---

---

# 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, 2008 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

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 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                
Non-accelerated filer o  (Do no check if a smaller reporting company) | Accelerated filer x
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 13, 2008, the
registrant had 29,652,386 shares of its common stock, no par value, issued and
outstanding.

As of October 13, 2008, the aggregate
     market value of the voting stock held by non-affiliates of the registrant
     was approximately $76,989,999 (computed on the basis of the last trade of
     the common stock on the NASDAQ Capital Market on October 13, 2008).

# 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 January 20, 2009 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, 2008.

---

---

---



# 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 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 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 and to a lesser extent our patent-pending boric acid
based pesticide technologies. We are developing technology-based bioscience products,
including our silver dihydrogen citrate-based antimicrobials, which we believe will
provide best in class, 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 green products, while providing competitive advantages in
efficacy and safety.

Bioscience Technologies
Our flagship bioscience technology is
an aqueous disinfectant, silver dihydrogen citrate (SDC). A patented new
molecular entity, SDC is an electrolytically generated source of stabilized ionic silver
that can serve as the basis for a broad range of products in diverse markets. SDC liquid
is colorless, odorless, tasteless, non-caustic and formulates well with other compounds.
As a platform technology, our SDC-based antimicrobial is distinguished from competitors in
the marketplace because of its superior efficacy combined with reduced toxicity. We are
producing and plan to expand the production of pre-formulated, ready-to-use products for
private label distribution, as well as varying strengths of SDC concentrate as an additive
or raw material for inclusion in other companies products, 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 our Environmental Protection Agency
(EPA) registered RoachX® and AntX products, though these products
are not currently being actively marketed or developed.

# Principal Products and
Markets

Silver Dihydrogen Citrate. Our
flagship technology is a patented, aqueous antimicrobial called silver dihydrogen citrate
(SDC). SDC is an electrolytically generated source of stabilized ionic silver that can
serve as the basis for a broad range of products in diverse markets. Colorless, odorless,
tasteless and non-caustic, the aqueous SDC formulates well with other compounds. We
produce and have begun to market, 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.

3

---



We currently have EPA registration
for our 2400-parts per million (ppm) technical grade SDC concentrate (trade name Axenohl)
as well as for our Axen and Axen30 hard surface disinfectant products for commercial,
industrial and consumer applications including restaurants, homes and medical facilities.
The Axen30 EPA registration 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 Staph, 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.

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. In May 2004, Therapeutics began
development of SDC within the first two groups of products subject to FDA regulation;
womens health products and acne products. In May 2006 we expanded the Therapeutics
Agreement to include development of SDC as an active pharmaceutical ingredient in products
for treatment of dermatophytoses such as Tinea pedis (athletes foot), onychomycosis
(nail fungus), among others, as well as development of antimicrobial skin wash products,
beginning with a hand sanitizer. In December 2006, Therapeutics submitted an
Investigational New Drug (IND) application with 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). FTA has begun formulation and clinical projects for FDA-regulated
dermatology, wound care and medical biofilm control products containing SDC. FTA will fund
and direct all development activities and FDA regulatory filings under the agreement. 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, with
the exception of the in-process IND for 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.

4

---



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 are initially marketing the product through distributor relationships to the
cruise ship industry under the name Cruise Control.

In April 2008, we entered into a
development and distribution partnership with privately-held Rockline Industries, Inc.
(Rockline). Under our agreement, Rockline is expected to market Axen30 to
retailers under those stores private label brands, under Rocklines own label
brand and under our KinderGuard brand. In addition, we have granted Rockline the exclusive
right to develop and commercialize wet wipes containing SDC for similar markets.

In July 2008, our distributor in
Brazil obtained national regulatory approval for an SDC-based disinfectant. We have
granted a license to market and sell SDC-based products in Brazil to privately held Life
Biociências S/A of Apucarana, Paraná in Brazil (Lifebio), a company of Grupo
Nilson Ribeiro, together in a joint venture with privately held PCI International, Inc. of
Lafayette, Louisiana (PCI). We sell SDC concentrate to Lifebio/PCI for
blending, packaging and distribution of non-pharmaceutical SDC-based antimicrobial
products in Brazil. Lifebio/PCI has constructed a facility in Apucarana, Paraná
dedicated to blending and packaging SDC concentrate into hard surface disinfectant.

