall is the President, CEO and Chairman
of the Board, positions that he has held since 1992.





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.




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.















Item
1A.  Risk Factors




Except
for the historical information contained herein or incorporated by reference,
this annual report on Form 10-K and the information incorporated by reference
contains forward-looking statements that involve risks and uncertainties. These
statements include projections about our accounting and finances, plans and
objectives for the future, future operating and economic performance and other
statements regarding future performance. These statements are not guarantees of
future performance or events. Our actual results may differ materially from
those discussed here. Factors that could cause or contribute to differences in
our actual results include those discussed in the following section, as well as
those discussed in Part I, Item 2 entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and elsewhere throughout this
annual report on Form 10-K and in any other documents incorporated by reference
into this report. You should consider carefully the following risk factors,
together with all of the other information included or incorporated in this
annual report on Form 10-K. Each of these risk factors, either alone or taken
together, could adversely affect our business, operating results and financial
condition, as well as adversely affect the value of an investment in our common
stock. There may be additional risks that we do not presently know of or that we
currently believe are immaterial which could also impair our business and
financial position.   If any of the events described below were
to occur, our financial condition, our ability to access capital resources, our
results of operations and/or our future growth prospects could be materially and
adversely affected and the market price of our common stock could
decline.  As a result you could lose some or all of any investment you
may have made or may make in our common stock.




We
have a history of losses, and we may not achieve or sustain
profitability




We had a
loss of $7,067,300 after taxes for the fiscal year ended July 31, 2009 (“Fiscal
2009”), a loss of $6,540,300 after taxes for the fiscal year ended July 31, 2008
(“Fiscal 2008”), and a loss of $4,654,900 after taxes for the fiscal year ended
July 31, 2007 (“Fiscal 2007”).  As of July 31, 2009, we had an
accumulated deficit of approximately $38.5 million.  We may continue
to have losses in the future.  If the penetration into the marketplace
of SDC takes longer than anticipated, 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 could force us
to reduce research, testing, development and marketing of our technology and/or
force us to reduce the size and scope of our operations, or cease operations
altogether.




We do not
yet have significant cash inflows from product sales or from other sources of
revenue to offset our ongoing and planned investments in corporate
infrastructure, research and development projects, regulatory submissions,
business development activities, and sales and marketing, among other
investments.  These investments may not be successful.  In
addition, some of these investments cannot be postponed and we may be
contractually or legally obligated to make them.  In future periods we
may need to seek additional capital through the issuance of debt, common stock,
preferred stock, convertible securities or through other means, any one of which
could reduce the value, perhaps substantially, of our outstanding common
stock.  We currently have no long-term debt, however the issuance of
debt, common stock, preferred stock, convertible securities, or other financial
instruments in future periods, if any, 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 cause us to fail to execute our business plan, fail to take
advantage of future opportunities, or fail to respond to competitive pressures
or unanticipated customer requirements, and further may require us to delay,
reduce 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, sell some or all
of our intellectual property, or to reduce or cease operations.




The risks
associated with our business may be more acute during periods of economic
slowdown or recession.  In addition to other consequences, these
periods may be accompanied by decreased consumer spending generally, as well as
decreased demand for, or additional downward pricing pressure on our
products.  Accordingly, any prolonged economic slowdown or a lengthy
or severe recession with respect to either the U.S. or the global economy is
likely to have a material adverse effect on our results of operations, financial
condition and business prospects.  As a result, given the recent
deterioration in the U.S. and global economies, as well as the decreasing
purchasing power of consumers and institutions, we expect that our business will
continue to be adversely affected for so long as, and to the extent that, such
adverse economic conditions exist.




If
our efforts to achieve and maintain market acceptance of our core SDC technology
are not successful, or we fail to obtain necessary governmental approvals, we
are unlikely to attain profitability




We have
invested a significant portion of our time and financial resources in the
development and commercialization of our core SDC technology.  We
expect that sales of SDC will constitute a substantial portion, or all, of our
revenues in future periods.  Any material decrease in the overall
level of sales or expected sales of, or the prices for, SDC, whether as a result
of competition, change in customer demand, or any other factor, would have a
materially adverse effect on our business, financial condition and results of
operations.











We are
marketing our new antimicrobial silver ion technology to industrial and consumer
markets.  These products have not yet been accepted into the
marketplace, and may never be accepted.  In addition, even if our
products achieve market acceptance, we may not be able to maintain product sales
or other forms of revenue over time if new products or technologies are
introduced that are more favorably received than our products, are more
cost-effective or otherwise render our products less attractive or
obsolete.  Other 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 U.S. 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. We believe that all products derived from SDC, or
products that may be derived from SDC in future periods, require or will require
approval by government agencies prior to marketing or sale in the U.S. or
overseas.  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.  For example, regulatory review of SDC by the EPA has
historically been time consuming and expensive, due primarily, we believe, to
the novel nature of our technology.  While we cannot accurately
predict the outcome of such regulatory processes, we expect the review process
to remain time consuming and expensive as we, or our partners, apply for
approval to market new formulations or to make additional claims.  We
also cannot predict the extent or impact of future legislation or regulation in
the U.S. or overseas.




Some of
our new bioscience applications, for example those aimed at healthcare, food
preparation and agriculture markets, will also require approval by government
agencies prior to marketing or sale in the U.S. or overseas.  Until
we, or our partners, obtain approvals from the appropriate regulatory
authorities for future potential product applications, if any, we will not be
able to market or sell such products, which would limit our
revenues.  Even after approval, if any, we will remain subject to
changing governmental policies regulating antimicrobial products.




If
we are not able to manage our anticipated growth effectively, we may not become
profitable




We
anticipate that expansion will continue to be required to address potential
market opportunities for our SDC technology.  There can be no
assurance that our infrastructure will be sufficiently scalable to manage any
future growth.  There also can be no assurance that if we continue to
invest in additional infrastructure, we will be effective in expanding our
operations or that our systems, procedures or controls will be adequate to
support such expansion. In addition, we will need to provide additional sales
and support services to our partners if we achieve our anticipated growth with
respect to the sale of our SDC technology for various
applications.  Failure to properly manage an increase in customer
demands could result in a material adverse effect on customer satisfaction, our
ability to meet our contractual obligations, and on our operating
results.




The
industries in which we operate are heavily regulated and we may be unable to
compete effectively




We are a
bioscience company focused on the marketing and continued development of our
electrolytically generated stabilized ionic silver technology, including our
flagship SDC antimicrobial.  The risks, regulatory hurdles and costs
of doing business in our target markets are high. Our SDC 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 U.S. 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.  In addition, in August 2009 we obtained EPA registration
for an SDC-based sanitizer for food contact surfaces.  In addition to
the Federal EPA, 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.  There
can be no guarantee that a particular state, or any state, will continue to
allow the sale of SDC-based products, or grant any new approvals in future
periods.




We intend
to fund and manage additional U.S. EPA-regulated product development internally,
in conjunction with our regulatory consultants and potentially by partnering
with other third parties.  We are also partnering, or intend to
partner, with third parties who are seeking, or intend to seek, approvals to
market SDC-based products in markets outside the U.S.  However, the
introduction of additional regulated antimicrobial products in the U.S. or in
markets outside the U.S. could take several years, or may never be
achieved.  Existing state, federal or international approvals may not
be maintained.  Additionally, doing business internationally carries a
great deal of risk with regard to foreign government regulation, banking,
currency fluctuation, and many other factors.




We
are subject to intense competition




Our
silver ion and other products compete in highly competitive markets dominated by
extremely large, well financed domestically and internationally recognized
chemical and pharmaceutical companies. Many of our competitors have greater
financial resources than we do in the areas of sales, marketing, branding and
product development, and we expect to face additional competition from these
competitors in the future.  Many of our competitors already have well
established brands and distribution.  Focused competition by chemical
and pharmaceutical giants could substantially limit or eliminate our potential
market share and ability to profit from our products and
technologies.  Our ability to compete will depend upon our ability,
and the ability of our distributors and other partners, to develop brand
recognition and novel distribution methods, and to displace existing,
established and future products in our relevant target markets.  We or
our partners or distributors may not be successful in doing so.




We
rely on a small number of key supply ingredients in order to manufacture our
products




All of
the supply ingredients used to manufacture our products are readily available
from multiple suppliers.  However, commodity prices for these
ingredients can vary significantly and the margins that we are able to generate
could decline if prices rise.  For example, both silver and citric
acid prices have been volatile recently.  In many of our distribution
and development agreements, we are unable to raise our product prices to our
customers quickly to maintain our margins, and significant price increases for
key inputs would therefore have an adverse effect on our results of
operations.











We
are subject to substantial regulation related to quality standards applicable to
our manufacturing and quality processes.  Our failure to comply with
applicable quality standards could have an adverse effect on our business,
financial condition, or results of operations.




The EPA
regulates the registration, manufacturing, and sales and marketing of many of
our products, and those of our distributors and partners, in the United
States.  Significant government regulation also exists in overseas
markets.  Compliance with applicable regulatory requirements is
subject to continual review and is monitored through periodic inspections and
other review and reporting mechanisms.




Failure
by us or our partners to comply with current or future governmental regulations
and quality assurance guidelines could lead to temporary manufacturing
shutdowns, product recalls or related field actions, product shortages or delays
in product manufacturing. Efficacy or safety concerns and/or manufacturing
quality issues with respect to our products or those of our partners could lead
to product recalls, fines withdrawals, declining sales, and/or our failure to
successfully commercialize new products or otherwise achieve revenue
growth.




In
addition, 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 our existing partners or any other potential partner, or
we, will be able to obtain the resources necessary to further develop our
technology or obtain regulatory approvals, or that the products will be
successful in meeting the strict criteria imposed by the FDA.  It may
be several years before we, or any third party to whom we grant rights to use
our silver ion technologies, are able to introduce any FDA regulated
antimicrobial pharmaceutical products containing our technology.




If
a natural or man-made disaster strikes our manufacturing facility, we will be
unable to manufacture our products for a substantial amount of time and our
sales and profitability will decline.




Our sole
manufacturing facility and the manufacturing equipment we use to produce our
products would be costly to replace and could require substantial lead-time to
repair or replace.  The facility may be affected by natural or
man-made disasters and in the event they were affected by a disaster, we would
be forced to set up alternative production capacity, or rely on third party
manufacturers to whom we would have to disclose our trade
secrets.  Although we possess insurance for damage to our property and
the disruption of our business from casualties, such insurance may not be
sufficient to cover all of our potential losses, may not continue to be
available to us on acceptable terms, or at all, and may not address the
marketing and goodwill consequences of our inability to provide products for an
extended period of time.




If
we are unable to successfully develop or commercialize new applications of our
SDC technology, our operating results will suffer




In
addition to its use on inanimate surfaces, we believe that our SDC technology
also shows promise as a broad-spectrum antimicrobial for use in human and
veterinary healthcare products.  We plan to pursue additional EPA and
FDA regulatory approvals for other applications. We have entered into agreements
with FTA Therapeutics for the development and commercialization of certain FDA
regulated SDC-based products.  However, we do not exercise any control
over these development partners.  FTA’s resources are limited and
progress to date on all indications has been slow.  Any products
developed may never achieve regulatory approval and may never be
commercialized.  If they are commercialized, we may not receive a
share of future revenues that provides an adequate return on our historical or
future investment.




Our
ability to generate increased revenue depends in part upon the ability and
willingness of our current and potential strategic partners in both FDA and
non-FDA environments to increase awareness of our technology to their customers,
and to provide implementation services. If our strategic partners fail to
increase awareness of our technology or to assist us in getting access to
decision-makers, then we may need to increase our marketing expenses, change our
marketing strategy or enter into marketing relationships with different parties,
any of which could impair our ability to generate increased revenue or to
generate profits from our technology.




Because
we are an early stage company, it is difficult to evaluate our prospects; our
financial results may fluctuate and these fluctuations may cause our stock price
to fall




Since
acquiring the rights to our SDC technology, we have encountered and likely will
continue to encounter risks and difficulties associated with new and rapidly
evolving markets. These risks include the following, among others:




·
            we
      may not increase our sales to our existing customers and expand our
      customer base;




·
            we
      may not succeed in maintaining and expanding our current sales and in
      penetrating other markets and applications of our SDC
      technology;




·
            we
      or our partners and/ distributors may not establish and maintain effective
      marketing programs and create product awareness or brand
      identity;




·
            we
      may not attract and retain key business development, technical and
      management personnel;




·
            we
      may not succeed in locating strategic partners and licensees of our
      technology;




·
            we
      may not effectively manage our anticipated growth;
  and




·
            we
      may not be able to adequately protect our intellectual
      property.











In
addition, because of our limited operating history and the early stage of the
market for our SDC technology, we have limited insight into trends that may
emerge and affect our business.  Forecasting future revenues is
difficult, especially since our technology is novel and we are at the early
stages of the adoption of our technology.  Market acceptance of our
products may change rapidly.  In addition, our customer base is highly
concentrated.  Fluctuations in the buying patterns of our current or
potential customers for any reason, could significantly affect the level of our
sales on a period to period basis.  As a result, our financial results
could fluctuate to an extent that may not meet market expectations and that also
may adversely affect our stock price.  There are a number of other
factors that could cause our financial results to fluctuate unexpectedly,
including product sales, the mix of product sales, the cost of product sales,
the achievement and timing of research and development and regulatory
milestones, changes in expenses, including non-cash expenses such as the fair
value of stock options granted, and manufacturing or supply issues, among other
issues.




We
have no product distribution experience and we expect to rely on third parties
who may not successfully sell our products




We have
no product distribution experience and currently rely and plan to rely primarily
on product distribution arrangements with third parties.  We also plan
to license our technology to certain third parties for commercialization of
certain applications.  We expect to enter into additional distribution
agreements and licensing agreements in the future, and we may not be able to
enter into these additional agreements on terms that are favorable to us, if at
all. In addition, we may have limited or no control over the distribution
activities of these third parties. These third parties could sell competing
products and may devote insufficient sales efforts to our products. As a result,
our future revenues from sales of our products, if any, will depend on the
success of the efforts of these third parties.




We
expect to rely on third parties to develop SDC-based products and they may not
do so successfully or diligently




We rely
on third parties to whom we license rights to our technology to develop products
containing SDC for many of the applications for which we believe SDC-based
products have, or may have, market opportunities.  Generally, under
our contractual relationships with these third parties, we rely on the third
party to fund and direct product development activities and appropriate
regulatory filings.  Any of these third parties may not be able to
successfully develop such SDC-based products, due to, among other factors, a
lack of capital; a lack of appropriate diligence; a change in the evaluation by
the third party of the market potential for SDC-based products; technical
failures; and poorer than expected test results resulting from trial use of any
products that may be developed.




If
we are unable to obtain, maintain or defend patent and other intellectual
property ownership rights relating to our technology, we or our collaborators
and distributors may not be able to develop and market products based on our
technology, which would have a material adverse impact on our results of
operations and the price of our common stock




We rely
and expect in the future to 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.  As a result, we cannot
assure you that our means of protecting our proprietary rights will be adequate,
and the infringement of such rights could have a material negative impact on our
business and on our results of operations.




We have
filed for U.S. and foreign patent applications and trademark registrations for
our patents and trademarks. We may not be successful in obtaining these patents
and trademarks, and we may be unable to obtain additional patent and trademark
protection in the future. Furthermore, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights are
uncertain.  It is possible that, despite our efforts, competitors or
others will create and use products in violation of our patents and/or adopt
service names similar to our service names or otherwise misappropriate our
intellectual property. Such patent infringement or misappropriation could have a
material adverse effect on our business. Any unauthorized production of our
SDC-based products, whether in the U.S. or overseas, would or could reduce our
own sales of SDC-based products, thereby reducing, perhaps significantly, our
actual or potential profits.  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 U.S. 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
diversion of resources, and could seriously harm our business and operating
results.




If we are
found to have violated the trademark, trade secret, copyright, patent or other
intellectual property rights of others, such a finding could result in the need
to cease use of a trademark, trade secret, copyrighted work or patented
invention in our business and the obligation to pay a substantial amount for
past infringement. It could also be necessary for us to pay a substantial amount
in the future if the rights holders are willing to permit us to continue to use
the intellectual property rights. Either having to cease use or pay such amounts
could make us much less competitive and could have a material adverse impact on
our business, operating results and financial condition.




To the
extent that we operate internationally, the laws of foreign countries may not
protect our proprietary rights to the extent as do the laws of the U.S. 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, or potential
competitors, could independently develop similar technology.









We
may become subject to product liability claims




As a
business which manufactures and markets products for use by consumers and
institutions, we may become liable for any damage caused by our products,
whether used in the manner intended or not. 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, and you may lose some or all of any
investment you have made, or may make, in our common stock.




Litigation
or the actions of regulatory authorities may harm our business or otherwise
distract our management




Substantial,
complex or extended litigation could cause us to incur major expenditures and
distract our management. For example, lawsuits by employees, former employees,
shareholders, partners, customers, or others, or actions taken by regulatory
authorities, could be very costly and substantially disrupt our
business.  Such lawsuits or actions could from time to time be filed
against the Company and/or or our executive officers and
directors.  Such lawsuits and actions are not uncommon, and we cannot
assure you that we will always be able to resolve such disputes or actions on
terms favorable to the Company.




Maintaining
compliance with our obligations as a public company may strain our resources and
distract management, and if we do not remain compliant our stock price may be
adversely affected




Our
common stock is registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  It is therefore subject to the information,
proxy solicitation, insider trading and other restrictions and requirements of
the SEC under the Exchange Act.  The SEC continues to issue new and
proposed rules, and complying with existing and new rules results in significant
costs to us of being a public company, including substantial costs during Fiscal
2009 and Fiscal 2008, and in future years.  In addition, in April 2008
we obtained a listing of our common stock on the NASDAQ Capital Market, adding
the additional cost and administrative burden of maintaining such a
listing.  These additional regulatory costs and requirements will
reduce our future profits or increase our future losses, and more management
time and effort will be needed to meet our regulatory obligations than
before.




We are
required to evaluate our internal controls systems in order to allow management
to report on our internal controls as required by Section 404 of the
Sarbanes-Oxley Act.  Our management is required to attest to, and have
our Independent Registered Public Accounting Firm attest to, the adequacy of our
internal controls.  We are also required to file our annual and
quarterly reports with the Securities and Exchange Commission (“SEC”) on an
accelerated basis.  Recent SEC pronouncements suggest that in the next
several years we may be required to report our financial results using new
International Financial Reporting Standards, replacing U.S. GAAP, which would
require us to make significant investments in training, hiring, consulting and
information technology, among other investments.  All of these and
other reporting requirements and heightened corporate governance obligations
that we face, or will face, will further increase the cost to us, perhaps
substantially, of remaining compliant with our obligations under the Exchange
Act and the Sarbanes-Oxley Act.  In order to meet these incremental
obligations, we will need to invest in our corporate and accounting
infrastructure and systems, and acquire additional services from third party
auditors and advisors.  As a result of these requirements and
investments, we will incur significant additional expenses and will suffer a
significant diversion of management’s time.  There is no guarantee
that we will be able to continue to meet these obligations in a timely manner,
and we could therefore be subject to sanctions or investigation, or the
delisting of our common stock, by regulatory authorities such as the SEC or the
NASDAQ Capital Market.  Any such actions could adversely affect our
financial results and the market price of our common stock, perhaps
significantly.




Our
publicly-filed reports are reviewed from time to time by the SEC, and any
significant changes or amendments required as a result of any such review may
result in material liability to us and may have a material adverse impact on the
trading price of our common stock




The
reports of publicly-traded companies are subject to review by the SEC from time
to time for the purpose of assisting companies in complying with applicable
disclosure requirements, and the SEC is required, pursuant to the Sarbanes-Oxley
Act of 2002, to undertake a comprehensive review of a company’s reports at least
once every three years.  SEC reviews may be initiated at any time.
While we believe that our previously filed SEC reports comply, and we intend
that all future reports will comply in all material respects with the published
rules and regulations of the SEC, we could be required to modify, amend or
reformulate information contained in prior filings as a result of an SEC review.
Any modification, amendment or reformulation of information contained in such
reports could be significant and result in material liability to us and have a
material adverse impact on the trading price of our common stock.




We
are dependent on our management team, and the loss of any key member of this
team may prevent us from achieving our business plan in a timely
manner




Our
success depends largely upon the continued services of our executive officers
and other key personnel. Our executive officers and key personnel could
terminate their employment with us at any time without penalty. We do not
maintain key person life insurance policies on our executive officers or other
employees, other than Michael L. Krall, our President and Chief Executive
Officer.  The policy we have on Mr. Krall would likely not provide a
benefit sufficient to offset the financial losses resulting from the loss of Mr.
Krall’s future services.  The loss of one or more of our executive
officers or key employees could seriously harm our business, results of
operations, financial condition, and/or the market price of our common stock. We
cannot assure you that in such an event we would be able to recruit qualified
personnel able to replace these individuals in a timely manner, or at all, on
acceptable terms.











Because
competition for highly qualified business development and bioengineering
personnel is intense, we may not be able to attract and retain the employees we
need to support our planned growth




To
successfully meet our objectives, we must continue to attract and retain highly
qualified business development and bioengineering personnel with specialized
skill sets focused on the industries in which we compete, or intend to
compete.  Competition for qualified business development and
bioengineering personnel can be intense.  Our ability to meet our
business development objectives will depend in part on our ability to recruit,
train and retain top quality people with advanced skills who understand our
technology and business.  In addition, it takes time for our new
personnel to become productive and to learn our business.  If we are
unable to hire or retain qualified business development and bioengineering
personnel, it will be difficult for us to sell our products or to license our
technology, and we may experience a shortfall in revenue and not achieve our
anticipated growth.




Anti-takeover
provisions under our charter documents and California law could delay or prevent
a change of control and could also limit the market price of our
stock




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 us that is not approved by our Board of Directors (the
“Board”), even if such events may be beneficial to the interests of
shareholders. For example, our Board, without shareholder approval, has the
authority and power to issue all authorized and unissued shares of common stock
which have not otherwise been reserved for issuance, on such terms as the Board
determines. The Board 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 our common stock. In
addition, California law contains provisions that have the effect of making it
more difficult for others to gain control of the Company.




The
price of our common stock may be volatile, which may cause investment losses for
our shareholders




Since our
initial public offering in August 1996, the price and trading volume of our
common stock have been highly volatile. The price has ranged from below $1 per
share to over $8 per share, and the monthly trading volume has varied from under
200,000 shares to over 7.8 million shares.  During the twelve months
prior to October 12, 2009, the closing price of our common stock on any given
day has ranged from $1.50 to $3.99 per share, and the monthly trading volume has
varied from approximately 1.5 million shares to approximately 5.4 million
shares. In the future, the market price of our common stock may be volatile and
could fluctuate substantially due to many factors, including:




·
            actual
      or anticipated fluctuations in our results of
  operations;




·
            the
      introduction of new products or services, or product or service
      enhancements by us or our
competitors;




·
            developments
      with respect to our or our competitors’ intellectual property rights or
      regulatory approvals or denials;




·
            announcements
      of significant acquisitions or other agreements by us or our
      competitors;




·
            the
      sale by us of our common or preferred stock or other securities, or the
      anticipation of sales of such
securities;




·
            sales
      or anticipated sales of our common stock by our insiders (management and
      directors);




·
            the
      trading volume of our common stock, particularly if such volume is
      light;




·
            conditions
      and trends in our industry;




·
            changes
      in our pricing policies or the pricing policies of our
      competitors;




·
            changes
      in the estimation of the future size and growth of our markets and, among
      other factors;




·
            general
      economic conditions.




In
addition, the stock market in general, the NASDAQ Capital Market, and the market
for shares of novel technology and biotechnology companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of those companies. Further,
the market prices of bioscience companies have been unusually volatile in the
last year, and many economists expect such unusual volatility to continue for
the foreseeable future. These broad market and industry factors may materially
harm the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price of
a company’s securities, shareholder derivative lawsuits and securities class
action litigation have often been instituted against that company. Such
litigation, if instituted against the Company or our officers and directors,
could result in substantial costs and a diversion of management’s attention and
resources.  In addition, this volatility could adversely affect an
investor’s ability to sell shares of our common stock and/or the available price
for such shares, and could result in lower prices being available to an investor
if the investor wishes to sell their shares at any given time.









Our
future capital needs are uncertain, and we may need to raise additional funds in
the future which may not be available on acceptable terms or at
all.




Our
capital requirements will depend on many factors, including, among other
factors:




·
            acceptance
      of, and demand for, our products;




·
            the
      success of our strategic partners in developing and selling products
      derived from our technology;




·
            the
      costs of further developing our existing, and developing new, products or
      technologies




·
            the
      extent to which we invest in new technology, testing and product
      development;




·
            the
      number and timing of acquisitions and other strategic transactions;
      and




·
            the
      costs associated with the continued operation, and any future growth, of
      our business.




Our
existing sources of cash and cash flows may not be sufficient to fund our future
activities. As a result, we may need to raise additional funds, and such funds
may not be available on favorable terms, or at all. Furthermore, if we issue
equity or convertible debt securities to raise additional funds, our existing
shareholders may experience dilution, and the new equity or debt securities may
have rights, preferences and privileges senior to those of our existing common
stock holders. If we incur additional debt, it may increase our leverage
relative to our earnings or to our equity capitalization. If we cannot raise
funds on acceptable terms, we may need to scale back our expenditures through
reductions in our workforce and operations, and we may not be able to develop or
enhance our technologies and/or products, execute our business plan, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated consumer requirements.




We
may not be able to maintain our NASDAQ listing




In April
2008, we obtained a listing for our common stock on the NASDAQ Capital
Market.  In order to maintain our listing, we will need to continue to
meet certain minimum listing standards that include, or may include, our
shareholders’ equity, the market value of our listed or publicly held
securities, the number of publicly held shares, our net income, a minimum bid
price for our common stock, the number of shareholders, the number of market
makers, and certain of our corporate governance policies.  If we fail
to maintain the standards required now or in future by the NASDAQ Capital
Market, our common stock could be delisted from the NASDAQ Capital
Market.  Such delisting could cause our stock to be classified as
“penny stock,”, among other potentially detrimental consequences, any of which
could significantly impact your ability to sell your shares or to sell your
shares at a price that you may deem to be acceptable.




If
outstanding options and warrants to purchase shares of our common stock are
exercised, or if other remaining authorized shares of our common stock are
issued, the interests of our shareholders could be diluted




We have
approximately 8,495,222 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 $2.29.  In addition, approximately 7,378,630 authorized
shares of our common stock remain available for future issuance under equity
compensation plans or otherwise.  The exercise of options and
warrants, and the sale of shares underlying such options or warrants, could have
an adverse effect on the market for our common stock, including the price that
an investor could obtain for their shares.  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
options and warrants yet to be granted or issued.




We
may not be able to utilize all of, or any of, our tax net operating loss
carry-forwards and our future after-tax earnings, if any, could be
reduced




At July 31, 2009, we had
federal and California tax net operating loss carry-forwards of approximately
$50,009,800 and $39,871,800, respectively.Utilization of the
net operating loss carry-forwards may be subject to a substantial annual
limitation due to ownership change limitations that may have occurred or that
could occur in the future, as required by Section 382 of the Internal Revenue
Code as well as similar state provisions. These ownership changes may limit the
amount of net operating loss carry-forwards that can be utilized annually to
offset future taxable income and tax, respectively. In general, an ownership
change, as defined by Section 382 of the Internal Revenue Code results from a
transaction or series of transactions over a three-year period resulting in an
ownership change of more than 50 percentage points of the outstanding stock of a
company by certain stockholders or public groups. Since the Company’s formation,
we have raised capital through the issuance of capital stock on several
occasions (both before and after our initial public offering in 1996) which,
combined with the purchasing shareholders’ subsequent disposition of those
shares, may have resulted in such an ownership change, or could result in an
ownership change in the future upon subsequent disposition.  While we
believe that the Company has not experienced an ownership change, the pertinent
tax rules related thereto are complex and subject to varying interpretations,
and thus complete assurance cannot be provided that the taxing authorities would
not take an alternative position.




In
addition, our federal tax loss carry-forwards will begin expiring in the year
ending July 31, 2010 unless previously utilized, and will completely expire in
the year ending July 31, 2028.  Between July 31, 2010 and July 31,
2012, $3,323,800 of our federal net operating loss carry-forwards will expire,
and the balance of our current federal net operating loss carry-forwards will
expire between July 31, 2018 and July 31, 2028.  Our California tax
loss carry-forwards will begin to expire in the year ending July 31, 2014, and
will completely expire in the year ending July 31, 2029. If we are
unable to earn sufficient profits to utilize the carry-forwards by these dates,
they will no longer be available to offset future profits, if
any.









We
are subject to tax audits by various tax authorities in multiple
jurisdictions




From time
to time we may be audited by tax authorities to whom we are
subject.  Any assessment resulting from such audits, if any, could
result in material changes to our past or future taxable income, tax payable or
deferred tax assets, and could require us to pay penalties and interest that
could materially adversely affect our financial results.




We
may never pay dividends




We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends on our common stock in the foreseeable future. The future payment
of dividends on our common stock, if any, is dependent on the discretion of our
Board, our earnings, our financial condition and other business and economic
factors which our Board may consider relevant.























Item
1B.  Unresolved Staff Comments


Not
applicable.





Item
2.  Properties


Our
business operates in a 14,879 square foot facility located in a light
industrial/office park in El Cajon, California.  This location houses
all administrative, manufacturing and warehousing functions.  In
September 2006 we commenced a new sixty month operating lease for the
facility.




During
Fiscal 2007, we made significant improvements to the manufacturing areas to
expand our production capacity and warehousing operations, and in April 2008 we
added 1,812 square feet of adjacent space that we are using for additional
warehousing operations.




Item
3.  Legal Proceedings


From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are not currently aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.




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


No
matters were submitted to shareholders in the fourth quarter of Fiscal
2009.















PART
II





Item
5.  Market for the Registrant’s Common Equity,  Related
Shareholder Matters and Issuer Purchases of Equity Securities




Market
Information




Since
April 2, 2008, our common stock has been traded on the NASDAQ Capital Market
under the symbol “PURE.”  Prior to April 2, 2008, our common stock was
traded on the Over the Counter Bulletin Board under the symbol
“PURE.OB.”  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
      Year 2009
            
            Fiscal
      Year 2008Quarter
      Ended
            
            High
            
            
            Low
            
            Quarter
      Ended
            
            High
            
            
            LowJuly
      31, 2009
            
            $
            2.60
            
            
            $
            1.22
            
            July
      31, 2008
            
            $
            5.52
            
            
            $
            3.78April
      30, 2009
            
            $
            3.19
            
            
            $
            1.64
            
            April
      30, 2008
            
            $
            6.40
            
            
            $
            2.58January
      31, 2009
            
            $
            4.10
            
            
            $
            1.95
            
            January
      31, 2008
            
            $
            8.72
            
            
            $
            4.60October
      31, 2008
            
            $
            5.42
            
            
            $
            1.91
            
            October
      31, 2007
            
            $
            8.59
            
            
            $
            2.72






Price
Performance Graph





Set forth
below is a graph comparing the total return on an indexed basis of a $100
investment in our common stock, against comparable indices.  Due to
the nature of our business, we do not believe that a comparable peer group of
publicly-traded platform technology companies exists; hence, we compared the
return on investment in our stock to the NASDAQ Composite Index and the S&P
500 Index.  The measurement points utilized in the graph consist of
the closing data on the last trading day in each of our fiscal
years.  The stock performance presented below is not intended to be,
and may not be, indicative of future stock performance.

















16







Security
Holders





As of
October 9, 2009, we had approximately 169 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 9, 2009 was
$1.83.





Dividend
Policy





We have
never paid common stock cash dividends and have no current plans to do
so.  We currently anticipate that we will retain all of our future
earnings for use in the development and expansion of our business and for
general corporate purposes. Any determination to pay dividends in the future
will be at the discretion of our Board and will depend upon our results of
operation, financial condition and other factors as the Board, in its
discretion, deems relevant.





Recent
Sales of Unregistered Securities





None.





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
            3,071,641
            $1.63
            5,458,323Equity
      compensation plans not approved by security holders
            4,436,156
            $2.71
            1,603,000Total
            7,507,797
            $2.27
            7,061,323





The
following equity compensation plans have not been 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. 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.  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.  Executive officers and directors are not eligible
      participants under this plan.

















Item
6. Selected Financial Data




The
following selected consolidated financial information has been taken or derived
from our audited consolidated financial statements. The information set forth
below is not necessarily indicative of our results of future operations and
should be read in conjunction with “Management's Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes included elsewhere in this Form 10-K. See "Item 8.
Consolidated Financial Statements and Supplementary Data.”




Years
      Ended July 31,2009
              
              
              
              
              2008
              
              
              
              
              2007
              
              
              
              
              2006
              
              
              2005Consolidated
      Statements of Operations Data:Revenue
              
              $
              728,563
              
              
              
              
              $
              1,487,464
              
              
              
              
              $
              336,392
              
              
              
              
              $
              200,432
              
              
              $
              155,806Loss
      from continued operations
              
              $
              (7,064,917
              )
              (1)
              
              
              $
              (6,537,919
              )
              (1)
              
              
              $
              (4,652,477
              )
              (1)
              
              
              $
              (3,812,916
              )
              
              $
              (3,011,818
              )Income
      / (loss) from discontinued operations
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              
              $
              1,530,060
              
              
              (2)Net
      loss after taxes
              
              $
              (7,067,317
              )
              
              
              
              $
              (6,540,319
              )
              
              
              
              $
              (4,654,877
              )
              
              
              
              $
              (3,682,926
              )
              
              $
              (317,070
              )Net
      loss per common share, basic and dilutedContinuing operations
              
              $
              (0.23
              )
              
              
              
              $
              (0.24
              )
              
              
              
              $
              (0.19
              )
              
              
              
              $
              (0.19
              )
              
              $
              (0.19
              )Discontinued operations
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              0.01
              
              
              $
              0.02Net loss
              
              $
              (0.23
              )
              
              
              
              $
              (0.24
              )
              
              
              
              $
              (0.19
              )
              
              
              
              $
              (0.18
              )
              
              $
              (0.17
              )Consolidated
      Balance Sheets Data:Cash,
      cash equivalents and short-terminvestments
              
              $
              4,213,744
              
              
              
              
              $
              6,632,288
              
              
              
              
              $
              1,443,712
              
              
              
              
              $
              4,720,362
              
              
              $
              405,888Total
      assets
              
              $
              7,648,952
              
              
              
              
              $
              10,940,838
              
              
              
              
              $
              4,862,039
              
              
              
              
              $
              7,965,274
              
              
              $
              3,314,037Long-term
      obligations
              
              $
              19,351
              
              
              
              
              $
              15,798
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              
              $
              -Accumulated
      deficit
              
              $
              (38,500,175
              )
              
              
              
              $
              (31,392,858
              )
              
              
              
              $
              (24,892,539
              )
              
              
              
              $
              (20,237,662
              )
              
              $
              (16,554,736
              )Total
      stockholders' equity
              
              $
              7,066,435
              
              
              
              
              $
              9,983,574
              
              
              
              
              $
              4,359,658
              
              
              
              
              $
              7,553,386
              
              
              $
              2,960,736




(1)
            Loss
      from continuing operations for the fiscal years ended July 31, 2009, 2008,
      and 2007 includes approximately $501,400, $2,119,000, and $1,371,900,
      respectively, of stock-based compensation expense pursuant to the
      provisions of Statement of Financial Accounting Standards No. 123R
      “Share-Based Payment,” which we adopted on August 1,
  2006.




(2)
            In
      May 2005, we sold the assets of our Water Treatment Division to
      Maryland-based Innovative Medical Services, LLC for
      $2,375,000.  The Water Treatment Division was reported as a
      discontinued operation in the year ended July 31, 2005, during the period
      prior to its sale.

















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




This
report contains forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
“continue,” the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we, nor any other person, assume
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Annual Report on Form 10-K to conform such
statements to actual results or to changes in our expectations.




The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes and other financial information appearing elsewhere in this Annual
Report. Readers are also urged to carefully review and consider the various
disclosures made by us which attempt to advise interested parties of the factors
which affect our business, including without limitation the disclosures made in
Item 1A of Part I of this Annual Report under the Caption “Risk
Factors”.




Risk
factors that could cause actual results to differ from those contained in the
forward-looking statements include but are not limited to: our limited operating
history; our history of losses; our future capital needs; the rapidly changing
technologies and market demands; the failure of our products to achieve broad
acceptance; our failure to successfully compete; our dependence on a single
product; our failure to comply with government regulation; the loss of a key
member of our management team; our failure to protect our intellectual property;
our exposure to intellectual property and product liability claims; changes in
government policies and other risks identified in this Annual Report on Form
10-K.







The
financial statements presented herein, and discussed below, have been prepared
in accordance with U.S. Generally Accepted Accounting Principles.




Overview


PURE
Bioscience (sometimes referred to herein as the “Company,” “we” “us” or “our”)
was incorporated in the state of California on August 24, 1992. We began as a
provider of pharmaceutical water purification products for the pharmacy
market.  In 2000, we commenced investments in the development of novel
bioscience technologies, and subsequent to the May 2005 sale of our Water
Treatment Division we have been exclusively focused on the development and
commercialization of our current and future bioscience products.




We are
expanding into markets with broad potential by developing new, proprietary
bioscience products based upon our patented silver ion antimicrobial
technologies. We are developing technology-based bioscience products, including
our silver dihydrogen citrate-based antimicrobials, which we believe can provide
novel, non-toxic solutions to numerous global health challenges and represent
innovative advances in diverse markets. We believe that our technologies are in
a position to contribute significantly to today’s global trend toward industrial
and consumer use of environmentally friendly products, while providing
competitive advantages in efficacy and safety.




Bioscience
Technologies


Our
flagship bioscience technology is a patented, aqueous antimicrobial called
silver dihydrogen citrate (“SDC”). A 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, including as an active
pharmaceutical ingredient. In addition to SDC, we have obtained patent
protection for ionic silver-based molecular entities utilizing 14 organic acids
other than citric acid.




We also
own certain rights to 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 the
products RoachX and AntX, however these products are not currently being
actively marketed or developed.




Sources
of Revenue


Our
principal sources of revenue are comprised of sales of SDC concentrate as well
as both bulk and individually bottled SDC-based hard surface disinfectant. SDC
concentrate is sold to distributors that either resell the concentrate as an
active ingredient or preservative in other companies’ products, or blend the
product into hard surface disinfectant products for sale to retail, commercial
and institutional customers. SDC-based hard surface disinfectant is sold in bulk
and as individually bottled products to distributors that in turn sell the
product to retail, commercial and institutional customers. In addition to sales
of SDC concentrate and finished goods, we anticipate generating additional
revenues from licensing and royalty arrangements in future periods.