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. Branded as
Innovex, the Triglycylboride product line launched in October 2001 with our
EPA-approved, patent-pending RoachX®. We subsequently developed additional products
including the EPA-approved AntX75®, and EPA-exempt non-toxic TrapX rodent lure. Our
marketing efforts behind the Innovex products have been limited, and we believe that only
through investment in additional formulations, greater marketing efforts and wider
distribution could we see significantly higher sales and profits than we have historically
achieved with the technology. We will continue to evaluate such investments, however we
will now entirely focus our resources on the development of SDC, which we believe has
significantly greater market potential than the Triglycylboride technology. 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.

During Fiscal 2008, we signed a
number of distribution agreements for the distribution of Axen30 as a hard surface
disinfectant, including agreements with Swabplus, Inc. for China, Hong Kong and Taiwan,
and Orchem Corporation and DuraBan International for the United States.

Customers
We sell SDC concentrate 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. 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. During Fiscal
2008, sales to each of the three following customers comprised 10 percent or more of our
revenues; Ciba, a reseller of SDC concentrate for use as a preservative or active
ingredient; Bioasepsis, a distributor of SDC-based disinfectant in Colombia; and Uribe
& Gold, a distributor of SDC-based disinfectant in selected regions of Latin America.

Competition
The markets for SDC and each of its
potential uses are highly competitive. We have a number of competitors that vary in size
and scope and breadth of products offered. 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. 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. In order to compete with such existing 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
PropertyOur 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.

5

---



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 which 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+, Staph
Attack®, Staphacide®, Axenohl®, Axen®, Silvérion®,
Kinderguard®, Cruise Control®, Nutripure, Elderguard,
Critterguard, Innovex®, RoachX®, AntX, TrapX® and Medifier.

# 

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, although we outsource some blending
and packaging operations and may continue to outsource such operations to one or more
third parties. We outsource such operations where it is economically advantageous to us
and to our customers, particularly in regard to the reduction of shipping costs. We
outsourced certain Axen30 bottling operations and RoachX manufacturing during Fiscal 2007.
We did not outsource any manufacturing operations during Fiscal 2008.

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.

If we manufacture RoachX, AntX and
TrapX products in future periods, we intend to outsource manufacturing operations for the
production of these products. The active and inactive ingredients are readily available
through multiple manufacturers in the U.S. and overseas.

Research and 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.

All in-house R&D costs, outside
legal costs for maintaining issued patents, and third-party laboratory testing expenses
are charged to operations when incurred, and are included in operating expenses. Outside
legal costs and filing fees related to obtaining new patents are capitalized as incurred.
The total amounts capitalized for pending patents were $125,100 and $204,200 in the fiscal
years ended July 31, 2008 (Fiscal 2008) and 2007 (Fiscal 2007),
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, 2008, the weighted average remaining
amortization period for all patents was approximately 11.7 years. Amortization expense for
Fiscal 2008, Fiscal 2007 and the year ended July 31, 2006 (Fiscal 2006) was
$175,800, $164,500 and $157,400, respectively.

In addition to the amortization of
capitalized patents, expense charged to R&D was $1,470,600, $1,056,300 and $1,036,500
in Fiscal 2008, 2007 and 2006, respectively. Total R&D expense, including
amortization, was $1,646,400, $1,220,800 and $1,193,900 in Fiscal 2008, Fiscal 2007 and
Fiscal 2006, respectively.

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 three such
products currently registered by the EPA under FIFRA: the antimicrobial pesticides Axen,
Axen30 and Axenohl. 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.

6

---



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. 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 added a new development and licensing
partner for SDC-based products for human use, FTA Therapeutics, LLC (FTA). FTA has begun
formulation and clinical projects for FDA-regulated dermatology, wound care and medical
biofilm control products containing SDC, and we intend to subsequently license development
rights for other indications to multiple third parties, the first being FTA. 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, or we expect will be, obligated to obtain and maintain
all necessary regulatory approvals or registrations in each specific country, to enable
our 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.

In addition to SDC, our
Triglycylboride boric acid-based pesticides are also regulated by the EPA under FIFRA, and
by the agencies of the 50 states. We have two such pesticides registered by the U.S. EPA
and the 50 states; AntX and RoachX, however in July 2008, we suspended the development and
marketing efforts for these products in order to focus on the development of our SDC and
related technologies.

Employees
As of October 10, 2008, we employed
twenty-two people, twenty-one of whom were full-time employees. None of our employees are
covered by collective bargaining agreements.

Company Website
We maintain a website at
www.purebio.com. We make our periodic and current reports available free of charge on our
website. 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 reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, including us.

Executive Officers of
the RegistrantThe following table and information
below sets forth information with respect to each of our current executive officers.

|Name               |  | Age |  | Position                           |  | Held Position Since | 
|------------------ |  | --- |  | ---------------------------------- |  | ------------------- | 
|Michael L. Krall   |  | 56  |  | President, CEO, Chairman, Director |  | 1992                | 
|                  
|Andrew J. Buckland |  | 45  |  | CFO, Principal Accounting Officer  |  | 2005                | 
|                  
|Donna Singer       |  | 38  |  | Executive Vice President, Director |  | 1998                | 

The executive  officers serve at the
discretion of the Board,  except Mr. Krall, who is employed  pursuant to an employment
agreement.

Business Experience

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

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.

7

---



# 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 II, Item 7 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, results of operations and 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 maintain profitability

We had a loss of $6,540,300 after
taxes for the fiscal year ended July 31, 2008 and a loss of $4,654,900 after taxes for the
fiscal year ended July 31, 2007. As of July 31, 2008, we had an accumulated deficit of
approximately $31.4 million. We may continue to have losses in the future. If the
penetration into the marketplace of SDC is later 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. If we do become
profitable in future periods, we have an employment contract with our Chief Executive
Officer and President which includes a provision for him to be paid an amount equal to 3%
of our net income before taxes, if any. Such payments would reduce our profitability.

We do not yet have significant cash
inflows from product sales 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, 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, 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, or to reduce or cease operations.

If our efforts to achieve and
maintain market acceptance of our core SDC technology are not successful, or we fail to
obtain necessary governmental approval, 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. Although we believe SDC has applications in multiple industries,
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 consumer 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 that market
acceptance 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. Complying with
applicable government regulations and obtaining necessary clearances or approvals can be
time consuming and expensive, and there can be no assurance that regulatory review will
not involve delays or other actions adversely affecting the marketing and sale of our
products. We also cannot predict the extent or impact of future legislation or regulation.
Some of our new bioscience applications for the healthcare markets and food preparation
markets will require approval by government agencies prior to marketing or sale in the
U.S. We have not yet applied for FDA or Department of Agriculture approval to market any
such products. If any future product applications are not approved by the appropriate
regulatory authority, 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.

8

---



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 expand our
operations, management will be effective in expanding our physical facilities 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 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 perform on new contracts
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. While the rewards in
these fields are potentially great, 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
EPA registration for our 2400-parts per million (ppm) technical grade SDC concentrate
(trade name Axenohl), as well as for our Axen and Axen30 hard surface disinfectant
products for commercial, industrial and consumer applications including restaurants, homes
and medical facilities. We intend to fund and manage additional EPA-regulated product
development internally, 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. In addition, doing business internationally carries a
great deal of risk with regard to foreign government regulation, banking and 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 risen recently. A decision is expected imminently by the European Commission on an
antidumping action against Chinese citric acid producers, a dominant force in the global
citric acid market, which has caused global citric acid price increases in anticipation of
antidumping duties that the European Commission could impose on Chinese producers. Any
measures could be followed by similar action from the authorities in the U.S. 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.