Because
the development of our SDC technology is at an early stage of development and
commercialization, it is difficult to predict our revenues.  Our
historical revenues have fluctuated from period to period based on factors that
include, but are not limited to, the timing of regulatory approvals regarding
our and our partners’ products containing SDC; the timing of product launches by
both our strategic partners and, in some cases, their customers and partners;
the timing of our entry into new strategic agreements, and the quantities of our
products required by our partners to effect new research programs and product
launches.




Our
revenues have historically fluctuated from period to period.  For
example, in Fiscal 2009 we reported revenues from product sales of $478,000,
compared with revenue from product sales for Fiscal 2008 of
$1,487,000.  Among other factors, during Fiscal 2008 we recorded
product revenue of $997,000 for sales to two international distributors for whom
we did not recognize any revenue in Fiscal 2009.




In future
periods, we expect our revenues to continue to fluctuate.  In some
cases, such as under our agreement with BASF, we will not be aware of the launch
of products containing SDC until they are available to end-users.  In
February 2009 the first name brand personal care products containing SDC as the
active ingredient were launched in Europe by a customer of
BASF.  Notwithstanding that we sold the SDC used as an active
ingredient in the product, we were not able to anticipate this launch due to the
contractual rights of BASF and its customer.




Cost
of Revenues and Operating Expenses


Costs of Revenue.
  Costs of product revenue include materials consumed, manufacturing
overheads, shipping costs, salaries, benefits and related expenses of
operations.  In addition, included in our inventory of finished goods
as of July 31, 2009 are approximately 12,000 gallons of SDC concentrate that we
purchased from an unrelated third party in a lien sale (see Note 5 to the
consolidated financial statements for further information regarding this
transaction).  This transaction had no impact on our consolidated
statements of operations for Fiscal 2009, however it is expected to temporarily
reduce our cost of goods sold per gallon of SDC concentrate sold in future
periods.




Gross
profit on product sales represents net revenue less the costs of revenue. Gross
profit percentage is highly dependent on pricing, contractual agreements,
overhead allocations and other factors.  We do not believe that
historical gross profit margins on product sales are a reliable indicator of
future gross profit margins.




During
the three month period ended January 31, 2009 we recorded $250,000 of licensing
revenue on the expiration of an agreement whereby we allowed a third party a
limited time period to exclusively evaluate our SDC technology.  Cost
of goods sold related to this revenue was zero, as we did not incur any costs
directly related to our commitments under the agreement.




Selling and Marketing.  Selling and marketing expenses consist primarily of salaries
and benefits, and amounts paid to third party providers for marketing, sales,
public relations and advertising, along with promotional and trade show costs
and travel expenses. Sales and marketing expenses also include share-based
compensation allocable to employees and third party advisors performing services
related to sales and marketing.




General and Administrative.  General and administrative expenses include employee salaries
and benefits, and amounts paid to third party providers for finance and
accounting, legal activities, human resources, insurance, information
technology, and other administrative activities.  General and
administrative expenses also include share-based compensation allocable to
employees and third party advisors performing general and administrative
services.




Research and
Development.   Research and development costs include in-house
research costs, expenditures for third party testing, patent amortization,
outside legal costs for maintaining issued patents, and product registration
expenditures. We do not currently expect our research and development expense to
grow significantly in future periods, however if opportunities arise,
particularly in the development and testing of new formulations, we will
evaluate the need for additional research expenditures based on potential market
sizes and our estimation of the likelihood of our technology achieving
successful results.  Research and development expenses also include
share-based compensation allocable to employees and third party advisors
performing services related to research and development.




Critical
Accounting Policies




Accounting
for Long-Lived Assets / Intangible Assets


We assess
the impairment of long-lived assets, consisting of property, plant, equipment
and finite-lived intangible assets, whenever events or circumstances indicate
that the carrying value may not be recoverable.  Examples of such
events or circumstances include:




·
            An
      asset’s ability to continue to generate income from operations and
      positive cash flow in future
periods;




·
            Loss
      of legal ownership or title to an
asset;




·
            Significant
      changes in our strategic business objectives and utilization of the
      asset(s); and




·
            The
      impact of significant negative industry or economic
  trends.




Recoverability
of assets to be held and used in operations is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the assets. The factors used to evaluate the future net cash flows,
while reasonable, requires a high degree of judgment and the results could vary
if the actual results are materially different than the forecasts. In addition,
we base useful lives and amortization or depreciation expense on our subjective
estimate of the period that the assets will generate revenue or otherwise be
used by us. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less selling costs.











We also
periodically review the lives assigned to our intangible assets to ensure that
our initial estimates do not exceed any revised estimated periods from which we
expect to realize cash flows from the technologies.  If a change were
to occur in any of the above-mentioned factors or estimates, the likelihood of a
material change in our reported results would increase.




Accounting
for Stock-Based Compensation


We
adopted the fair value provisions of SFAS 123(R) on August 1,
2006.  Stock-based compensation expense for all stock-based
compensation awards granted after August 1, 2006 is based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). Specifically,
we estimate the weighted-average fair value of options granted using the
Black-Scholes Option Pricing Model based on evaluation assumptions regarding
expected volatility, dividend yield, risk-free interest rates, the expected term
of the option and the expected forfeiture rate. Each of these assumptions, while
reasonable, requires a certain degree of judgment and the fair value estimates
could vary if the actual results are materially different than those initially
applied.  Prior to the adoption of SFAS 123(R), we were not required
to record compensation cost in the consolidated financial statements for stock
options issued to employees or directors.




Recent
Accounting Pronouncements


In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements, which provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except Statement No.
123R and related interpretations and pronouncements that require or permit
measurement similar to fair value but are not intended to measure fair
value.  In February 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective
Date of FASB Statement No. 157,” which provides a one year deferral of the
effective date of FAS 157 for non-financial assets and non-financial liabilities
to years beginning after November 15, 2008 (our fiscal year ending July 31,
2010). As a result, we are only partially adopting SFAS No. 157 as it relates to
our financial assets and liabilities until we are required to apply this
pronouncement to our non-financial assets and liabilities beginning with the
fiscal year ending July 31, 2010.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement No.
115. This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions in
SFAS No. 159 are elective, however the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates.  Under SFAS No. 159, we would
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. The fair value
option: (a) may be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method; (b) is irrevocable
(unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments.  This statement became
effective for us on August 1, 2008, however we did not elect the fair value
option for any of our financial assets or financial liabilities.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”).  SFAS 141R replaces SFAS No. 141, Business Combinations and
requires an acquirer in a business combination to recognize the assets acquired,
the liabilities assumed, including those arising from contractual contingencies,
any contingent consideration, and any non-controlling interest in the acquiree
at the acquisition date, measured at their fair values as of that date, with
limited exceptions specified in SFAS 141R.  SFAS 141R also amends SFAS
No. 109, Accounting for Income
Taxes, and SFAS 142, Goodwill and Other Intangible
Assets.   SFAS 141R applies prospectively to business
combinations, if any, for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008 (our fiscal year ending July 31, 2010).  In April 2009, the
FASB issued SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies, which amends
the accounting prescribed in SFAS 141(R) for assets and liabilities arising from
contingencies in business combinations. SFAS 141(R)-1 requires pre-acquisition
contingencies to be recognized at fair value if fair value can be reasonably
determined during the measurement period. If fair value cannot be reasonably
determined, SFAS 141(R)-1 requires measurement based on the recognition and
measurement criteria of SFAS 5, Accounting for Contingencies.
The adoption of the provisions of SFAS 141R or SFAS 141(R)-1 did not have a
material effect on our financial condition, results of operations or cash flows
for Fiscal 2009.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Non-controlling Interests
in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements.  SFAS 160 also
changes the way the consolidated income statement is presented by requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest.  It
also requires disclosure, on the face of the consolidated statement of income,
of the amounts of consolidated net income attributable to the parent and to the
non-controlling interest.  SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent owners and the
interests of the non-controlling owners of a subsidiary.  SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (our fiscal year ending July 31, 2010).
We do not currently expect the adoption of the provisions of SFAS No. 160 to
have a material effect on our financial condition, results of operations or cash
flows.











In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP No. FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.”  The intent of the position is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141R, and other U.S. generally accepted
accounting principles. The provisions of FSP No. FAS 142-3 are effective for
fiscal years beginning after December 15, 2008 (our fiscal year ending July 31,
2010).  We are currently evaluating the impact, if any, that the
adoption of FSP No. FAS 142-3 could have on our consolidated financial
statements or results of operations.




In June
2008, the FASB ratified Emerging Issue Task Force (“EITF”) 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF
07-5”). EITF 07-5 provides a framework for determining whether an instrument is
indexed to an entity’s own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal
years beginning after December 15, 2008 (our fiscal year ending July 31,
2010).  We do not currently expect the implementation of EITF 07-5 to
have a material impact on our consolidated financial statements.




In
October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active (“FSP FAS
157-3”), which clarifies the application of SFAS 157 in an inactive
market.  Additional guidance is provided regarding how a reporting
entity’s own assumptions should be considered when relevant observable inputs do
not exist, how available observable inputs in a market that is not active should
be considered when measuring fair value, and how the use of market quotes should
be considered when assessing the relevance of inputs available to measure fair
value. FSP FAS 157-3 became effective immediately upon issuance. Its adoption
did not impact our consolidated financial statements.




In April
2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP
157-4”). Based on the guidance, if an entity determines that the level of
activity for an asset or liability has significantly decreased and that a
transaction is not orderly, further analysis of transactions or quoted prices is
needed, and a significant adjustment to the transaction or quoted prices may be
necessary to estimate fair value in accordance with FASB Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”). FSP 157-4 is to be applied prospectively and became effective for
us as Fiscal 2009.  The adoption of FSP 157-4 did not have an impact
on the Company’s consolidated results or financial condition.




In April
2009, the FASB issued FSP FAS 107-2 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-2 and FSP APB 28-1”). FSP FAS
107-2 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value and the
related carrying amount of financial instruments in interim and annual periods.
FSP APB 28-1 amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements.  FSP
FAS 107-2 and FSP APB 28-1 also require disclosure about the method and
significant assumptions used to estimate the fair value of financial
instruments. FAS FSP 107-2 and FSP APB 28-1 became effective for us as of Fiscal
2009.  Their adoption did not impact our consolidated financial
statements.




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”), which amend the
other-than-temporary guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  FSP 115-2 and 124-2 became effective for us as of Fiscal
2009.  Their adoption did not impact our consolidated financial
statements.




In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
165”). SFAS 165 provides rules on recognition and disclosure for events and
transactions occurring after the balance sheet date but before the financial
statements are issued or available to be issued.  In addition, SFAS
165 requires a reporting entity to disclose the date through which subsequent
events have been evaluated, as well as whether that date is the date the
financial statements are issued or the date the financial statements are
available to be issued. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009. We have adopted SFAS 165 and have included the
required additional disclosures in Note 16 to the consolidated financial
statements.




In June
2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation
No. 46(R” (“FAS 167”). FAS 167 amends FIN 46(R), Consolidation of Variable Interest
Entities (revised December 2003)—an interpretation of ARB No. 51,to
require an issuer to perform an analysis to determine whether the issuer’s
variable interest or interests give it a controlling financial interest in a
variable interest entity, if any. This analysis identifies the primary
beneficiary of a variable interest entity as one with the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and the obligation to absorb losses of the entity
that could potentially be significant to the variable interest.  FAS
167 will be effective as of the beginning of the annual reporting period
commencing after November 15, 2009 (our fiscal quarter ending October 31,
2010).  We will assess the potential impact, if any, of the adoption
of FAS 167 on our consolidated financial statements.




In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles(“SFAS 168”). SFAS 168 will become the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this statement, the codification will
supersede all then existing non-SEC accounting and reporting
standards.  All other non-grandfathered, non-SEC accounting literature
not included in the codification will become non-authoritative. This statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009 (our fiscal quarter ended October 31, 2009). We
do not currently expect the adoption of SFAS 168 to have a material impact on
our financial condition, results of operations or cash flows.















Results
of Operations for the Year Ended July 31, 2009 (“Fiscal 2009”) Versus The Year
Ended July 31, 2008 (“Fiscal 2008”)




Revenue and Gross
Margin




For
Fiscal 2009, product revenues of $478,300 declined by $1,009,200, or 68%,
compared with Fiscal 2008.  The decrease is primarily due to the
recording of revenue of $997,300 in Fiscal 2008 for sales to two international
distributors for whom we did not recognize any revenue in Fiscal
2009.  Product revenues for each of the periods presented were derived
from sales of finished products to our partners and distributors, and product
sold to our partners for product development and testing.




During
Fiscal 2009, 84% of product sales were made to five strategic partners that are
also developing markets for our products.  98% of revenue from product
sales for the year was derived from sales made to U.S. domestic
customers.  During Fiscal 2008, 90% of product sales were made to five
strategic partners, and 33% of revenue from product sales for the year was
derived from sales made to U.S. domestic customers.  In some cases we
have, or may have in future periods, distributors or strategic partners to whom
we have granted rights to sell our technology in multiple countries. Generally,
we do not require such distributors to report to us the quantities of products
that they sell in each country.  In such cases, we report revenues
based on the country of first sale.




Gross
profit on product sales for Fiscal 2009 was $240,100, compared with $1,023,900
in Fiscal 2008.  The gross margin percentage declined from 69% in
Fiscal 2008 to 50% for Fiscal 2009.  The decline is primarily due to
an increased proportion of lower margin products sold in the most recent
period.  During Fiscal 2009, 38% of our product sales were of bulk SDC
concentrate, and 62% of our product sales were of bulk Axen30 or finished
packaged products containing Axen 30, our ready to use
product.  During the prior year, 77% of our product sales were of bulk
SDC concentrate and 23% of our product sales were of bulk Axen30 or finished
packaged products containing Axen 30.  We generally sell our SDC bulk
concentrate at higher margins than our ready to use products.




During
Fiscal 2008 we recorded deferred revenue on receipt of a non-refundable fee of
$250,000 which we received subject to an agreement whereby we allowed a third
party a limited time period to exclusively evaluate our SDC technology for use
within specified indications and for certain products.  Upon the
termination of the agreement on January 31, 2009, we recognized the $250,000 as
licensing revenue in the consolidated statements of operations for Fiscal
2009.  Cost of goods sold related to this revenue was zero, as we did
not incur any costs directly related to our commitments under the
agreement.




Operating
Costs




Operating
costs declined by $79,700, from $7,704,200 in Fiscal 2008, to $7,624,500 in
Fiscal 2009.  Within these aggregate operating costs, selling expenses
declined by $111,600 to $694,100 in Fiscal 2009, compared with Fiscal
2008.  The decrease in selling expenses is primarily due to $300,000
of employee and consultant stock option expense recorded in the prior year,
which was partially offset by increased salary expense in Fiscal
2009.




General
and administrative expenses increased by $319,000 or 6%, to $5,462,000 in Fiscal
2009 compared with Fiscal 2008.  Included in general and
administrative expense for Fiscal 2009 is $781,600 of bad debt
expense.  This amount is made up of amounts billed during prior
periods to two international distributors.  During Fiscal 2008 we
granted non-exclusive distribution and blending rights to a new distributor for
the sale of SDC-based products in Colombia.  In addition, we granted
non-exclusive distribution and blending rights to a second distributor, which is
affiliated with the first distributor, for the sale of SDC-based products in
Argentina, Venezuela, Panama and Costa Rica. The $781,600 receivable includes
$57,000 for amounts billed at cost to the distributors in August 2008 for parts
shipped directly to them by one of our U.S. packaging
suppliers.  Subsequent to this transaction, we have not sold any
products to either of the two referenced distributors.




During
the three month period ended January 31, 2009 we determined these accounts to be
delinquent, established a full reserve and recorded $781,600 as bad debt
expense, within general and administrative expense.  At July 31, 2009
the referenced amounts remained uncollected; and we have written off the full
receivable of $781,600.  Management currently considers all other
accounts receivable to be fully collectible.




This
increase in expense was offset by a decline of $1,212,300 in stock and stock
option expense within general and administrative expense, the most significant
factor being $1,123,000 of stock and stock option expense recorded in Fiscal
2008 for option and stock grants made to our officers and
directors.  In April 2008, we granted options, which vested on the
date of grant, to purchase 275,000 shares of common stock to directors and
officers of the Company, valued at approximately $906,000.  We also
granted 30,000 shares of common stock to each of three independent directors of
the Company, the aggregate of 90,000 shares being valued at
$463,500.  $1,123,000 of the expense for these option and stock grants
was booked to general and administrative expense in Fiscal 2008.  This
expense was partially offset by $92,200 of expense recorded in Fiscal 2009 for
option and stock grants made to our officers and directors in May
2009.  We issued options to purchase an aggregate of 360,000 shares of
our common stock, to our three executive officers; granted 86,800 shares of
restricted stock to four of our directors, and issued a five year option to
purchase 30,000 shares of common stock to one of our directors.  The
aggregate fair value for Fiscal 2009 grants was $993,500, however as each award
has vesting requirements, only $92,200 of the expense was recorded within the
consolidated statements of operations for Fiscal 2009.




We
recognized employee and director stock option and stock grant non-cash expense
in general and administrative expenses for Fiscal 2009 of $410,500 and for
Fiscal 2008 of $1,622,800.











General
and administrative payroll expense increased by $242,800 year over year due to
new hires and salary increases, and accounting and legal fees increased by
$188,400.  Additionally, insurance, depreciation, rent, Board of
Directors’ Committee fees, and investor relations and public relations expense,
accounted for $338,200 of the increase in general and administrative expense for
Fiscal 2009 compared with Fiscal 2008.




Research
and development costs, including in-house costs, patent amortization, outside
legal costs for maintaining approved patents, and product registration
expenditures, declined in Fiscal 2009 by 11% to $1,468,500, from $1,646,400 in
Fiscal 2008.  The decline in expense is primarily related to a decline
of $178,300 in patent related legal fees and a decline of $135,400 in employee
and director stock option expense.  These decreases were partially
offset by increases in payroll and in consulting costs.  We do not
currently expect our research and development expense to grow significantly in
future periods, however if opportunities arise, particularly in the development
and testing of new formulations, we will evaluate the need for additional
research expenditures based on potential market sizes, our estimation of the
likelihood of our technology achieving successful results, and the availability
of working capital.




In July
2008 we suspended the development and marketing efforts for our Triglycylboride
boric acid-based pesticides in order to focus on the development of our SDC and
related technologies.  We concurrently wrote down the net unamortized
balance of the capitalized patents associated with the Triglycylboride
technology, which amounted to $109,300, and recorded an impairment charge of
$109,300 within operating costs on the consolidated statements of operations for
Fiscal 2008.




Our loss
from operations before taxes and other income increased by $454,100, from a loss
of $6,680,400 in Fiscal 2008 to a loss of $7,134,400 in Fiscal
2009.




Other
Income




Other
income declined by $72,900 in Fiscal 2009 compared with Fiscal 2008, due
primarily to gains on the sale of T-bills recorded in the prior year, and
decreased interest income from lower average cash balances and lower interest
rates.




Income
Taxes




Income
tax expense for Fiscal 2009 and 2008 was $2,400, the minimum franchise tax we
pay to the State of California regardless of income or loss.  All
other federal or state tax liabilities were offset by current period losses or
available federal and California net operating loss carry-forwards.




In June
2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  Under FIN 48, we must recognize the tax
benefit from an uncertain tax position if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position.




FIN 48
became effective for us on August 1, 2007.  The adoption of FIN 48 did
not have a material impact on our consolidated results of operations or
financial position for Fiscal 2009 or 2008, as we had no unrecognized tax
benefits that, if recognized, would affect our effective income tax rate in
future periods.  Our practice is to recognize interest and/or
penalties related to income tax matters in income tax expense, however we had no
accrued interest or penalties at either August 1, 2008 or July 31,
2009.