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 Therapeutics and with FTA for the development and commercialization of
certain FDA regulated SDC-based products. However, we do not exercise any control over
these development partners. Both Therapeutics and FTAs resources are limited
and progress to date on all indications has been slow. 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 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. Such products 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
solution to their customers and provide implementation services. If our strategic partners
fail to increase awareness of our solution 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.

9

---



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
may not establish and maintain effective marketing programs and continue to build our
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; and
| | - | --------------------------------------------------------------------------------------

| |  | we
may not effectively manage our anticipated growth.
| | - | -----------------------------------------------------

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 such 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 net 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, 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.

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, including our collaborators. 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.

If we are unable to obtain,
maintain or defend patent and other intellectual property ownership rights relating to our
technology, we 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.

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.

10

---



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

# Litigation may harm our
business or otherwise distract our management

Substantial, complete or extended
litigation could cause us to incur large expenditures and distract our management. For
example, lawsuits by employees, shareholders or customers could be very costly and
substantially disrupt our business. Disputes from time to time with such companies or
individuals are not uncommon, and we cannot assure you that we will always be able to
resolve such disputes on terms favorable to us.

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. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 was signed into law. The Sarbanes-Oxley Act relates to us and
adds to our obligations for regulatory reporting, accounting, corporate governance,
internal controls and business practices. The SEC continues to issue new and proposed
rules implementing various provisions of the Sarbanes-Oxley Act, and meeting these rules
will substantially increase the cost to us of being a public company, including
substantial costs during the fiscal year ending July 31, 2009 and in future years. This
additional cost will reduce our future profits or increase our future losses, and a
greater proportion of 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. Based on the market capitalization
of our common stock at January, 31 2008, we met the defined requirements for becoming an
accelerated filer, which require us to attest to, and have our Independent Registered
Public Accounting Firm attest to, our internal controls under Section 404 of the
Sarbanes-Oxley Act. We are also, commencing with this report on Form 10-K, required to
file our annual and quarterly reports with the Commission 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. All of these and other reporting requirements and
heightened corporate governance obligations that we will face or are already facing 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 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 by regulatory authorities
such as the Commission, the Public Company Accounting Oversight Board, 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 to
undertake a comprehensive review of a companys reports at least once every three
years under the Sarbanes-Oxley Act of 2002. 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. In particular, we
rely on Michael L. Krall, our President and Chief Executive Officer. 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 employees, other
than Mr. Krall, and 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 key employees could seriously harm our
business, results of operations and financial condition. We cannot assure you that in such
an event we would be able to recruit personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.

11

---



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 our industry. 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
industry. In addition, it takes time for our new business development personnel to become
productive, particularly with respect to obtaining major customer accounts. In many cases,
newly hired business development personnel are unable to develop their skills rapidly
enough, which results in a relatively high turnover rate and a corresponding increased
need to make continual new hires. If we are unable to hire or retain qualified business
development and bioengineering personnel, or if newly hired personnel fail to develop the
necessary skills or reach productivity slower than anticipated, it would be more difficult
for us to sell our products or to license our technology, and we may experience a
shortfall in revenue and not achieve our planned 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 and preferred 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 us.

Our management and our Board of
Directors has significant influence over our direction and policies, and may be able to
delay or prevent a change of control of our Company, which could adversely affect our
stock price

As of October 13, 2008, Michael L. Krall, our
President and Chief Executive Officer, beneficially owned,
including exercisable options, approximately 7% of our common stock.  As of the same date, our directors
and officers as a group beneficially owned, including exercisable options and warrants, approximately
21% of our common stock.  As a result, our management, and Mr. Krall in particular, are in a position to
significantly influence our direction and policies, the election of our Board and the outcome of any
other matters requiring shareholder approval.  This concentration of ownership may harm the market price
of our common stock by, among other things:

| |  | delaying,
deferring, or preventing a change in control of our Company;
| | - | ----------------------------------------------------------------------

| |  | impeding
a merger, consolidation, takeover, or other business combination involving our Company; or
| | - | ---------------------------------------------------------------------------------------------------

| |  | discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control
of our Company.
| | - | ----------------------------------------------------------------------------------------------------------------------