At July 31, 2009, we had
federal and California tax net operating loss carry-forwards of approximately
$50,009,800 and $39,871,800, respectively.Realization of our
deferred tax assets, which relate to operating loss carry-forwards and timing
differences, is dependent on future earnings.  The timing and amount
of future earnings are uncertain and therefore we establish a 100% valuation
allowance.




Net Income
(Loss)




Our net
loss after taxes increased by $527,000, from a net loss of $6,540,300 in Fiscal
2008 to a net loss of $7,067,300 in Fiscal 2009.




Results
of Operations for the Year Ended July 31, 2008 (“Fiscal 2008”) Versus The Year
Ended July 31, 2007 (“Fiscal 2007”)




Revenue and Gross
Margin




For
Fiscal 2008, revenues of $1,487,500 increased by $1,151,100 compared with Fiscal
2007.  The increase is primarily due to sales made to new customers
with whom we had entered into development and distribution agreements during
Fiscal 2008.  40% of sales for Fiscal 2008 were made to one strategic
partner and 84% of our sales were made to the largest four
partners.  67% of sales for Fiscal 2008 were made to international
customers and 33% were made to U.S. domestic customers, compared with 24% made
to international customers and 76% made to U.S. domestic customers during Fiscal
2007.




Gross
profit on product sales for Fiscal 2008 was $1,023,900, compared with $115,300
in Fiscal 2007.  The gross margin percentage improved from 34% in
Fiscal 2007 to 69% in Fiscal 2008.  The improvement is primarily due
to an increased proportion of higher margin products sold in Fiscal 2008
compared with Fiscal 2007.  During Fiscal 2008, 77% of our product
sales were of bulk SDC concentrate and 23% of our product sales were of bulk
Axen30 or finished packaged products containing Axen 30, our ready to use
product.  During Fiscal 2007, 28% of our product sales were of bulk
SDC concentrate and 72% of our product sales were of bulk Axen30, finished
packaged products containing Axen 30, blending systems and RoachX.  We
generally sell our SDC bulk concentrate at higher margins than our other
products.











Operating
Costs




Operating
costs increased by $2,748,100, from $4,956,100 in Fiscal 2007, to $7,704,200 for
Fiscal 2008.  Within these aggregate operating costs, selling
expenses, which are primarily made up of our business development consultants
and employees and their associated expenses declined by $93,500, to $805,600 in
Fiscal 2008 compared with Fiscal 2007.  The decline in selling expense
in Fiscal 2008 is primarily due to a $79,000 decrease in stock option expense,
the majority of which is for grants made to third party consultants and
advisors.




General
and administrative expenses increased by $2,306,700, to $5,143,000 in Fiscal
2008, compared with Fiscal 2007.  Stock option expense within general
and administrative expense increased by approximately $830,000 for Fiscal 2008,
compared with the prior year.  In April 2008, we granted options to
purchase 275,000 shares of our common stock, which vested on their date of
grant, to directors and officers of the Company.  The fair value of
these grants was approximately $906,000.  We also granted 30,000
shares of common stock to each of three directors of the Company, the aggregate
of 90,000 shares being valued at $463,500, and we also issued 100,000 fully
vested options to purchase our common stock to a new director, for which we
recorded $351,000 of general and administrative expense.  We also
issued 12,500 shares of our common stock with a fair value of $44,000 for a
legal settlement.  The total expense for option and stock grants
booked to general and administrative expense in Fiscal 2008 was
$1,622,800.




During
Fiscal 2007, we incurred non-cash expense of $793,900 for stock options granted
to officers and directors during the year, based on their Black-Scholes
valuation at the grant date, including a grant made to a new director and stock
awarded to directors based on the market price of the common stock at the award
date.




General
and administrative payroll and payroll-related expense increased by
approximately $277,000 year over year due to new hires and salary increases,
accounting fees increased by approximately $190,000, and costs for Fiscal 2008
also included $81,000 in fees related to the April 2008 listing of our common
stock on the NASDAQ Capital Market.  Legal fees charged to general and
administrative expense, primarily related to the development of contracts and
the protection of our intellectual property, increased by $422,000 for Fiscal
2008 compared with the prior year.  Additionally, Sarbanes-Oxley
compliance costs, travel expenses, depreciation, and health insurance costs all
increased in Fiscal 2008 compared with Fiscal 2007.




Research
and development costs increased in Fiscal 2008 by $425,600, to $1,646,400,
compared with Fiscal 2007.  Expense for Fiscal 2008 included $148,000
of non-cash stock option expense for grants made to officers during the
period.  There were no such grants made to officers during Fiscal
2007.  Additionally, during Fiscal 2008, we incurred $105,000 of
expense for patent related legal services provided in prior
years.  Research and development payroll and payroll-related expense
increased by $199,000 year over year due to new hires and salary increases, and
third party testing costs for Fiscal 2008 increased by $141,000 over the prior
year.  These expense increases were partially offset by a decline of
$186,000 in consulting fees paid to outside advisors, including $65,000 of
non-cash expense in Fiscal 2007 for the issuance of 30,000 shares of our common
stock.




In July
2008 we suspended the development and marketing efforts for our Triglycylboride
boric acid-based pesticides in order to focus on the development of our SDC and
related technologies.  We concurrently wrote down the net unamortized
balance of the capitalized patents associated with the Triglycylboride
technology, which amounted to $109,300, and recorded an impairment charge of
$109,300 within operating costs on the consolidated statements of operations for
Fiscal 2008.




Our loss
from operations before taxes and other income increased by $1,839,600, from
a loss of $4,840,800 for Fiscal 2007 to a loss of $6,680,400 for Fiscal
2008.




Other
Income




Other
income declined by $45,900 for Fiscal 2008 compared with Fiscal
2007.  Gains on the sale of U.S. Treasury Bills were almost entirely
offset by decreased interest income from lower average cash balances and lower
interest rates.




Income
Taxes




Income
tax expense for Fiscal 2008 and Fiscal 2007 was $2,400, the minimum franchise
tax we pay to the State of California regardless of income or
loss.  All other federal or state tax liabilities were offset by
current period losses or available federal and California net operating loss
carry-forwards.  Our practice is to recognize interest and/or
penalties related to income tax matters in income tax expense, however we had no
accrued interest or penalties at either August 1, 2007 or July 31,
2008.




At July
31, 2008, we had federal and California tax net operating loss carry-forwards of
approximately $40,888,600 and $30,753,000, respectively.  Realization
of our deferred tax assets, which relate to operating loss carry-forwards and
timing differences, is dependent on future earnings.  The timing and
amount of future earnings are uncertain and therefore we establish a 100%
valuation allowance.




Net Income
(Loss)




Our net
loss after taxes increased by $1,885,400, from a net loss of $4,654,900 for
Fiscal 2007 to a net loss of $6,540,300 for Fiscal 2008.











LIQUIDITY
AND CAPITAL RESOURCES




Fiscal 2009 vs. Fiscal
2008




From
inception through the present, we have financed our operations primarily through
sales of our equity securities, through lines of credit and the issuance of
debentures, and in May 2005 by the sale of our Water Treatment
Division.




At July
31, 2009, we had cash and cash equivalents of $4,213,700, no short-term
investments, and no long-term debt.  On September 3, 2009, subsequent
to the end of Fiscal 2009, we closed a registered direct offering whereby we
sold $3 million of our common stock and warrants to institutional
investors.  After fees and expenses, the net proceeds of this offering
to us were approximately $2.78 million.




Total
current assets at July 31, 2009 were $4,847,700, a decline of $3,041,900 from
July 31, 2008.  $2,418,500 of this decline was in cash, cash
equivalents and short-term investments.  Cash used in operating
activities for Fiscal 2009 was $5,910,100, compared with $4,404,600 for Fiscal
2008.  The increase in operating cash expenditures is primarily due to
reduced revenue collections and increased general and administrative expenses,
and the timing of the payment of accounts payable.  In particular, in
Fiscal 2008 we received a non-refundable fee of $250,000 subject to an agreement
whereby we allowed a third party a limited time period to exclusively evaluate
our SDC technology.  Our net accounts receivable declined by $691,700
from July 31, 2008 to July 31, 2009, primarily due to a bad debt write-off in
Fiscal 2009 of $781,600 related to amounts unpaid by two international
distributors.  The increased general and administrative cash
expenditures in Fiscal 2009 include increased payroll, insurance, legal fees,
accounting fees, and investor relations and public relations
expenses.  In Fiscal 2009, inventory increased by $51,600 to $421,700
at July 31, 2009.  In Fiscal 2008 accounts payable and accrued
liabilities increased by $222,300, whereas in Fiscal 2009 accounts payable and
accrued liabilities declined by $161,500.




Our
operating cash outflows could be greater in future periods.  Net cash
used in operations was $5,910,100 in Fiscal 2009, $4,404,600 in Fiscal 2008, and
$2,672,000 in Fiscal 2007.  Our future capital needs and our future
profits, if any, are uncertain, and will depend on many factors including, among
others, the acceptance of, and demand for, our products; the success of
our  strategic partners in selling our products; our success and the
success of our strategic partners in obtaining regulatory approvals to sell our
products; the costs of further developing our existing, and developing new,
products or technologies; the extent to which we invest in new technology and
product development; and the costs associated with the continued operation, and
any future growth, of our business.




During
Fiscal 2009, cash provided by investing
activities was $4,392,000, compared with $4,306,200 of cash usedin investing
activities during Fiscal 2008.  During Fiscal 2009, a net amount (cash
sales less cash purchases) of $4,589,300 was provided by
short-term investments, compared with $3,881,200 used in Fiscal
2008.  In addition, during Fiscal 2009 we invested $100,300 in patents
and $97,000 to purchase property, plant and equipment; whereas in Fiscal 2008,
such investments were $125,100 and $299,900 respectively.  During
Fiscal 2008, we invested $149,000 in software and consulting services related to
the April 2008 implementation of a new Enterprise Resource Planning (ERP)
System.  At July 31, 2009 the net capitalized value of our capitalized
patents and our property, plant and equipment was $1,944,700 and $856,500
respectively.




Total
cash inflows from financing activities for Fiscal 2009 were $3,707,400, compared
with $9,999,600 in Fiscal 2008.  Net proceeds from the sale of common
stock in Fiscal 2009 were $2,769,500, compared with $7,741,000 during Fiscal
2008.  Sales of common stock in Fiscal 2009 were derived from a
registered direct offering in May 2009, whereby we sold $3 million of our common
stock and warrants to institutional investors.  After fees and
expenses, the net proceeds of the offering to us were $2,769,500 (see Note 8 to
the consolidated financial statements for more information regarding this
offering).  Sales of common stock in Fiscal 2008 were derived from a
private placement in October 2007, whereby we sold $8,438,308 of unregistered
common stock and warrants to accredited investors.  The net proceeds
of the private placement to us were $7,741,000.




Cash
proceeds from exercise of stock options and warrants in Fiscal 2009 were
$937,900, compared with $2,254,000 in Fiscal 2008.  In August 2008, we
received an aggregate of $150,000 from the exercise of non-employee options to
purchase 50,000 shares of our common stock at an exercise price of $3.00, and
received $15,000 from the exercise of options to purchase 28,450 shares of our
common stock by two officers, at an average exercise price of
$0.53.  In December 2008, we received $631,600 from the exercise of
options to purchase 339,800 shares of our common stock by one of our directors,
at an average exercise price of $1.86.  In January 2009, we received
$79,500 from a director for the exercise of options to purchase 150,000 shares
of our common stock at an exercise price of $0.53; and received $18,000 from the
same director for the exercise of common stock warrants to purchase 36,000
shares of our common stock at an exercise price of $0.50.  In
addition, during the three month period ended July 31, 2009 we received $24,750
from the exercise of options to purchase 15,000 shares of common stock issued in
prior periods for consulting services, and we received $19,000 from the exercise
of options to purchase 27,500 shares of our common stock issued under employee
stock options plans.




At July
31, 2009, we had total liabilities of $582,500, a decline of $414,700 from July
31, 2008, primarily due to a decline in accounts payable and a decline in
deferred revenue.  The decline in deferred revenue is primarily
related to the receipt in Fiscal 2008 of a non-refundable fee of $250,000 which
we received subject to an agreement whereby we allowed a third party a limited
time period to exclusively evaluate our SDC technology.  The fee was
recognized into revenue in Fiscal 2009.











Fiscal 2008 versus Fiscal
2007




During
Fiscal 2008, cash, cash equivalents and short-term investments increased by
$5,188,600, due primarily to $7,741,000 raised in a private placement of common
stock and $2,254,000 in cash received from the exercise of stock options during
Fiscal 2008, which was partially offset by $4,404,600 of cash used in operations
for the year.  In Fiscal 2007, cash flows from financing activities
were $475,190, which was received pursuant to the exercise of stock
options.  There were no other sales of common stock in Fiscal
2007.




The
$4,404,600 of cash used in operations for Fiscal 2008 was $1,732,600 greater
than the $2,672,000 of cash used in operations for Fiscal 2007.  The
increase in operating cash expenditures is primarily as a result of increased
general and administrative expenses including payroll, accounting fees, legal
fees, patent related research and development expenditures, and investments in
new manufacturing staff and inventory to support new partners and anticipated
product needs.




During
Fiscal 2008, cash used in investing activities was $4,306,200.  Of
this amount, a net amount (cash purchases less cash sales) of $3,881,200 was
invested in short-term investments, $125,100 was invested in patents, and
$299,900 was invested in property, plant and equipment.  During Fiscal
2007, cash used in investing activities was $1,787,900.  Of this
amount, a net amount of $708,100 was invested in short-term investments,
$204,200 was invested in patents, and $875,700 was invested in property, plant
and equipment.  During Fiscal 2007 we spent approximately $524,000 to
redevelop the manufacturing and office areas of our El Cajon
facility.




Future Cash
Needs




During
the next twelve months, we anticipate making significant investments in
manufacturing processes, to improve efficiency and to be able to meet
anticipated demand; in regulatory applications for new products or additional
claims; in our corporate and business development infrastructure; and in
programs required for us to maintain our compliance with securities laws as well
as the listing standards of the NASDAQ Capital Market, among other
investments.  We believe, however, that our cash resources are sufficient
to meet our anticipated needs during the next twelve months.  Our
assessment is based on historical working capital needs, operating loss trends,
and our current business outlook.




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 our technology and its
commercial potential.  We currently have no long-term debt, however
the issuance of debt, equity or convertible securities in future periods, if
any, 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 cause us to fail to execute
our business plan, fail to take advantage of future opportunities, or fail to
respond to competitive pressures or unanticipated consumer requirements, and
further may 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.




OFF
BALANCE SHEET ARRANGEMENTS


We do not
have any off balance sheet arrangements.




CONTRACTUAL
OBLIGATIONS





Payments
      due by periodTotal
            
            
            Less
      than
              1
      year
            
            
            1–3
      years
            
            
            3–5
      years
            
            
            More
      than 5 yearsLong-Term
      Debt Obligations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Capital
      Lease Obligations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Operating
      Lease Obligations
            
            $
            442,200
            
            
            $
            178,300
            
            
            $
            263,900
            
            
            
            –
            
            
            
            –Purchase
      Obligations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Other
      Long-Term Liabilities Reflected on the Registrant's Balance Sheet under
      GAAP
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Total
            
            $
            442,200
            
            
            $
            178,300
            
            
            $
            263,900
            
            
            
            –
            
            
            
            –

















Item
7A. Quantitative and Qualitative Disclosures About Market Risk




Our
exposure to interest rate risk at July 31, 2009 was related to our investment
portfolio which consisted largely of institutional money market mutual funds
investing.  From time to time our investments may be exposed to market
risk related to changes in interest rates.  Our current investment
policy is to maintain an investment portfolio consisting only of diversified
institutional money market mutual funds investing in  A-1 (S&P) or
Prime-1 (Moody’s); U.S. Treasury Securities, or United States Government
obligations issued by or backed by a federal agency of the United States
Government.  We do not enter into investments for trading or
speculative purposes, and our cash is deposited in, and invested through, highly
rated financial institutions in the United States.  While our
available for sale securities, if any, are subject to interest rate risk and
would fall in value if market interest rates increased, we estimate that the
fair value of such an investment portfolio would not decline by a material
amount in the event of an increase in market interest rates.  We
therefore would not expect our operating results or cash flows to be affected to
any significant degree by the effect of a change in market interest
rates.




We have operated mainly in the United
States, and during the fiscal years ended July 31, 2009, 2008, and 2007, all of
our sales, both international and domestic, have been denominated in U.S.
dollars.  Additionally, our purchases are predominantly made in U.S.
dollars.  Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.



















Item
8.  Consolidated Financial Statements and Supplementary
Data







Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


PURE
Bioscience







We have
audited the accompanying consolidated balance sheets of PURE Bioscience as of
July 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period
ended July 31, 2009.  These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.




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




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PURE Bioscience as of
July 31, 2009 and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended July 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of PURE Bioscience’s internal
control over financial reporting as of July 31, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
October 13, 2009 expressed an unqualified opinion thereon.









/s/ Mayer Hoffman McCann
P.C.


San
Diego, California


October
­­13, 2009













PURE
      BioscienceCONSOLIDATED BALANCE
  SHEETSJuly
      31,2009
              
              
              2008ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              4,213,744
              
              
              $
              2,024,400Short-term
      investments
              
              
              -
              
              
              
              4,607,888Accounts
      receivable, net of allowance for doubtful accountsof $0 at July
      31, 2009 and $0 at July 31, 2008
              
              
              143,031
              
              
              
              834,721Inventories,
      net
              
              
              421,655
              
              
              
              370,043Prepaid
      expenses
              
              
              69,317
              
              
              
              52,560Total current
      assets
              
              
              4,847,747
              
              
              
              7,889,612Total
      property, plant and equipment, net
              
              
              856,504
              
              
              
              1,034,835Patents
              
              
              1,944,701
              
              
              
              2,016,391Total
      assets
              
              $
              7,648,952
              
              
              $
              10,940,838LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              368,418
              
              
              $
              596,132Accrued
      liabilities
              
              
              192,348
              
              
              
              126,141Deferred
      revenue
              
              
              -
              
              
              
              256,793Taxes
      payable
              
              
              2,400
              
              
              
              2,400Total current
      liabilities
              
              
              563,166
              
              
              
              981,466Deferred
      rent
              
              
              19,351
              
              
              
              15,798Total
      liabilities
              
              
              582,517
              
              
              
              997,264Stockholders'
      EquityPreferred
      Stock, no par value:5,000,000
      shares authorized, no shares issued
              
              
              -
              
              
              
              -Class A
      common stock, no par value:50,000,000
      shares authorized32,307,966
      issued and outstanding at July 31, 2009, and29,573,936
      issued and outstanding at July 31, 2008
              
              
              38,498,904
              
              
              
              35,436,077Additional
      Paid-In Capital
              
              
              4,566,024
              
              
              
              4,155,608Warrants:1,411,725
      issued and outstanding at July 31, 2009, and880,351 issued
      and outstanding at July 31,2008
              
              
              2,501,682
              
              
              
              1,766,159Accumulated
      other comprehensive income
              
              
              -
              
              
              
              18,588Accumulated
      deficit
              
              
              (38,500,175
              )
              
              
              (31,432,858
              )Total
      stockholders' equity
              
              
              7,066,435
              
              
              
              9,943,574Total
      liabilities and stockholders' equity
              
              $
              7,648,952
              
              
              $
              10,940,838


The
accompanying notes are an integral part of the consolidated financial
statements


30





PURE
      BioscienceCONSOLIDATED STATEMENTS OF
      OPERATIONSFor the Years Ended July
31,2009
              
              
              2008
              
              
              2007REVENUES
      FROM PRODUCT SALESNet
      revenues
              
              $
              478,263
              
              
              $
              1,487,464
              
              
              $
              336,392Cost
      of sales
              
              
              238,168
              
              
              
              463,596
              
              
              
              221,108Gross
      profit
              
              
              240,095
              
              
              
              1,023,868
              
              
              
              115,284OTHER
      REVENUESRevenues
      from license agreements
              
              
              250,000
              
              
              
              -
              
              
              
              -Cost
      of other revenues
              
              
              -
              
              
              
              -
              
              
              
              -Gross
      profit
              
              
              250,000
              
              
              
              -
              
              
              
              -Total
      gross profit
              
              
              490,095
              
              
              
              1,023,868
              
              
              
              115,284Selling
      expenses
              
              
              694,073
              
              
              
              805,628
              
              
              
              899,145General
      and administrative expenses
              
              
              5,462,007
              
              
              
              5,142,961
              
              
              
              2,836,224Research
      and development
              
              
              1,468,460
              
              
              
              1,646,352
              
              
              
              1,220,764Impairment
      of capitalized assets
              
              
              -
              
              
              
              109,286
              
              
              
              -Total
      operating expenses
              
              
              7,624,540
              
              
              
              7,704,227
              
              
              
              4,956,133Loss
      from operations
              
              
              (7,134,445
              )
              
              
              (6,680,359
              )
              
              
              (4,840,849
              )Other
      income and (expense):Interest
      income
              
              
              18,718
              
              
              
              30,786
              
              
              
              150,878Other
              
              
              50,810
              
              
              
              111,654
              
              
              
              37,494Total
      other income (expense)
              
              
              69,528
              
              
              
              142,440
              
              
              
              188,372Net
      loss before income taxes
              
              
              (7,064,917
              )
              
              
              (6,537,919
              )
              
              
              (4,652,477
              )Income
      tax provision
              
              
              (2,400
              )
              
              
              (2,400
              )
              
              
              (2,400
              )Net
      loss
              
              $
              (7,067,317
              )
              
              $
              (6,540,319
              )
              
              $
              (4,654,877
              )Net
      loss per common share, basic and diluted
              
              $
              (0.23
              )
              
              $
              (0.24
              )
              
              $
              (0.19
              )Weighted
      average common shares used incomputing
      basic and diluted net loss per common share
              
              
              30,595,299
              
              
              
              27,553,215
              
              
              
              24,432,905





The
accompanying notes are an integral part of the consolidated financial
statements


31











PURE
      BioscienceCONSOLIDATED STATEMENTS OF CASH
      FLOWSFor
      the Years Ended July 31,2009
              
              
              2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (7,067,317
              )
              
              $
              (6,540,319
              )
              
              $
              (4,654,877
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Amortization
      and depreciation
              
              
              447,282
              
              
              
              405,749
              
              
              
              257,086Impairment
      of capitalized assets
              
              
              -
              
              
              
              113,158
              
              
              
              167,643Stock-based
      compensation
              
              
              501,359
              
              
              
              2,119,034
              
              
              
              1,371,863Bad
      debt expense
              
              
              781,627
              
              
              
              -
              
              
              
              -Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (89,937
              )
              
              
              (827,173
              )
              
              
              50,527Prepaid
      expense
              
              
              (16,757
              )
              
              
              (42,816
              )
              
              
              116,242Inventories
              
              
              (51,612
              )
              
              
              (127,144
              )
              
              
              (70,960
              )Deferred
      rent
              
              
              3,553
              
              
              
              15,798
              
              
              
              -Deferred
      revenue
              
              
              (256,793
              )
              
              
              256,793
              
              
              
              -Accounts
      payable and accrued liabilities
              
              
              (161,507
              )
              
              
              222,292
              
              
              
              90,492Net
      cash (used) in operating activities
              
              
              (5,910,102
              )
              
              
              (4,404,628
              )
              
              
              (2,671,984
              )Cash
      flows from investing activitiesInvestment
      in patents
              
              
              (100,270
              )
              
              
              (125,108
              )
              
              
              (204,188
              )Purchase
      of property, plant and equipment
              
              
              (96,991
              )
              
              
              (299,900
              )
              
              
              (875,668
              )Purchases
      of short-term investments
              
              
              (4,076,992
              )
              
              
              (10,633,849
              )
              
              
              (2,488,981
              )Sales
      of short-term investments
              
              
              8,666,292
              
              
              
              6,752,608
              
              
              
              1,780,923Net
      cash provided by (used) in investing activities
              
              
              4,392,039
              
              
              
              (4,306,249
              )
              
              
              (1,787,914
              )Cash
      flows from financing activitiesNet
      proceeds from the sale of common stock
              
              
              2,769,478
              
              
              
              7,740,967
              
              
              
              475,190Proceeds
      from exercise of stock options and warrants
              
              
              937,929
              
              
              
              2,253,963
              
              
              
              -Proceeds
      from section 16(b) short-swing profits
              
              
              -
              
              
              
              4,693
              
              
              
              -Net
      cash provided by financing activities
              
              
              3,707,407
              
              
              
              9,999,623
              
              
              
              475,190Net
      increase (decrease) in cash and cash equivalents
              
              
              2,189,344
              
              
              
              1,288,746
              
              
              
              (3,984,708
              )Cash
      and cash equivalents at beginning of period
              
              
              2,024,400
              
              
              
              735,654
              
              
              
              4,720,362Cash
      and cash equivalents at end of period
              
              $
              4,213,744
              
              
              $
              2,024,400
              
              
              $
              735,654Supplemental
      disclosures of cash flow informationCash
      paid for taxes
              
              $
              2,400
              
              
              $
              2,400
              
              
              $
              2,400Cash
      paid for interest
              
              $
              -
              
              
              $
              49
              
              
              $
              -







The
accompanying notes are an integral part of the consolidated financial
statements












PURE
      BioscienceCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYCommon Stock
              
              
              Additional
              
              
              Warrants
              
              
              
              
              
              
              
              
              TotalPaid-In
              
              
              
              
              
              
              
              
              Comprehensive
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Shares
              
              
              Amount
              
              
              Income
              
              
              Deficit
              
              
              EquityBalance,
      July 31, 2006
              
              
              23,983,002
              
              
              $
              25,801,653
              
              
              $
              1,743,570
              
              
              
              391,698
              
              
              $
              245,825
              
              
              $
              -
              
              
              $
              (20,237,662
              )
              
              $
              7,553,386Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,654,877
              )
              
              
              (4,654,877
              )Common
      stock issued for services
              
              
              30,000
              
              
              
              65,100
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              65,100Stock
      options issued for services
              
              
              -
              
              
              
              -
              
              
              
              91,290
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              91,290Share-based
      compensation - options
              
              
              -
              
              
              
              -
              
              
              
              651,969
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              651,969Share-based
      compensation - stock grants
              
              
              60,000
              
              
              
              177,600
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              177,600Stock
      options exercised
              
              
              978,803
              
              
              
              475,190
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              475,190Canceled
      shares
              
              
              (90,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance,
      July 31, 2007
              
              
              24,961,805
              
              
              $
              26,519,543
              
              
              $
              2,486,829
              
              
              
              391,698
              
              
              $
              245,825
              
              
              $
              -
              
              
              $
              (24,892,539
              )
              
              $
              4,359,658Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,540,319
              )
              
              
              (6,540,319
              )Change
      in unrealized gains
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,588
              
              
              
              -
              
              
              
              18,588Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,521,731
              )Private
      placement of common stock, net
              
              
              1,677,596
              
              
              
              6,155,321
              
              
              
              -
              
              
              
              587,153
              
              
              
              1,585,647
              
              
              
              -
              
              
              
              -
              
              
              
              7,740,968Common
      stock issued for services
              
              
              12,500
              
              
              
              43,750
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              43,750Stock
      options issued for services
              
              
              -
              
              
              
              -
              
              
              
              192,550
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              192,550Share-based
      compensation - options
              
              
              -
              
              
              
              -
              
              
              
              1,406,223
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,406,223Share-based
      compensation - stock grants
              
              
              90,000
              
              
              
              463,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              463,500Section
      16(b) short-swing profits
              
              
              -
              
              
              
              -
              
              
              
              4,693
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,693Stock
      options exercised
              
              
              2,761,053
              
              
              
              2,228,403
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,228,403Exercised
      warrants
              
              
              70,982
              
              
              
              25,560
              
              
              
              65,313
              
              
              
              (98,500
              )
              
              
              (65,313
              )
              
              
              -
              
              
              
              -
              
              
              
              25,560Canceled
      shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance,
      July 31, 2008
              
              
              29,573,936
              
              
              $
              35,436,077
              
              
              $
              4,155,608
              
              
              
              880,351
              
              
              $
              1,766,159
              
              
              $
              18,588
              
              
              $
              (31,432,858
              )
              
              $
              9,943,574Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,067,317
              )
              
              
              (7,067,317
              )Change
      in unrealized gains
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18,588
              )
              
              
              -
              
              
              
              (18,588
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,085,905
              )Registered
      offering of common stock
              
              
              1,418,441
              
              
              
              2,023,984
              
              
              
              -
              
              
              
              567,374
              
              
              
              745,494
              
              
              
              -
              
              
              
              -
              
              
              
              2,769,478Common
      stock issued for services
              
              
              20,000
              
              
              
              58,600
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              58,600Stock
      options issued for services
              
              
              -
              
              
              
              -
              
              
              
              9,310
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,310Share-based
      compensation - stock options
              
              
              -
              
              
              
              -
              
              
              
              391,135
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              391,135Share-based
      compensation - restricted stock grants
              
              
              -
              
              
              
              42,314
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,314Stock
      options exercised
              
              
              1,259,589
              
              
              
              919,929
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              919,929Exercised
      warrants
              
              
              36,000
              
              
              
              18,000
              
              
              
              9,971
              
              
              
              (36,000
              )
              
              
              (9,971
              )
              
              
              -
              
              
              
              -
              
              
              
              18,000Canceled
      shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance,
      July 31, 2009
              
              
              32,307,966
              
              
              $
              38,498,904
              
              
              $
              4,566,024
              
              
              
              1,411,725
              
              
              $
              2,501,682
              
              
              $
              -
              
              
              $
              (38,500,175
              )
              
              $
              7,066,435




The
accompanying notes are an integral part of the consolidated financial
statements
  33





Notes
to Consolidated Financial Statements




Note
1.    Organization and Summary of Significant Accounting
Policies




This
summary of significant accounting policies of PURE Bioscience 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 U.S. Generally Accepted Accounting Principles (“GAAP”) and
have been consistently applied in the preparation of the financial
statements.




Organization
and Business Activity




PURE
Bioscience (sometimes referred to herein as the “Company” or “we”) was
incorporated in the state of California on August 24, 1992.  We began
as a provider of pharmaceutical water purification products for the pharmacy
market.  In 2000, we began investing in the development of novel
bioscience technologies and since the May 2005 sale of our Water Treatment
Division we have been exclusively focused on the development and
commercialization of our current and future bioscience products.  The
accompanying financial statements include the consolidated accounts of PURE
Bioscience and its subsidiary, ETIH2O Corporation, a Nevada
corporation.




Basis
of Presentation and Principles of Consolidation




The
accompanying financial statements include the consolidated accounts of PURE
Bioscience and its subsidiary, ETIH2O Corporation, a Nevada
corporation.  All inter-company balances and transactions have been
eliminated.




Use
of Estimates




The
preparation of the financial statements in conformity with GAAP 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.  The results of operations for the year ended
July 31, 2009 (“Fiscal 2009”), are not necessarily indicative of the results of
operations for future periods.




Reclassifications




Certain
comparative figures for prior periods have been reclassified. Specifically, in
our Annual Report for the year ended July 31, 2007 (“Fiscal 2007”), we reported
a net use of cash of $708,058 for short-term investments, on the face of the
Consolidated Statements of Cash Flows for Fiscal 2007.  On the face of
the Consolidated Statements of Cash Flows for the Fiscal 2007 presented herein,
we have reported net cash used for the purchase of short-term investments of
$2,488,981; and net cash received from the sale of short-term investments of
$1,780,923.  The net cash used for the purchases and sales ($2,488,981
less $1,780,923) is equal to the $708,058 previously reported.




Concentration
of Credit Risk




As of
July 31, 2009 all cash deposits and short-term investments were invested in
either U.S. FDIC insured bank accounts; institutional money market mutual funds
investing in A-1 (S&P) or Prime-1 (Moody’s); U.S. Treasury Securities, or
United States Government obligations issued by or backed by a federal agency of
the United States Government.  $3,098,900 of our cash and cash
equivalents were maintained at three separate major financial institutions in
the United States in accounts that are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $100,000.   Effective October 3, 2008,
the Emergency Economic Stabilization Act of 2008 raised the FDIC deposit
coverage limits to $250,000 per owner from $100,000 per owner. The enhanced
limits are currently available through December 31, 2009.




Also at
July 31, 2009, $1,114,800 of our cash and cash equivalents were held in accounts
maintained at two separate major financial institutions in the United States
that are provided with up to $500,000 in protection by the Securities Investor
Protection Corporation (“SIPC”) should such a firm close due to bankruptcy or
other financial difficulties and customer assets are missing.




At July
31, 2009 we had no short-term investments.  During Fiscal 2009, our
short-term investments, which were all converted to cash and cash equivalents
during the year, were invested in U.S. Treasury Bills with maturities of less
than 360 days, and were held at a major financial institution in the United
States.  These assets were provided with up to $500,000 in protection
by the SIPC.




We have
not experienced any losses in our cash, cash equivalents and short-term
investments and believe we are not exposed to any significant credit
risk.  At times, deposits held may exceed the amount of insurance
provided by the FDIC or SIPC.  Generally, these deposits may be
redeemed upon demand and, therefore, are believed to bear low risk.




Other
financial instruments that potentially subject us to concentrations of credit
risk consist of accounts receivable. We extend credit to our customers based on
credit evaluations and past payment performance, but do not obtain collateral to
secure our accounts receivable.




Revenue
Recognition




During
the periods presented herein our product revenue was derived from the sale of
silver dihydrogen citrate (“SDC”) concentrate and the sale of finished packaged
products containing SDC.  We recognize revenue from sales of these
products under the provisions of Staff Accounting Bulletin No. 104, Revenue
Recognition, which is generally when we ship the products free on board from
either our facility or from third party packagers, we have transferred title to
the goods, and we have eliminated our risk of loss.




Any
amounts received prior to satisfying our revenue recognition criteria are
recorded as deferred revenue in the accompanying consolidated balance sheets.
See Note 2 for further information regarding our licensing revenues and amounts
previously recorded as deferred revenue in the consolidated balance
sheets.











Cost
of Goods Sold




Cost of
goods sold for product sales includes direct and indirect costs to manufacture
products, including materials consumed, manufacturing overheads, shipping costs,
salaries, benefits and related expenses of operations.  Cost of goods
sold related to licensing revenues recorded in Fiscal 2009 was zero, as we did
not incur any costs directly related to our commitments under the agreement to
allow a third party a limited time period to exclusively evaluate our SDC
technology.




Accounts
Receivable




Trade
accounts receivable are recorded net of allowances for doubtful
accounts.  Estimates of allowances for doubtful accounts are
determined based on payment history and individual customer
circumstances.




Intangible
Assets / Long-Lived Assets




Our
intangible assets primarily consist of the worldwide patent portfolio of our
silver ion technologies.  Outside legal costs and filing fees related
to obtaining patents are capitalized as incurred.  The total amounts
capitalized for pending patents was $100,270 and $125,108 in Fiscal 2009, and in
the year ended July 31, 2008 (“Fiscal 2008”),
respectively.   Patents are stated net of accumulated
amortization of $1,252,225 and $1,080,265 at July 31, 2009 and July 31,
2008 respectively.




The
cumulative cost of acquiring patents is amortized on a straight-line basis over
the estimated remaining useful lives of the patents, generally between 17 and 20
years from the date of issuance.  At July 31, 2009 the weighted
average remaining amortization period for all patents was approximately 10.9
years.  Amortization expense for Fiscal 2009, Fiscal 2008 and Fiscal
2007, was $172,000, $175,800, and $164,500, respectively, and the estimated
amortization expense over each of the next five years is as
follows:




Year
      Ended July 31
            
            Estimated
              Amortization2010
            
            $
            177,0002011
            
            $
            183,0002012
            
            $
            188,0002013
            
            $
            194,0002014
            
            $
            200,000




In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
our long-lived assets and amortizable intangible assets are tested for
impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable.  We assess the recoverability
of such assets by determining whether their carrying value can be recovered
through undiscounted future operating cash flows, including our estimates of
revenue driven by assumed market segment share and estimated
costs.  If impairment is indicated, we measure the amount of such
impairment by comparing the fair value to the carrying value.  During
Fiscal 2009, Fiscal 2008 and Fiscal 2007, we recorded impairment charges of
zero, $109,286, and zero, respectively.  See Note 11 for more
information regarding the impairment charge recorded in Fiscal
2008.




Accounting
for Stock-Based Compensation




In
December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
123(R), Share-Based Payment, which establishes accounting for share-based awards
exchanged for employee and director services and requires us to expense the
estimated fair value of these awards over the applicable service
period.  Under SFAS No. 123(R), share-based compensation cost is
measured at the grant date based on the estimated fair value of the award, and
is recognized as expense over the applicable service period.  We do
not have, and have not had during Fiscal 2009, Fiscal 2008 or Fiscal 2007, any
stock option awards with market or performance conditions.




We
adopted the accounting provisions of SFAS No. 123(R) effective August 1, 2006,
using the modified prospective application.  Under the modified
prospective application, prior fiscal periods are not revised for comparative
purposes.   Prior to August 1, 2006, we followed Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, as
amended, in our accounting for share-based
compensation.    The valuation provisions of SFAS No. 123(R)
apply to awards that were outstanding on August 1, 2006 and were or are
subsequently modified or cancelled, and to awards made subsequent to August 1,
2006.




Stock
Options to Non-Employees




Charges
for stock options granted to non-employees have been determined in accordance
with SFAS No. 123(R) and EITF No. 96-18, Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, whereby we use the estimated fair value of the stock
options issued, based on the Black-Scholes Option Pricing Model.  For
such stock options, during Fiscal 2009 we recorded $1,149 in selling expense and
$8,161 in research and development expense; during Fiscal 2008 we recorded
$192,550 in selling expense and $13,011 in research and development expense; and
during Fiscal 2007 we recorded $346,873 in selling expense, $91,290 in general
and administrative expense, and $39,032 in research and development
expense.




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
              7.0
      yearsComputer
      Software
              5.0
      yearsFurniture
      and Fixtures
              10.0
      yearsLeasehold
      Improvements
              4.5
      years




All
capitalized costs associated with leasehold improvements are depreciated over
the remaining life of the lease.  See Note 7 for details of the
current lease term of our facility.













Shipping
and Handling Costs


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




Inventory




Inventories
are stated at the lower of cost or net realizable value using the average cost
method.  See Note 5 for further information regarding our inventory
and its valuation.




Cash,
Cash Equivalents and Short-term Investments




We
consider all liquid investments with maturities of ninety days or less when
purchased to be cash equivalents.  Our short-term investments have
maturities of greater than ninety days from the date of purchase.  We
classify securities as “available-for-sale” in accordance with SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, and carry these investments at fair value
with any unrealized gains and losses reported as a component of shareholders’
equity on the consolidated balance sheets and in the statements of shareholders’
equity.  At July 31, 2009 we had no short-term
investments.  All of our short-term investments as of July 31, 2008
were carried at fair value, based upon market prices quoted on the last day of
the fiscal period, and were considered available for sale.  We use the
specific identification method to determine the cost of debt securities sold,
and include gross realized gains and losses in investment
income.  Realized gains recorded for Fiscal 2009, Fiscal 2008, and
Fiscal 2007 were $57,992, $124,181, and zero respectively.  All
interest and dividends received from short-term investments are included in
interest income.