The price of our common stock may
be volatile, which may limit our ability to raise capital in the future or 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 13, 2008, the closing price of our common stock on any given day has ranged from
$2.46 to $8.50 per share, and the monthly trading volume has varied from approximately 1.2 million
shares to approximately 7.9 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;
| | - | ----------------------------------------------------------------------------------

| |  | announcements
of significant acquisitions or other agreements by us or our competitors;
| | - | ---------------------------------------------------------------------------------------

| |  | our
sale of common stock or other securities in the future;
| | - | -----------------------------------------------------------

| |  | sales
of common stock by our insiders (management and directors);
| | - | -----------------------------------------------------------------

| |  | the
trading volume of our common stock;
| | - | ---------------------------------------

| |  | 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
| | - | ---------------------------------------------------------------------------

| |  | general
economic conditions.
| | - | ----------------------------

12

---



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 securities and biotechnology
companies have been particularly volatile. 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 us, 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.

# 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, which could significantly impact your ability to sell your shares.

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 8,244,300
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 $2.06. In addition, approximately
12,103,300 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, 2008, we had federal and
California tax net operating loss carry-forwards of approximately $40,350,300
and $30,753,800 respectively. The difference between federal and California tax
loss carry-forwards is primarily due to limitations on California loss
carry-forwards.

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.

In addition, our federal tax loss carry-forwards
will begin expiring in the year ending July 31, 2017 unless previously utilized,
and will completely expire in the year ending July 31, 2028. The California tax
loss carry-forwards will begin to expire in the year ended July 31, 2013 and
will completely expire in the year ending July 31, 2018. If we are unable to
earn sufficient profits to utilize the carry-forwards by these dates, they will
no longer be available to offset profits.

# 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 will depend on our
earnings, financial condition and other business and economic factors, which our Board may
consider relevant.

# ITEM 1B. UNRESOLVED
STAFF COMMENTS

None.

13

---



# 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
January 2007, we commenced a new sixty month operating lease for the facility.

During the year ending July 31, 2007,
we made significant improvements to the manufacturing areas to expand our manufacturing
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 the year ended July 31, 2008.

14

---



# 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 2008 |  | Fiscal Year 2007 |  |      
|---------------- |  | ---------------- |  | -----
|
|July 31, 2008    |  | $5.52            |  | $3.78
|April 30, 2008   |  | $6.40            |  | $2.58
|January 31, 2008 |  | $8.72            |  | $4.60
|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 and may not be indicative of future stock performance.



15

---



Security
Holders

As of October 13, 2008, we
had approximately 183 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 13, 2008 was $2.78.

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    |  |                                                                                                 |  | 4,112,022                                                                       |  | $1.29                                                                                                                                           | 
|                                                           |  |                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                 |  | 3,806,251                                                                       |  | $2.76                                                                                                                                           | 
|                                                           |  |                                                                                                
|Total                                                      |  |                                                                                                 |  | 7,918,273                                                                       |  | $2.00                                                                                                                                           | 

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. The options have a five-year term
          with vesting ratably over a five-year period. Executive officers and directors
          are not eligible participants under this plan.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

16

---



# 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, |  
|------------------------------------------------- |  | -------------------- | -
|
|Consolidated Statements of Operations Data:       |  |                      |  
|Revenue                                           |  |                      | $
|Loss from continuing operations                   |  |                      | $
|Income / (loss) from discontinued operations      |  |                      | $
|Net loss after taxes                              |  |                      | $
|Net loss per common share, basic and diluted      |  |                      | $
|                                                  |  |                     
|Shares used in computing basic and diluted        |  |                     
|net loss per common share                         |  |                      |  
|                                                  |  |                     
|Consolidated Balance Sheets Data:                 |  |                     
|Cash, cash equivalents and short-term investments |  |                      | $
|Total assets                                      |  |                      | $
|Long-term obligations                             |  |                      | $
|Accumulated deficit                               |  |                      | $
|Total stockholders' equity                        |  |                      | $

| | (1) | Loss
from continued operations for the years ended July 31, 2008 and 2007           includes
approximately $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, 2004 and in
the year ended July 31, 2005 during the period prior to its           sale.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---



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.