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 our technology and its
commercial potential.  We currently have no long-term debt, however
the issuance of debt, equity or convertible securities in future periods, if
any, 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 cause us to fail to execute
our business plan, fail to take advantage of future opportunities, or fail to
respond to competitive pressures or unanticipated customer requirements, and
further may 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.




Comprehensive
Income




SFAS 130,
Reporting Comprehensive Income, requires us to display comprehensive income or
loss and its components as part of our consolidated financial
statements.  Our comprehensive loss includes our net loss and certain
changes in equity that are excluded from our net loss, including unrealized
holding gains and losses on available-for-sale securities.  SFAS 130
requires such changes in shareholders’ equity to be included in accumulated
other comprehensive income or loss.   For Fiscal 2009, 2008 and
2007, our comprehensive loss was $7,085,905, $6,521,731, and $4,654,877,
respectively, and included unrealized holding gains on available-for-sale
securities at the end of the periods of zero, $18,588, and zero, respectively.
During Fiscal 2007, we had no realized gains or losses on available for sale
securities.




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 services, we use market prices
of our common stock to estimate the fair value of the shares
issued.  Whenever options or warrants are issued for services, 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
Loss Per Common Share




In
accordance with FASB Statement No. 128, Earnings Per Share (“SFAS 128”), we
compute basic loss per share by dividing the applicable net loss by the weighted
average number of common shares outstanding during the respective
period.  Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock equivalents, including stock options and
warrants, unless the effect is to reduce a loss or increase the income per
common share from continuing operations.  As we incurred losses in
Fiscal 2009, Fiscal 2008 and Fiscal 2007, we did not include common stock
equivalent shares of 7,673,741, 8,322,798, and 10,685,448, respectively, in
the computation of net loss per share as the effect would have been
anti-dilutive.  Therefore, both the basic and diluted loss per common
share for Fiscal 2009, Fiscal 2008 and Fiscal 2007 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 EndedJuly 31, 2009
            
            
            July 31, 2008
            
            
            July 31, 2007Shares
      outstanding
            
            
            32,307,966
            
            
            
            29,573,936
            
            
            
            24,961,805Weighted
      average number of common shares actually outstanding
            
            
            30,595,299
            
            
            
            27,553,215
            
            
            
            24,432,905Stock
      options
            
            
            6,175,216
            
            
            
            7,442,447
            
            
            
            10,293,750Restricted
      stock
            
            
            86,800
            
            
            
            -
            
            
            
            -Warrants
            
            
            1,411,725
            
            
            
            880,351
            
            
            
            391,698Total
      weighted average shares
            
            
            38,269,040
            
            
            
            35,876,013
            
            
            
            35,118,353Net
      loss
            
            $
            (7,067,317
            )
            
            $
            (6,540,319
            )
            
            $
            (4,654,877
            )Net
      loss per common share, basic and diluted
            
            $
            (0.23
            )
            
            $
            (0.24
            )
            
            $
            (0.19
            )




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.




Recent
Accounting Pronouncements




In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements, which provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except Statement No.
123R and related interpretations and pronouncements that require or permit
measurement similar to fair value but are not intended to measure fair
value.  In February 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective
Date of FASB Statement No. 157,” which provides a one year deferral of the
effective date of FAS 157 for non-financial assets and non-financial liabilities
to years beginning after November 15, 2008 (our fiscal year ending July 31,
2010). As a result, we are only partially adopting SFAS No. 157 as it relates to
our financial assets and liabilities until we are required to apply this
pronouncement to our non-financial assets and liabilities beginning with the
fiscal year ending July 31, 2010.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement No.
115. This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions in
SFAS No. 159 are elective, however the amendment to SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The fair value option established by
SFAS No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates.  Under SFAS No. 159, we would
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. The fair value
option: (a) may be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method; (b) is irrevocable
(unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments.  This statement became
effective for us on August 1, 2008, however we did not elect the fair value
option for any of our financial assets or financial liabilities.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”).  SFAS 141R replaces SFAS No. 141, Business Combinations and
requires an acquirer in a business combination to recognize the assets acquired,
the liabilities assumed, including those arising from contractual contingencies,
any contingent consideration, and any non-controlling interest in the acquiree
at the acquisition date, measured at their fair values as of that date, with
limited exceptions specified in SFAS 141R.  SFAS 141R also amends SFAS
No. 109, Accounting for Income
Taxes, and SFAS 142, Goodwill and Other Intangible
Assets.   SFAS 141R applies prospectively to business
combinations, if any, for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008 (our fiscal year ending July 31, 2010).  In April 2009, the
FASB issued SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies, which amends
the accounting prescribed in SFAS 141(R) for assets and liabilities arising from
contingencies in business combinations. SFAS 141(R)-1 requires pre-acquisition
contingencies to be recognized at fair value if fair value can be reasonably
determined during the measurement period. If fair value cannot be reasonably
determined, SFAS 141(R)-1 requires measurement based on the recognition and
measurement criteria of SFAS 5, Accounting for Contingencies.
The adoption of the provisions of SFAS 141R or SFAS 141(R)-1 did not have a
material effect on our financial condition, results of operations or cash flows
for Fiscal 2009.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Non-controlling Interests
in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements.  SFAS 160 also
changes the way the consolidated income statement is presented by requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest.  It
also requires disclosure, on the face of the consolidated statement of income,
of the amounts of consolidated net income attributable to the parent and to the
non-controlling interest.  SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent owners and the
interests of the non-controlling owners of a subsidiary.  SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (our fiscal year ending July 31, 2010).
We do not currently expect the adoption of the provisions of SFAS No. 160 to
have a material effect on our financial condition, results of operations or cash
flows.




In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP No. FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.”  The intent of the position is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141R, and other U.S. generally accepted
accounting principles. The provisions of FSP No. FAS 142-3 are effective for
fiscal years beginning after December 15, 2008 (our fiscal year ending July 31,
2010).  We are currently evaluating the impact, if any, that the
adoption of FSP No. FAS 142-3 could have on our consolidated financial
statements or results of operations.













In June
2008, the FASB ratified Emerging Issue Task Force (“EITF”) 07-5, Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF
07-5”). EITF 07-5 provides a framework for determining whether an instrument is
indexed to an entity’s own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal
years beginning after December 15, 2008 (our fiscal year ending July 31,
2010).  We do not currently expect the implementation of EITF 07-5 to
have a material impact on our consolidated financial statements.




In
October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active (“FSP FAS
157-3”), which clarifies the application of SFAS 157 in an inactive
market.  Additional guidance is provided regarding how a reporting
entity’s own assumptions should be considered when relevant observable inputs do
not exist, how available observable inputs in a market that is not active should
be considered when measuring fair value, and how the use of market quotes should
be considered when assessing the relevance of inputs available to measure fair
value. FSP FAS 157-3 became effective immediately upon issuance. Its adoption
did not impact our consolidated financial statements.




In April
2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP
157-4”). Based on the guidance, if an entity determines that the level of
activity for an asset or liability has significantly decreased and that a
transaction is not orderly, further analysis of transactions or quoted prices is
needed, and a significant adjustment to the transaction or quoted prices may be
necessary to estimate fair value in accordance with FASB Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”). FSP 157-4 is to be applied prospectively and became effective for
us as of Fiscal 2009.  The adoption of FSP 157-4 did not have an
impact on the Company’s consolidated results or financial
condition.




In April
2009, the FASB issued FSP FAS 107-2 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-2 and FSP APB 28-1”). FSP FAS
107-2 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value and the
related carrying amount of financial instruments in interim and annual periods.
FSP APB 28-1 amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements.  FSP
FAS 107-2 and FSP APB 28-1 also require disclosure about the method and
significant assumptions used to estimate the fair value of financial
instruments. FAS FSP 107-2 and FSP APB 28-1 became effective for us as of Fiscal
2009.  Their adoption did not impact our consolidated financial
statements.




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”), which amend the
other-than-temporary guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  FSP 115-2 and 124-2 became effective for us as of Fiscal
2009.  Their adoption did not impact our consolidated financial
statements.




In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
165”). SFAS 165 provides rules on recognition and disclosure for events and
transactions occurring after the balance sheet date but before the financial
statements are issued or available to be issued.  In addition, SFAS
165 requires a reporting entity to disclose the date through which subsequent
events have been evaluated, as well as whether that date is the date the
financial statements are issued or the date the financial statements are
available to be issued. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009. We have adopted SFAS 165 and have included the
required additional disclosures in Note 17.




In June
2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation
No. 46(R” (“FAS 167”). FAS 167 amends FIN 46(R), Consolidation of Variable Interest
Entities (revised December 2003)—an interpretation of ARB No. 51,to
require an issuer to perform an analysis to determine whether the issuer’s
variable interest or interests give it a controlling financial interest in a
variable interest entity, if any. This analysis identifies the primary
beneficiary of a variable interest entity as one with the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and the obligation to absorb losses of the entity
that could potentially be significant to the variable interest.  FAS
167 will be effective as of the beginning of the annual reporting period
commencing after November 15, 2009 (our fiscal quarter ending October 31, 2010).
We will assess the potential impact, if any, of the adoption of FAS 167 on our
consolidated financial statements.




In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS
168 will become the source of authoritative GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this statement, the codification will supersede all then
existing non-SEC accounting and reporting standards.  All other
non-grandfathered, non-SEC accounting literature not included in the
codification will become non-authoritative. This statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009 (our fiscal quarter ended October 31, 2009). We do not
currently expect the adoption of SFAS 168 to have a material impact on our
financial condition, results of operations or cash flows.





Note
2.   Deferred Revenue




Any
amounts received prior to satisfying our revenue recognition criteria are
recorded as deferred revenue in the consolidated balance
sheets.  During Fiscal 2008 we recorded deferred revenue on receipt of
a non-refundable fee of $250,000 which we received subject to an agreement
whereby we allowed a third party a limited time period to exclusively evaluate
our SDC technology for use within specified indications and for certain
products.  Upon the termination of the agreement in January 2009, we
recognized the $250,000 as licensing revenue in the consolidated statements of
operations for Fiscal 2009.










Note
3.  Accounts Receivable




Trade
accounts receivable are recorded net of allowances for doubtful
accounts.  Estimates for allowances for doubtful accounts are
determined based on payment history and individual customer
circumstances.  The allowance for doubtful accounts was zero at July
31, 2009, and 2008, respectively.




During
Fiscal 2008 we granted non-exclusive distribution and blending rights to a new
distributor for the sale of SDC-based products in Colombia.  In
addition, we granted non-exclusive distribution and blending rights to a second
distributor, which is affiliated with the first distributor, for the sale of
SDC-based products in Argentina, Venezuela, Panama and Costa Rica. The invoiced
total for both distributors was $781,600.  The $781,600 receivable
included $57,000 for amounts billed at cost to the distributors in August 2008
for parts shipped directly to them by one of our U.S. packaging
suppliers.  Subsequent to this transaction, we have not sold any
products to either of the two referenced distributors.




During
the three month period ended January 31, 2009 we determined these accounts to be
delinquent, established a full reserve and recorded $781,600 as bad debt
expense, within general and administrative expense.  At July 31, 2009
the referenced amounts remained uncollected; and we have written off the full
receivable of $781,600.




Management
currently considers all other accounts receivable to be fully
collectible.





Note
4.   Research and Development




All
in-house Research and Development (“R&D”) costs, and outside legal costs and
filing fees for maintaining issued patents are charged to operations when
incurred and are included in operating expenses.




Note
5.   Inventory




Inventories
are stated at the lower of cost or net realizable value using the weighted
average cost method.  Inventories at July 31, 2009 and 2008 consisted
of:




2009
            
            
            2008Raw
      Materials
            
            $
            194,652
            
            
            $
            252,491Work
      in Progress
            
            
            -
            
            
            
            -Finished
      Goods
            
            
            227,003
            
            
            
            117,552$
            421,655
            
            
            $
            370,043





Included
in our inventory of finished goods as of July 31, 2009 are approximately 12,000
gallons of SDC concentrate that we purchased from an unrelated third party in a
lien sale.  During the fourth quarter of Fiscal 2009 we were advised
that YRC Logistics Global, LLC (“YRC”), a global logistics company based in the
United States, was warehousing this SDC concentrate on behalf of one of our
international distributors, in addition to fixed assets that the distributor had
ordered from multiple U.S. manufacturers.  As YRC had not been paid
for either warehousing or shipping costs, they placed a lien on the SDC and
fixed assets and conducted a public lien sale in June 2009.  We
purchased the concentrate and assets in the lien sale for
$28,191.  $26,267 of this amount was attributable to the SDC
concentrate and $1,924 to the fixed assets.  With the addition of
$1,200 in costs to ship the SDC to our facility, we added $27,467 to the value
of our SDC concentrate inventory for the addition of the approximately 12,000
gallons.  This transaction had no impact on our consolidated
statements of operations for Fiscal 2009, however it is expected to temporarily
reduce our cost of goods sold per gallon of SDC concentrate sold in future
periods.




Note
6.    Property, Plant and Equipment




Property,
plant and equipment are stated at cost less accumulated
depreciation.  All improvements and additions that extend the life of
existing assets are capitalized.  The cost of maintenance and repairs
that do not extend or improve the asset are expensed as incurred.  The
following is a summary of property, plant, and equipment – at cost less
accumulated depreciation:







July
      31, 2009
            
            
            July
      31, 2008Computers
      and equipment
            
            $
            800,947
            
            
            $
            782,480Furniture
      and fixtures
            
            
            18,034
            
            
            
            30,566Leasehold
      improvements
            
            
            605,883
            
            
            
            604,4361,424,864
            
            
            
            1,417,482Less:
      accumulated depreciation
            
            
            568,360
            
            
            
            382,647Total
            
            $
            856,504
            
            
            $
            1,034,835







Total
depreciation expense for Fiscal 2009, Fiscal 2008 and Fiscal 2007 was $275,322,
$229,930, and $92,600, respectively.




Note
7.    Commitments and Contingencies, and Legal
Proceedings




In
September 2006, we entered into a sixty month operating lease agreement for our
office and manufacturing location in El Cajon, California.  In April
2008, we amended our operating lease to include an additional 1,812 square feet,
resulting in a total area of 14,879 square feet.  Rental expense
recorded in general and administrative expenses for Fiscal 2009, Fiscal 2008 and
Fiscal 2007 was $210,400, $185,300, and $173,300,
respectively.   Future minimum rental payments under the lease
for each of the four fiscal years, excluding variable and therefore currently
unknown costs for the maintenance of common areas, are as follows:




Year
      Ended July 31
            
            Amount2010
            
            $
            178,3002011
            
            $
            185,4002012
            
            $
            78,5002013
            
            $
            -$
            442,200











During Fiscal 2008 we
issued 12,500 shares of our common stock with a fair value of $43,750 and paid
an additional $135,000 for two legal settlements.During
Fiscal 2007 we received approximately $205,000 in proceeds from legal
settlements and recorded this amount as “Other” within “Other income and
(expense)” in the consolidated statements of operations for Fiscal
2007.  We have been awarded other amounts in arbitration proceedings
related to the ownership of, and trade secrets related to, our SDC
technology.  We believe it is unlikely that we will ever be able to
collect any part of such awards and we have therefore not recorded any amounts
as assets on the consolidated balance sheets as at July 31, 2008 or
2009.




Note
8.  Sales of Common Stock




On May
28, 2009 we closed a registered direct offering whereby we sold $3 million of
our common stock and warrants to institutional investors.  A shelf
registration statement relating to the securities sold in the offering was
declared effective by the Securities and Exchange Commission on May 8,
2009.





Under the
terms of the offering, we issued to the investors 1,418,441 shares of common
stock, and warrants to purchase 496,452 shares of our common
stock.  The common stock was sold at a price of $2.115 per share, and
the investors received warrants to purchase 0.35 shares of common stock at an
exercise price of $2.37 per share for each share of common stock they purchased
in the offering.  The fair value of the investor warrants, based on
their fair value relative to the common stock issued, was $652,694 (based on the
Black-Scholes Option Pricing Model assuming no dividend yield, volatility of
155.86%, and a risk-free interest rate of 2.16%).  The warrants were
exercisable as of May 27, 2009 and will expire five years from that
date.  In addition we paid a fee of $180,000 to Axiom Capital
Management, Inc. (“Axiom”) in consideration for its services as the placement
agent in the offering.  We also issued to Axiom and its principals,
warrants to purchase 70,922 shares of our common stock at an exercise price of
$2.64 per share. The fair value of the warrants issued to Axiom, based on
their fair value relative to the common stock issued, was $92,800 (based on the
Black-Scholes Option Pricing Model assuming no dividend yield, volatility
of 155.86%, and a risk-free interest rate of 2.16%).These warrants were
exercisable as of May 27, 2009 and will expire five years from that
date.





After
fees and expenses, the net proceeds of the offering to us were
$2,769,478.  The net proceeds from the offering will be used for
working capital.





See Note
16 for information regarding sales of common stock subsequent to July 31,
2009.





Note
9.  Other Equity and Common Stock Transactions




We paid
no cash dividends during any of the periods presented, and have never paid cash
dividends.





In August
2008, we received an aggregate of $150,000 from the exercise of non-employee
options to purchase 50,000 shares of our common stock at an exercise price of
$3.00, and received $15,079 from the exercise of options to purchase 28,450
shares of our common stock by two officers, at an average exercise price of
$0.53.





In
September 2008, we entered into a one year consulting agreement with an
independent third party for intellectual property legal services, the
compensation being a fee of $11,000 per month and an option to purchase 25,000
shares of our common stock which vests in equal increments bi-annually over a
two year period.  The options, which have an exercise price of $4.41,
were valued at $59,745 (based on the Black-Scholes Option Pricing Model,
assuming no dividend yield, volatility of 103.18% and a risk free interest rate
of 2.00%).  During Fiscal 2009 we expensed $8,161 of the options fair
value to research and development.  The options will be revalued
quarterly until fully vested with any change to fair value
expensed.





In
October 2008, we issued 10,000 shares in exchange for consulting services,
valued at $24,600 based on the market price of $2.46 per share. In addition,
there was a net exercise by one of our directors of 165,000 options that
resulted in the issuance of 133,430 shares of our common
stock.  Furthermore, during the three months ended October 31, 2008 we
recorded $57,412 of employee stock option expense.





In
December 2008, we received $631,600 from the exercise of options to purchase
339,800 shares of our common stock by one of our directors, at an average
exercise price of $1.86.  In the same month, there were net exercises
by two of our officers on 444,531 options that resulted in the issuance of
371,583 shares of our common stock.





In
January 2009, we received $79,500 from a director for the exercise of options to
purchase 150,000 shares of our common stock at an exercise price of $0.53; and
received $18,000 from the same director for the exercise of common stock
warrants to purchase 36,000 shares of our common stock at an exercise price of
$0.50.  Furthermore, we issued 10,000 shares in exchange for
consulting services, valued at $34,000.  During the three month period
ended January 31, 2009 we recorded $64,032 of employee stock option
expense.





During
the three month period ended April 30, 2009 there was a net exercise by one of
our directors of 150,000 options that resulted in the issuance of 106,126 shares
of our common stock.  During the three month period, we also recorded
$96,677 of employee stock option expense.