OverviewWe began as a provider of
pharmaceutical water purification products for the pharmacy market. Our historical
revenues were primarily derived from the Water Treatment business prior to its sale in May
2005; however, our business is now focused on investing in broader markets with novel,
proprietary bioscience products based upon our flagship bioscience technology, silver
dihydrogen citrate (SDC). SDC is an electrolytically generated source of
stabilized ionic silver that can serve as the basis for a broad range of products in
diverse markets. 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 efficacy and low
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 that utilize 14
organic acids other than citric acid.

We are at an early stage in the
development and marketing of our bioscience technologies in highly competitive markets,
and we anticipate that market acceptance of our novel technology may be a long term
achievement. Even when our antimicrobial products have been approved by regulatory
authorities and are available for commercial sale, there is often an extended period of
time in which potential users formulate and test them before committing to significant
purchases. Each formulation of our products requires regulatory approval for each
respective jurisdiction in which it is sold, and in addition to competitive challenges, we
believe that the investment necessary for us to research, test and obtain regulatory
approvals for our antimicrobial products will continue to be significant. However, we
believe we are in a position to accelerate additional regulatory approvals and negotiate
distribution, development and marketing agreements for the inclusion of our SDC and
related technology into multiple global products.

We are seeking marketing and
development partners in markets that we believe have broad potential for our new,
proprietary bioscience products based initially upon our patented silver ion antimicrobial
technologies. We are developing technology-based bioscience products, including our
SDC-based antimicrobials, which we believe have the potential to provide best in class,
non-toxic solutions to numerous global health challenges and represent innovative advances
in diverse markets. We believe that our technologies are positioned to contribute
significantly to todays global trend toward industrial and consumer use of
green products, while providing competitive advantages in efficacy and safety.

Sources of RevenueOur 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.

18

---



Cost of Revenues and
Operating ExpensesCosts of Revenue.   Costs of
revenue includes materials consumed, manufacturing overheads, shipping costs, salaries,
benefits and related expenses of operations. Gross profit represents net revenue less the
costs of revenue. Gross profit percentage is highly dependent on contract agreements,
royalty receipts and overhead allocations. We do not believe that historical gross profit
margins are a reliable indicator of future gross profit margins.

Selling and Marketing.  Selling
and marketing expenses consist primarily of salaries, commissions and related expenses for
personnel engaged in 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 personnel performing services related to
sales and marketing.

General and Administrative.  General and administrative expenses include salaries and related expenses for
personnel engaged in finance, human resources, insurance, information technology,
administrative activities and legal and accounting fees. General and administrative
expenses also include share-based compensation allocable to personnel performing general
and administrative services.

Research and Development.  
Research and development costs include in-house costs, 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.

Critical Accounting
Policies 

Our discussion and analysis of our
financial condition and results of operations are based upon our financial statements,
which have been prepared in accordance with accounting principles generally accepted in
the U.S. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate these estimates, including those related to percentage-of-completion, bad debts,
inventories, investments, income taxes, commitments, contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

We consider the following accounting
estimates below to be both those most important to the portrayal of our results of
operations and financial condition and those that require the most subjective judgment.

Accounting for
Long-Lived Assets / Intangible AssetsWe 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. As an example, 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 recorded an impairment charge
of $109,286 within operating expense within the consolidated statements of operations for
Fiscal 2008.

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 CompensationWe 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.