In May
2009, we issued options to purchase an aggregate of 360,000 shares of our common
stock, to our three executive officers. These options have a five year term and
vest annually in equal increments over four years. The options, which have an
exercise price of $2.34, were valued at $734,301 (based on the Black-Scholes
Option Pricing Model assuming no dividend yield, volatility of 155.42%, and a
risk free interest rate of 1.65%).  Additionally, in the same month we
granted 86,800 shares of restricted stock to four of our directors, and a five
year option to purchase 30,000 shares of common stock at an exercise price of
$2.34 per share, to one of our directors.   Both stock and
options vest after one year.  The 86,800 restricted shares were valued
at $203,112 or $2.34 per share (based on the prevailing market price of our
common stock on the date of grant), while the options were valued at $56,082
(based on the Black Scholes Option Pricing Model assuming no dividend yield,
volatility of 145.97%, and a risk free interest rate of 1.65%).  The
stock options and stock granted to directors and officers in May 2009 were
issued under the 2007 Equity Incentive Plan.





In June
2009, there was a net exercise of 50,000 options that resulted in the issuance
of 37,700 shares of our common stock.  In addition, we received
$19,000 from the exercise of options to purchase 27,500 shares of our common
stock issued under employee stock options plans.





In July
2009, we entered into a one year agreement with two independent third party
consultants who joined our Advisory Panel.  Each consultant was issued
an option to purchase 25,000 shares of common stock.  The options have
a two year term and vest in bi-annual increments over one year.  The
options, which have an exercise price of $1.66, were valued at $27,571 (based on
the Black-Scholes Option Pricing Model, assuming no dividend yield, volatility
of 99.11% and a risk free interest rate of 0.46%).  The options will
be revalued quarterly until fully vested with any change to fair value expensed.
In addition, during the three month period ended July 31, 2009 we received
$19,000 from the exercise of options to purchase 27,500 shares of common stock
issued under employee purchase plans; received $24,750 from the exercise of
options to purchase 15,000 shares of common stock issued in prior periods for
consulting services; and recorded $215,326 of expense for stock and options
issued to employees, officers, and directors.





At July
31, 2009, we had outstanding warrants to purchase 1,411,725 shares of our common
stock with exercise prices ranging from $2.37 to $8.60. These warrants expire at
various times between March 2011 and May 2014.  See Note 16 for
information regarding warrants issued subsequent to July 31, 2009.




Note
10.  Stock-Based Compensation




We have,
or have had during the fiscal years presented herein, the following equity
incentive plans (the Plans) pursuant to which options to acquire common stock
have been granted:




1998
Directors And Officers Stock Option Plan:  In December 1998, the
Company's shareholders approved the Amended PURE Bioscience 1998 Officers and
Directors Stock Option Plan.




2001
Directors And Officers Stock Option Plan:  In January 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:  In March 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:  In March 2002, the Company’s
shareholders approved the PURE Bioscience 2002 Employee Incentive Stock Option
Plan.  Eligible plan participants include employees and non-employee
directors of 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.




2007
Equity Incentive Plan:  Approved by the Company’s shareholders in
April 2007, the 2007 Equity Incentive Plan has a share reserve of 5,000,000
shares of common stock, which were registered under a Form S-8 filed with the
SEC in May 2007.  The Plan provides for the
grant of incentive and nonstatutory stock options as well as stock appreciation
rights, common stock awards, restricted stock units, performance units and
shares and other stock-based awards.During Fiscal 2007 common
stock options and common stock awards were granted under this Plan. Eligible
plan participants include employees, directors and consultants of the Company,
although incentive stock options generally may be granted only to
employees.




Non-employee
directors are eligible to receive stock option or other incentive grants under
the Company’s 1998 and 2001 Directors and Officers Stock Option Plans, the 2002
Non-Qualified and Employee/Incentive Stock Option Plan, and the 2007 Equity
Incentive Plan.  Employee directors are eligible to receive stock
option or other incentive grants under the Company’s 1998 and 2001 Directors and
Officers Stock Option Plans, the 2002 Non-Qualified Stock Option Plan, and the
2007 Equity Incentive Plan.











The Plans
are administered by the Compensation Committee of the Board (the “Compensation
Committee”).  The exercise price for stock options, or the value of
other incentive grants granted under the Plans, are set by the Compensation
Committee but may not be for less than the fair market value of the shares on
the date the award is granted. Fair market value is defined under the Plans as
being the average of the closing price for a specified number of consecutive
trading days ending on the day prior to the date the option or other award is
granted.  The period in which options can be exercised is set by the
Compensation 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. Options granted to continuing
officers or directors are immediately exercisable and vest upon
exercise.




On August 1, 2006, we adopted the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123
(revised 2004), Share-Based Payment (“SFAS123(R)”), requiring us to recognize
expense related to the fair value of share-based compensation awards to
employees and directors.  We elected to use the
modified-prospective-transition method as permitted by SFAS 123R and therefore
have not restated our financial results for prior fiscal years.  We
recognize compensation expense for stock option awards on a straight-line basis
over the applicable service period of the award.  The service period
is generally the vesting period, with the exception of options granted subject
to a consulting agreement, whereby the option vesting period and the service
period defined pursuant to the terms of the consulting agreement may be
different.  Share-based compensation expense for awards granted
subsequent to July 31, 2006 is based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R, using the Black-Scholes option
pricing model.  The following methodology and assumptions were used to
calculate share based compensation for Fiscal 2009 and Fiscal
2008:




For
      the years ended July 312009
            
            
            2008Expected
      price volatility
            
            
            97.70%
      - 156.73
            %
            
            
            66.10%
      - 117.58
            %Risk-free
      interest rate
            
            
            0.25
      % - 2.00
            %
            
            
            2.00%
      - 5.25
            %Expected
      rate of forfeiture
            
            
            0.0
            %
            
            
            0.0
            %Expected
      dividend yield
            
            
            0.0
            %
            
            
            0.0
            %Weighted
      average expected term
            
            3.4
      years
            
            
            2.3
      years




Expected
price volatility is the measure by which our stock price is expected to
fluctuate during the expected term of an option.  Expected volatility
is derived from the historical daily change in the market price of our common
stock, as we believe that historical volatility is the best indicator of future
volatility.  For stock options granted subsequent to July 31, 2006, we
have excluded the period prior to November 1, 2005 from our historical price
volatility, as during this period our market price reflected significant
uncertainty associated with both our arbitration proceedings against Falken
Industries and our ability to close the sale of the assets of the Water
Treatment Division.  We believe that the volatility of the market
price of our common stock during periods prior to November 1, 2005 is not
reflective of future expected volatility.




Following
the guidance of Staff Accounting Bulletin No. 107 (“SAB 107”), we have been
following the “Simplified Method” to determine the expected term of “Plain
Vanilla” options issued to employees and directors.  All of our
outstanding options granted to employees and directors are Plain Vanilla
options.  Under the Simplified Method, the expected term is presumed
to be the mid-point between the vesting date and the end of the contractual
term.  In SAB 107, the Staff stated that it would not expect a company
to use the Simplified Method for share option grants after December 31, 2007,
however on December 21, 2007 the SEC published Staff Accounting Bulletin No. 110
(“SAB 110”), which expressed the views of the Staff regarding the continued use
of a Simplified Method in certain circumstances where a company is unable to
rely on historical data.  We are unable to rely on our historical
exercise data as there have been only a limited number of option exercises in
recent periods; there have been a limited number of plan participants which is
expected to grow; our common stock was traded until April 2008 on the illiquid
Bulletin Board but our common stock is now listed on the NASDAQ Capital Market;
we have had over recent years significant trading blackout periods for employees
and directors; there has been minimal employee and director turnover; we have
recently changed the terms of employee stock option grants to reduce the term of
such grants; there are no comparable companies in terms of size, location and
industry (particularly as we are developing a platform technology and operate in
multiple industries); and we have had significant structural changes in our
business including the sale of the Water Treatment Division and abandonment of
our Triglycylboride technology, and expect to continue to change in the
foreseeable future.  We are therefore, under the guidance of SAB 110,
continuing to use the Simplified Method to determine the expected term of
options issued to employees and directors, but will continually evaluate our
historical data as a basis for determining the expected terms of such
options.




Our
estimation of the expected term for stock options granted to parties other than
employees or directors is the contractual term of the option award.




For the
purposes of estimating the fair value of stock option awards, the risk-free
interest rate used in the Black-Scholes calculation is based on the prevailing
U.S Treasury yield as determined by the U.S. Federal Reserve.  We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends on our common stock in the foreseeable future.




Stock-based
compensation expense recognized in the consolidated statements of operations is
based on awards ultimately expected to vest, reduced for estimated
forfeitures.  SFAS 123R requires forfeitures to be estimated at the
time of grant, and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Historically, we have not had
significant forfeitures of unvested stock options granted to employees and
directors.  A significant number of our stock option grants are fully
vested at issuance or have short vesting provisions.  Therefore, we
have estimated the forfeiture rate of our outstanding stock options as zero, but
will continually evaluate our historical data as a basis for determining
expected forfeitures.




The
following table sets forth the share-based compensation expense recorded in our
consolidated statements of operations for Fiscal 2009 and Fiscal 2008 resulting
from share-based compensation awarded to our employees, directors and third
party service providers:




Fiscal
      2009
            
            
            Fiscal
      2008Share-based
      compensation for employees and directors:Selling
      expense
            
            $
            10,199
            
            
            $
            98,784General
      and administrative expenses
            
            
            410,502
            
            
            
            1,622,764Research
      and development
            
            
            12,748
            
            
            
            148,176Total
      share-based compensation for employees and directors
            
            
            433,449
            
            
            
            1,869,724




Share-based
      compensation for third party service providers:Selling
      expense
            
            $
            1,149
            
            
            $
            51,736General
      and administrative expenses
            
            
            58,600
            
            
            
            43,750Research
      and development
            
            
            8,161
            
            
            
            -Total
      share-based compensation for third party service providers
            
            
            67,910
            
            
            
            95,486Total
      share-based compensation expense
            
            $
            501,359
            
            
            $
            1,965,210












A summary
of stock option activity is as follows:




Number
      of Shares
            
            
            Weighted-Average
      Exercise Price
            
            
            Aggregate
      Intrinsic Value ($000’s)Balance
      at July 31, 2007
            
            
            10,293,750
            
            
            
            $1.18
            
            
            
            $22,500Granted
            
            
            593,300
            
            
            
            $5.48Exercised
            
            
            (2,761,053
            )
            
            
            $0.85Forfeited
      / Cancelled
            
            
            (683,550
            )
            
            
            $1.41Balance
      at July 31, 2008
            
            
            7,442,447
            
            
            
            $1.62
            
            
            
            $26,479Granted
            
            
            892,250
            
            
            
            $2.42Exercised
            
            
            (1,259,589
            )
            
            
            $1.00Forfeited
      / Cancelled
            
            
            (899,892
            )
            
            
            $2.06Balance
      at July 31, 2009
            
            
            6,175,216
            
            
            
            $1.80
            
            
            
            $3,836








Outstanding
              
              
              ExercisableRange
      of Exercise Prices
              
              
              Number
      of Shares Outstanding
              
              
              
              Weighted
      Average Remaining Contractual Life (in years)
              
              
              
              Weighted
      Average Exercise Price
              
              
              
              Number
      of Shares Exercisable
              
              
              
              Weighted
      Average Remaining Contractual Life (in years)
              
              
              
              Weighted
      Average Exercise Price$0.50
      to $0.75
              
              
              1,560,000
              
              
              
              0.78
              
              
              
              $0.53
              
              
              
              1,560,000
              
              
              
              0.78
              
              
              
              $0.53$0.80
      to $1.20
              
              
              711,666
              
              
              
              1.32
              
              
              
              $0.81
              
              
              
              711,666
              
              
              
              1.32
              
              
              
              $0.81$1.50
      to $7.50
              
              
              3,903,550
              
              
              
              2.48
              
              
              
              $2.48
              
              
              
              3,006,225
              
              
              
              1.98
              
              
              
              $2.466,175,216
              
              
              
              1.91
              
              
              
              $1.80
              
              
              
              5,277,891
              
              
              
              1.54
              
              
              
              $1.67






Cash
received from options and warrants exercised in Fiscal 2009, Fiscal 2008 and
Fiscal 2007 was $937,929, $2,253,964 and $475,190, respectively. During
Fiscal  2009 there were net exercises of options to purchase 809,531
shares which resulted in the issuance of 648,839 shares of common stock. During
Fiscal 2008 there were net exercises of options to purchase 250,000 shares which
resulted in the issuance of 228,950 shares of common stock, and a net exercise
of 88,500 warrants which resulted in the issuance of 60,982 shares of common
stock. The intrinsic value of all options exercised during Fiscal 2009, Fiscal
2008 and Fiscal 2007 was $2,096,641, $12,874,047 and $2,012,600,
respectively.  The weighted-average grant date fair value of equity
options granted during Fiscal 2009, Fiscal 2008 and Fiscal 2007 was $1.88, $2.99
and $1.45 respectively.




On March
10, 2008, Gary Brownell resigned as a director of PURE Bioscience in order to
allow us to meet corporate governance standards which require that we have a
majority of independent directors.  On that date, our Board extended
the post-termination exercise period applicable to 837,500 vested and
outstanding stock options held by Mr. Brownell from three days following his
resignation to September 10, 2008.  We expensed $23,040 to general and
administrative expense during Fiscal 2008 based on this modification, in
accordance with SFAS 123(R).  There were no stock option modifications
during Fiscal 2009.




As of
July 31, 2009, there was $1,519,844 of unrecognized non-cash compensation cost
related to unvested options, which will be recognized over a weighted average
period of 3.2 years.





During
the three month period ended July 31, 2009 we issued 86,800 shares of restricted
stock to four of our independent directors.  The restricted shares,
valued at $203,112, will be expensed over the one year vesting term. Prior to
Fiscal 2009 all stock awards were immediately vested.  A summary of
restricted stock units issued during fiscal 2009 is as follows:




Number
      of SharesUnvested
      at July 31, 2008
            
            
            -Granted
            
            
            86,800Exercised
            
            
            -Forfeited
      / Cancelled
            
            
            -Unvested
      at July 31, 2009
            
            
            86,800


During
Fiscal 2009 and Fiscal 2008, we recognized stock based compensation expense for
restricted stock of $42,314 and zero respectively.  As of July 31,
2009, there was $160,797 of unrecognized non-cash compensation cost related to
unvested restricted shares, which will be recognized over a weighted average
period 0.80 years.




Note
11.  Patent Impairment and Related Expenses




No
impairment charges were recorded during Fiscal 2009.




In July
2008, we suspended the development and marketing efforts for our Triglycylboride
boric acid-based pesticides in order to focus on the development of our SDC and
related technologies.  We concurrently wrote down the net unamortized
balance of the capitalized patents associated with the Triglycylboride
technology, which amounted to $109,286, and the value of our remaining inventory
of raw materials and finished goods, which amounted to $33,063.  We
recorded the impairment charge of $109,286 within operating expenses on the
consolidated statements of operations for Fiscal 2008, and included the $33,063
of remaining inventory of raw materials and finished goods within cost of goods
sold for the same period.




Note
12.  Taxes




We file
federal and California consolidated tax returns with our
subsidiaries.  Our income tax provision for each of Fiscal 2009 and
2008 was $2,400, which is the minimum franchise tax we pay to the State of
California regardless of income or loss.




At July
31, 2009, we had federal and California tax net operating loss carry-forwards of
approximately $50,009,800 and $39,871,800, respectively. Included in these net
operating loss carry-forward amounts is $14,836,100 related to a deduction for
income tax purposes for which the Company has not realized a tax
benefit.  In future periods an adjustment would be recorded to
Additional Paid in Capital at the time that these net operating losses may be
utilized and reduce income tax.  At July 31, 2008, we had federal and
California tax net operating loss carry-forwards of approximately $40,888,600
and $30,753,000, respectively.  Utilization of the net operating loss
carry-forwards may be subject to a substantial annual limitation due to
ownership change limitations that may have occurred or that could occur in the
future, as required by Section 382 of the Internal Revenue Code as well as
similar state provisions. These ownership changes may limit the amount of net
operating loss carry-forwards that can be utilized annually to offset future
taxable income and tax, respectively. In general, an ownership change, as
defined by Section 382 of the Internal Revenue Code results from a transaction
or series of transactions over a three-year period resulting in an ownership
change of more than 50 percentage points of the outstanding stock of a company
by certain stockholders or public groups. Since the Company’s formation, we have
raised capital through the issuance of capital stock on several occasions (both
before and after our initial public offering in 1996) which, combined with the
purchasing stockholders’ subsequent disposition of those shares, may have
resulted in such an ownership change, or could result in an ownership change in
the future upon subsequent disposition.  While the Company does not
believe it has experienced an ownership change, the pertinent tax rules related
thereto are complex and subject to varying interpretations, and thus complete
assurance cannot be provided that the taxing authorities would not take an
alternative position.













Our
federal tax loss carry-forwards will begin expiring in the year ending July 31,
2010 unless previously utilized, and will completely expire in the year ending
July 31, 2028.  Between July 31, 2010 and July 31, 2012, $3,323,800 of
our federal net operating loss carry-forwards will expire, and the balance of
our current federal net operating loss carry-forwards will expire between July
31, 2018 and July 31, 2028.  Our California tax loss carry-forwards
will begin to expire in the year ending July 31, 2014, and will completely
expire in the year ending July 31, 2029.




Significant
components of our deferred tax assets are as follows:





July
      31, 2009
            
            
            July
      31, 2008Net
      operating loss carry-forward
            
            $
            13,419,700
            
            
            $
            10,735,700Stock
      options and warrants
            
            
            1,014,700
            
            
            
            1,005,000Other
      temporary differences
            
            
            (26,000
            )
            
            
            (87,400
            )Total
      deferred tax assets
            
            
            14,408,400
            
            
            
            11,653,300Valuation
      allowance for deferred tax assets
            
            
            (14,408,400
            )
            
            
            (11,653,300
            )Net
      deferred tax assets
            
            $
            -
            
            
            $
            -





Realization
of our deferred tax assets, which relate to operating loss carry-forwards and
timing differences, is dependent on future earnings, among other factors. 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 Fiscal 2009 was $2,755,100.




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




2009
              
              
              2008Federal
      tax benefit at the expected statutory rate
              
              
              0.34
              %
              
              
              0.34
              %State
      income tax, net of federal tax benefit
              
              
              5.80
              
              
              
              5.80Other
              
              
              (0.80
              )
              
              
              1.00Valuation
      allowance
              
              
              (39.00
              )
              
              
              (40.80
              )Income
      tax benefit – effective rate
              
              
              0.00
              %
              
              
              0.00
              %




In June
2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  Under FIN 48, we recognize the tax benefit
from a tax position if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position.




FIN 48
became effective for us on August 1, 2007, however the adoption of FIN 48 did
not have a material impact on our consolidated results of operations and
financial position as we had no unrecognized tax benefits that, if recognized,
would have impacted our effective income tax rate in future periods. Our
practice is to recognize interest and/or penalties related to income tax matters
in income tax expense, however we had no accrued interest or penalties at either
August 1, 2009 or July 31, 2008.  We are subject to taxation in the
United States and in California, and our historical tax years remain subject to
future examination by the U.S. and California tax authorities.