19

---



Recent Accounting
PronouncementsIn 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. This pronouncement is effective for fiscal years beginning after November 15, 2007
(our fiscal year ending July 31, 2009). We are continuing to evaluate the adoption of SFAS
No. 157, however we do not currently expect the statement to have a material impact on our
consolidated financial statements or results of operations.

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. SFAS No. 159 is
effective as of the beginning of the first fiscal year that begins after November 15, 2007
(our fiscal year ending July 31, 2009). We are continuing to evaluate the impact of SFAS
No. 159, however as our financial instruments are made up primarily of U.S. Treasury
Bills, Money Market Funds and FDIC-insured bank accounts, we do not currently expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.

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
requires the acquirer in a business combination achieved in stages (sometimes referred to
as a step acquisition) to recognize the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). In addition, SFAS 141Rs
requirement to measure the non-controlling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. SFAS 141R amends SFAS No. 109,
Accounting for Income Taxes, to require the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the combination,
or directly in contributed capital, depending on the circumstances. It also amends SFAS
142, Goodwill and Other Intangible Assets, to provide guidance on the impairment
testing of acquired research and development intangible assets and assets that the
acquirer intends not to use. SFAS 141R applies prospectively to business combinations 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). We
do not currently expect the adoption of the provisions of SFAS 141R to have a material
effect on our financial condition, results of operations or cash flows.

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.

20

---



# RESULTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2008 (FISCAL 2008) VERSUS YEAR ENDED JULY 31, 2007(FISCAL
2007)

# Revenue

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 have entered into development and
distribution agreements during Fiscal 2008. 40% of sales for Fiscal 2008 were made to one
strategic partner that is pursuing regulatory approvals and developing markets for our
products. 84% of our sales for the year were made to the largest four such 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 Margin

Gross profit for Fiscal 2008 was
$1,023,900, compared with $115,300 in the prior fiscal year. The gross margin percentage
improved from 34% in the prior fiscal year to 69% for Fiscal 2008, due primarily to
product mix. During Fiscal 2008, a higher proportion of revenues were from bulk SDC
concentrate than in the prior fiscal year, when finished packaged products contributed a
higher proportion of sales. We sell concentrated and bulk products at higher gross margins
than our finished packaged products.

# Operating Costs and
Selling Expense

Operating costs increased by
$2,748,100, from $4,956,100 in Fiscal 2007, to $7,704,200 for the 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 the 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 Expense

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 at an exercise price of $5.70, valued at
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.
$1,123,000 of the expense for these option and stock grants was booked to general and
administrative expense during Fiscal 2008. During Fiscal 2008, 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, and we also issued 12,500 shares of our
common stock with a fair value of $44,000 and paid an additional $30,000, for a legal
settlement. 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. (See Note 9 to the
consolidated financial statements for a discussion of stock based compensation expense for
Fiscal 2008 and Fiscal 2007).

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 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
Expenses

Research and development costs
increased in Fiscal 2008 by $425,600, to $1,646,400, compared with the prior fiscal year.
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 the prior
fiscal year. 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.

# Other operating expenses

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
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 the prior fiscal year. 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.

21

---



# Income Taxes

Income tax expense for Fiscal 2008
and 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.

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 and financial position 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, 2007 or July
31, 2008.

At July 31, 2008, we had federal and
California tax net operating loss carry-forwards of approximately
$40,350,300 and $30,753,800, respectively.  The difference between federal and California tax loss
carry-forwards is primarily due to limitations on California loss carry-forwards. 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.

# RESULTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2007 (FISCAL 2007) VERSUS YEAR ENDED JULY 31, 2006(FISCAL
2006)

Effective May 25, 2005, we sold the
assets of the Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. During Fiscal 2006 we received $200,000 plus
interest on a promissory note, and reimbursement of $132,500 from IMS LLC for working
capital we had provided subsequent to the sale. During Fiscal 2006, we also determined the
actual income tax liability on the operation and sale of the Water Treatment Division for
Fiscal 2005 to be $129,990 less than had been estimated at the prior years balance
sheet date, and therefore recorded an adjustment of this amount for Fiscal 2006 on the
face of the Statement of Operations as an additional income tax provision within
continuing operations, with a corresponding and offsetting income tax benefit to
discontinued operations. There were no further financial transactions associated with the
sale of the assets of the Water Treatment Division during Fiscal 2006 or 2007.