The
following table summarizes the activity related to our unrecognized tax
benefits:




Balance
      at July 31, 2007
              NoneIncreases
      related to current year tax positions
              NoneExpiration
      of statute of limitations for the assessment of taxes
              NoneOther
              NoneBalance
      at July 31, 2008
              NoneIncreases
      related to current year tax positions
              NoneExpiration
      of statute of limitations for the assessment of taxes
              NoneBalance
      at July 31, 2009
              None


Note
13.  Business Segment and Sales Concentrations




In
accordance with the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, certain information may be disclosed based
on the way we organize financial information for making operating decisions and
assessing performance.  SFAS 131 requires that we apply standards
based on a management approach, and requires segmentation based upon our
internal organization and disclosure of revenue and operating income based upon
internal accounting methods.  In determining operating segments, we
have reviewed the current management structure reporting to the chief operating
decision-maker (“CODM”) and analyzed the reporting the CODM receives to allocate
resources and measure performance.




We
believe that based upon the end use of our products, the value added
contributions made by us, the regulatory requirements, our customers and
partners, and the strategy required to successfully market finished products, we
are operating in a single segment.




Our
customers are strategic partners who are developing markets for, and
distributors who sell, products containing our SDC technology.  During
Fiscal 2009, 84% of product sales were made to five strategic partners that are
also developing markets for our products.  98% of revenue from product
sales for Fiscal 2009 was derived from sales made to U.S. domestic
customers.  During Fiscal 2008, 90% of product sales were made to five
strategic partners, and 33% of revenue from product sales for the year was
derived from sales made to U.S. domestic customers.




In some
cases we have, or may have in future periods, distributors or strategic partners
to whom we have granted rights to sell our technology in multiple countries.
Generally, we do not require such distributors to report to us the quantities of
products that they sell in each country.  In such cases, we report
revenues based on the country of first sale.




During
Fiscal 2009, 38% of our product sales were of bulk SDC concentrate, and 62% of
our product sales were of bulk Axen30 or finished packaged products containing
Axen 30, our ready to use product.  During the prior year, 77% of our
product sales were of bulk SDC concentrate and 23% of our product sales were of
bulk Axen30 or finished packaged products containing Axen 30.




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















Note
14.  Quarterly Financial Data (Unaudited)




The
following financial information reflects all normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
of the interim periods.  Summarized quarterly data for Fiscal 2009 and
Fiscal 2008 are as follows:





For
      the quarters endedOctober
      31
              
              
              January
      31
              
              
              April
      30
              
              
              July
      312009:Revenue
              
              $
              110,621
              
              
              $
              284,762
              
              
              $
              129,905
              
              
              $
              202,975Gross
      profit
              
              $
              50,809
              
              
              $
              273,940
              
              
              $
              69,314
              
              
              $
              96,032Net
      loss
              
              $
              (1,605,316
              )
              
              $
              (2,219,750
              )
              
              $
              (1,545,584
              )
              
              $
              (1,696,667
              )Basic
      and diluted net loss per share
              
              $
              (0.05
              )
              
              $
              (0.07
              )
              
              $
              (0.05
              )
              
              $
              (0.06
              )2008:Revenue
              
              $
              95,290
              
              
              $
              152,434
              
              
              $
              416,464
              
              
              $
              823,276Gross
      profit
              
              $
              63,597
              
              
              $
              101,947
              
              
              $
              322,618
              
              
              $
              535,706Net
      loss
              
              $
              (1,008,704
              )
              
              $
              (1,553,707
              )
              
              $
              (2,466,396
              )
              
              $
              (1,471,512
              )Basic
      and diluted net loss per share
              
              $
              (0.04
              )
              
              $
              (0.06
              )
              
              $
              (0.09
              )
              
              $
              (0.05
              )







Note
15.  Fair Value




Effective
August 1, 2008, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008,
the FASB issued FASB Staff Position (“FSP”) No. SFAS 157-2, “Effective Date
of FASB Statement No. 157,” which provides a one year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. As a result, we only partially
adopted SFAS 157 as it relates to our financial assets and liabilities until we
are required to apply this pronouncement to our non-financial assets and
liabilities beginning with fiscal year 2010. The adoption of SFAS 157 did not
have a material impact on our consolidated results of operations or financial
condition.




In
October 2008, the FASB issued FSP No. SFAS 157-3 “Determining the Fair
Value of a Financial Asset When the Market for that Asset is Not Active” (“FSP
SFAS 157-3”). FSP SFAS 157-3 clarifies the application of SFAS No. 157, in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP SFAS 157-3 is effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption of FSP SFAS 157-3 had no impact on our consolidated results
of operations, financial position or cash flows.




SFAS 157
defines fair value, establishes a framework for measuring fair value under U.S.
GAAP and enhances disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value under SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. SFAS 157 describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value
which are the following:




·
            Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.




·
            Level
      2 –  Inputs other than Level 1 that are observable, either
      directly or indirectly, such as quoted prices for similar assets or
      liabilities; quoted prices in markets that are not active; or other inputs
      that are observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.




·
            Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.




The
following table represents our fair value hierarchy for our financial assets
(cash, cash equivalents and short-term investments) measured at fair value on a
recurring basis as of July 31, 2009:




Level 1
            
            
            Level 2
            
            
            Level 3
            
            
            TotalCash
            
            $
            1,001,583
            
            
            
            —
            
            
            
            —
            
            
            $
            1,001,583Money
      market funds
            
            $
            3,212,161
            
            
            
            —
            
            
            
            —
            
            
            $
            3,212,161Total
            
            $
            4,213,744
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,213,744













Note
16.  Subsequent Events




On May
28, 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 165, Subsequent Events.  The statement establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued.  In particular, this statement sets forth the
period after the balance sheet date during which our management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date.  Additionally, the statement requires disclosure of the date
through which our management has evaluated subsequent events and the basis for
that date, that is, whether that date represents the date the financial
statements were issued or were available to be issued.





Our
management has evaluated events as of October 12, 2009, which is the last
practical date prior to the filing of this Annual Report.  All events
to this date are recognized or disclosed in the financial statements herein, to
the extent that they impact our balance sheets as at July 31 2009 or 2008; or
our statements of operations, statements of cash flows, or statements of
stockholders’ equity for Fiscal 2009, Fiscal 2008 or Fiscal
2007.  Other events that occurred subsequent to July 31, 2009 include
the following:





On
September 3, 2009 we closed a registered direct offering whereby we sold $3
million of our common stock and warrants to institutional
investors.  A shelf registration statement relating to the securities
sold in the offering was declared effective by the Securities and Exchange
Commission on May 8, 2009.  Under the terms of the offering, we issued
to the investors 1,818,182 shares of our common stock, and warrants to purchase
727,272 shares of our common stock.  The common stock was sold at a
price of $1.65 per share, and the investors received warrants to purchase 0.4
shares of common stock at an exercise price of $2.10 per share for each share of
common stock they purchased in the offering.   The warrants will be
exercisable as of March 3, 2010, and will expire five years from that
date.  In addition we paid a fee of $180,000 to Rodman & Renshaw,
LLC (“Rodman”) in consideration for its services as the placement agent in the
offering.  We also issued to Rodman and its principals, warrants to
purchase 90,909 shares of our common stock at an exercise price of $2.0625 per
share.  These warrants will be exercisable as of March 3, 2010, and will
expire on May 7, 2014.  After fees and expenses, the net proceeds of
the offering to us were $2,783,233, which will be used for working
capital.





Effective
September 1, 2009, Tommy G. Thompson resigned as a director of the Company to
join our Advisory Panel.





On
October 12, 2009, the Company entered into an amended and restated employment
agreement with Michael L. Krall, our Chief Executive Officer, which agreement
amends and restates in its entirety the employment agreement the Company
previously entered into with Mr. Krall effective as of April 17,
1996.  In addition, on October 12, 2009, the Company entered into
employment agreements with Andrew Buckland, our Chief Financial Officer, and
Donna Singer, our Executive Vice President.  The agreements are filed
as exhibits to this Annual Report.

















Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure




None.




Item
9A.  Controls and Procedures




Evaluation
of Disclosure 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 for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes 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 is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.





As
required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon the
foregoing evaluation, our Principal Executive Officer and our Principal
Financial Officer concluded that as of July 31, 2009 our disclosure
controls and procedures were effective at the reasonable assurance
level.





Changes
in Our Controls




There
were no changes in our internal controls over financial reporting during our
most recent quarter that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.





Management’s
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Exchange Act Rules 13a-15(f) and
15d-15(f).  Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control
- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on our evaluation under
this framework, our management concluded that our internal control over
financial reporting was effective as of July 31, 2009.  Mayer Hoffman
McCann P.C., an independent registered public accounting firm, has issued an
attestation report on the effectiveness of our internal control over financial
reporting as of July 31, 2009. This report, which expressed an unqualified
opinion on the effectiveness of our internal control over financial reporting as
of July 31, 2009, is included elsewhere herein.








Report
of Independent Registered Public Accounting Firm






The Board
of Directors and Stockholders


PURE
Bioscience




We have
audited PURE Bioscience’s (“the Company”) internal control over financial
reporting as of July 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, PURE Bioscience maintained, in all material respects, effective
internal control over financial reporting as of July 31, 2009, based on the
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PURE
Bioscience as of July 31, 2009 and 2008, and the related consolidated statements
of operations, stockholders’ equity and cash flows for each of the three years
in the period ended July 31, 2009 of PURE Bioscience, and our report dated
October 13, 2009 expressed an unqualified opinion on those financial statements.











/s/ Mayer Hoffman McCann
P.C.


San
      Diego, California


October
      13, 2009












Item
9B.  Other Information




In order
to retain the experience, skills, abilities, background and knowledge of our
current executive officers and provide well defined employment terms consistent
with U.S. biotechnology companies, on October 12, 2009, the Company entered into
an amended and restated employment agreement with Michael L. Krall, our Chief
Executive Officer, which agreement amends and restates in its entirety the
employment agreement the Company previously entered into with Mr. Krall
effective as of April 17, 1996.  In addition, on October 12, 2009, the
Company entered into employment agreements with Andrew Buckland, our Chief
Financial Officer, and Donna Singer, our Executive Vice
President.  The agreements were approved by the Board of Directors
upon the recommendation of the Company’s Compensation Committee and are filed as
exhibits to this Annual Report.  Capitalized terms used below are
defined in the agreements.  The principal terms of the agreements are
as follows:




Pursuant
to the agreements, as applicable, Mr. Krall is entitled to a base salary of
$300,000 per year, Mr. Buckland is entitled to a base salary of $225,000 per
year, and Ms. Singer is entitled to a base salary of $200,000 per
year.  In each case, the executive’s base salary may be increased, but
not decreased, from such amounts by the Company’s Board of Directors or the
Compensation Committee in its discretion.




Each
agreement continues until termination by either the Company or the
executive.  The agreements provide, as applicable, for annual bonus
targets equal to 50% of the executive’s then applicable base salary for Mr.
Krall and 35% of the executive’s then applicable base salary for each of Mr.
Buckland and Ms. Singer, in each case to be awarded at the sole discretion of
the Compensation Committee. Each agreement also provides that the executive will
be eligible for equity compensation grants to be awarded at the discretion of
the Compensation Committee.  In each case, if the employment agreement
is terminated without Cause by the Company or terminated by the executive for
Good Reason, the Executive, upon signing a release in favor of the Company, will
be entitled to severance pay in the form of a single lump sum cash
payment.  In the case of Mr. Krall, such severance payment equals 150%
of his then current Annual Base Compensation plus eighteen months of health and
dental insurance in accordance with COBRA. In the case of Ms. Singer, such
severance payment equals 100% of her then current Annual Base Compensation, plus
twelve months of health and dental insurance in accordance with
COBRA.  In the case of Mr. Buckland, such severance payment equals 75%
of his then current Annual Base Compensation, plus nine months of health and
dental insurance in accordance with COBRA.  In addition, in the event
of a termination for any reason other than by the Company for Cause, each
agreement provides that all outstanding vested stock options held by the
executive at the date of such termination would continue to be exercisable for a
period of up to 120 days following such termination, but in no event beyond the
maximum permitted expiration date.




The
agreements provide that, in the event either the executive’s employment is
terminated by the Company without Cause within twelve months following a Change
in Control, or the Executive resigns for Good Reason within such period, the
Executive will be entitled to additional severance pay in excess of the amounts
described in the preceding paragraph, in each case in an amount equal to a
single lump sum payment equal to 100% of the executive’s then current Annual
Base Compensation, plus the average annual bonus awarded to the executive for
the preceding two fiscal years.  In addition, in such event, the
vesting of all outstanding stock options then held by each executive would
automatically accelerate and all stock options would continue to be exercisable
for 12 months, but in no event beyond the maximum permitted expiration
date.











PART
III


Item
10.  Directors, Executive Officers and Corporate
Governance




The
information required by this Item is incorporated herein by reference to the
information contained in the Proxy Statement relating to our Annual Meeting of
Shareholders scheduled to be held on January 20, 2010, which will be filed
with the SEC no later than 120 days after the close of Fiscal 2009. Certain
information regarding our executive officers required by this item is set forth
in Part I of this Annual Report under the caption “Executive Officers of
the Registrant.”




Item
11.  Executive Compensation




The
information required by this Item is incorporated herein by reference to the
information contained in the Proxy Statement relating to our Annual Meeting of
Shareholders scheduled to be held on or about January 20, 2010, which will
be filed with the SEC no later than 120 days after the close of Fiscal
2009.




Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters




The
information required by this Item is incorporated herein by reference to the
information contained in the Proxy Statement relating to our Annual Meeting of
Shareholders scheduled to be held on or about January 20, 2010, which will
be filed with the SEC no later than 120 days after the close of Fiscal
2009.




Item
13.  Certain Relationships and Related Transactions, and Director
Independence




The
information required by this Item is incorporated herein by reference to the
information contained in the Proxy Statement relating to our Annual Meeting of
Shareholders scheduled to be held on or about January 20, 2010, which will
be filed with the SEC no later than 120 days after the close of Fiscal
2009.




Item
14.  Principal Accounting  Fees and Services




The
information required by this Item is incorporated herein by reference to the
information contained in the Proxy Statement relating to our Annual Meeting of
Shareholders scheduled to be held on or about January 20, 2010, which will
be filed with the SEC no later than 120 days after the close of Fiscal
2009.














PART
IV







Item
15.  Exhibits




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







3.1
            (1)
            --
      Articles of Incorporation3.1.1
            (2)
            --
      Articles of Amendment to Articles of Incorporation, dated March 11,
      20024.3
            (3)
            --
      Amended and Restated Bylaws4.3
            (1)
            --
      Form of Common Stock Certificate4.4
            (4)
            --
      Form of Investor Warrant4.41
            (5)
            --
      Form of Investor Warrant4.42
            (6)
            --
      Form of Investor Warrant4.5
            (7)
            --
      Form of Placement Agent Warrant10.15.1
            (8)
            --
      Innovative Medical Services Amended 1998 Directors and Officers Stock
      Option Plan10.15.2
            (9)
            --
      The Innovative Medical Services ETI H2O Option Plan10.15.3
            (10)
            --
      Innovative Medical Services Consultant and Advisors  Stock
      Option Plan10.15.4
            (11)
            --
      Innovative Medical Services 2001 Directors and Officers Stock Option
      Plan10.15.5
            (12)
            --
      Innovative Medical Services 2002 Employee Incentive Stock Option
      Plan10.15.6
            (13)
            --
      Innovative Medical Services 2002 Non-Qualified Stock Option
      Plan10.15.7
            (14)
            --
      PURE Bioscience 2004 Consultant and Advisors Stock Option
    Plan10.15.8
            (15)
            --
      The PURE Bioscience 2007 Equity Incentive Plan10.16
            (16)
            --
      Placement Agent Agreement, dated as of April 28, 2009, by and between Pure
      Bioscience and Axiom Capital Management, Inc.10.17
            (17)
            --
      Placement Agent Agreement, dated as of August 3, 2009, by and between Pure
      Bioscience and Rodman & Renshaw, LLC10.18
            
            --
      Employment Agreement by and between Pure Bioscience and Michael L. Krall
      dated October 12, 2009*10.19
            
            --
      Employment Agreement by and between Pure Bioscience and Andrew
      Buckland dated October 12, 2009*10.20
            
            --
      Employment Agreement by and between Pure Bioscience and Donna Singer dated
      October 12, 2009*14.1
            (18)
            --
      Code of Ethics21.1
            
            --
      Subsidiaries of the Registrant*23.0
            
            --
      Consent of Mayer Hoffman McCann P.C.*31.1
            
            --
      Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2
            
            --
      Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32.1
            
            --
      Certification of Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*32.2
            
            --
      Certification of Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*










(1)
            Incorporated
      by reference from Exhibit 3.1 to the Form SB-2 registration statement, SEC
      File #333-00434 effective August 8, 1996(2)
            Incorporated
      by reference from Exhibit 3.1.2 to the Annual Report on Form 10KSB for the
      fiscal year ended July 31, 2002, filed with the SEC on October 29,
      2003(3)
            Incorporated
      by reference from Exhibit 3.2 to the Current Report on Form 8-K, filed
      with the SEC on February 25, 2008(4)
            Incorporated
      by reference from Exhibit 4.4 to the Current Report on Form 8-K, filed
      with the SEC on October 25, 2007(5)
            Incorporated
      by reference from Exhibit 4.5 to the Current Report on Form 8-K, filed
      with the SEC on May 22, 2009(6)
            Incorporated
      by reference from Exhibit 4.5 to the Current Report on Form 8-K, filed
      with the SEC on September 2, 2009(7)
            Incorporated
      by reference from Exhibit 4.5 to the Current Report on Form 8-K, filed
      with the SEC on October 25, 2007(8)
            Incorporated
      by reference from Form S-8 filed with the SEC on December 23,
      1998(9)
            Incorporated
      by reference from Exhibit 99.6 to Form S-8 filed with the SEC on January
      30, 2001(10)
            Incorporated
      by reference from Exhibit 99.5 to Form S-8 filed with the SEC on January
      30, 2001(11)
            Incorporated
      by reference from Exhibit 99.4 to Form S-8 filed with the SEC on January
      30, 2001(12)
            Incorporated
      by reference from Exhibit 99.8 to Form S-8 filed with the SEC on May 20,
      2002(13)
            Incorporated
      by reference from Exhibit 99.7 to Form S-8 filed with the SEC on May 20,
      2002(14)
            Incorporated
      by reference from Exhibit 99 to Form S-8 filed with the SEC on April 23,
      2004(15)
            Incorporated
      by reference from Exhibit 10.15.8 to Form 10-K filed with the SEC on
      October 14, 2008(16)
            Incorporated
      by reference from Exhibit 10.2 on Form 8-K, filed with the SEC on May 22,
      2009(17)
            Incorporated
      by reference from Exhibit 10.2 on Form 8-K, filed with the SEC on
      September 2, 2009(18)
            Incorporated
      by reference from Exhibit 14.1 on Form 8-K, filed with the SEC on February
      25, 2008


*
      Filed herewith















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
            
            October
      13, 2009Michael
      L. Krall, President / Chief Executive Officer
              (Principal
      Executive Officer)/s/
      ANDREW J. BUCKLAND
            
            October
      13, 2009Andrew
      J. Buckland, Chief Financial Officer(Principal
      Financial and Accounting Officer)











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
            
            Director
            October
      13, 2009Gregory
      Barnhill/s/
      DENNIS BROVARONE
            
            Director
            October
      13, 2009Dennis
      Brovarone/s/
      JOHN J. CARBONE
            
            Director
            October
      13, 2009John
      J. Carbone/s/
      MICHAEL L. KRALL
            
            President/CEO
      and Director
            October
      13, 2009Michael
      L. Krall/s/
      PAUL V. MAIER
            
            Director
            October
      13, 2009Paul
      V. Maier/s/
      DONNA SINGER
            
            Executive
      Vice President and Director
            October
      13, 2009Donna
      Singer