# Revenues

For Fiscal 2007 revenues of $336,400
increased by $136,000, or 68%, compared with Fiscal 2006.

# Gross Margin

Gross profit for Fiscal 2007 was
$115,300, compared with $94,700 in the same period of the prior fiscal year. The gross
margin percentage declined from 47% in Fiscal 2006 to 34% in Fiscal 2007, due primarily to
product and customer mix. During Fiscal 2007, a higher proportion of revenues were from
finished packaged products and blending systems than in the prior fiscal year, when bulk
concentrate contributed a higher proportion of sales at higher margins.

# Operating Costs and
Selling Expense

Operating costs increased by 30%,
from $3,807,400 in Fiscal 2006, to $4,956,100 in Fiscal 2007. Within these aggregate
operating costs, selling expenses increased by $329,000, to $899,100 in Fiscal 2007
compared with the prior fiscal year. The increase in selling expenses was primarily due to
fees and stock option expense, and other costs associated with the introduction of SDC
products to new partners.

# General and
Administrative Expense

General and administrative expenses
increased by $792,900, to $2,836,200 in Fiscal 2007, compared with Fiscal 2006. 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. No expense was recorded in the
Statement of Operations for awards made to officers and directors in Fiscal 2006. In
addition, increases in third party expenses for legal services, insurance and accounting
in Fiscal 2007 were offset by stock option and other expenses in Fiscal 2006 for investor
relations and investment consulting services incurred in advance of our March 2006 private
placement. In addition to the stock option and common stock awards made to officers and
directors, we recognized stock option non-cash expense in general and administrative
expenses for awards to consultants for Fiscal 2007 of $127,000.

22

---



# Research and Development
Expense

Research and development costs,
including in-house costs, patent amortization, outside legal costs for maintaining
approved patents, and product registration expenditures increased for Fiscal 2007 by 2% to
$1,220,800, compared with the prior fiscal year. During Fiscal 2007, $25,300 of the costs
charged to R&D related to manufacturing and R&D facility overheads incurred during
periods in which we were designing and implementing new manufacturing and bottling
processes.

Our loss from operations before taxes
increased by $1,128,200, from a loss of $3,712,600 for Fiscal 2006 to a loss of $4,840,800
for Fiscal 2007.

# Other Income

Other income was $156,300 greater for
Fiscal 2007 than in the prior year, of which $64,700 was driven by increased interest
income from greater average cash balances. Additionally, income from legal settlements was
partially offset by capital asset write-downs associated with discontinued software
development projects and our facility reconstruction.

# Income Taxes

The total income tax provision for each of
Fiscal 2007 and 2006 was $2,400, the minimum franchise tax
paid to the State of California regardless of income or loss.  Additionally, for Fiscal 2006 we recorded
a $129,990 tax provision on the face of the Statement of Operations within continuing operations, with a
corresponding and offsetting income tax benefit to discontinued operations, related to the sale of the
Water Treatment Division. All other tax liabilities for the two years presented were offset by current
period losses or available federal and California net operating loss carry-forwards.  At July 31, 2007,
we had federal and California tax net operating loss carry-forwards of approximately $23,509,700 and
$13,915,600 respectively.  At July 31, 2006, we had federal and California tax net operating loss
carry-forwards of approximately $18,855,300 and $8,758,700 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 valuation
allowance.

Our net loss after taxes increased by
$972,000, from a net loss of $3,682,900 for Fiscal 2006 to a net loss of $4,654,900 for
Fiscal 2007.

# LIQUIDITY AND CAPITAL
RESOURCES

# Fiscal 2008 vs. Fiscal
2007

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, 2008, we had cash, cash equivalents and short-term
investments of $6,632,300, an increase of $5,188,600 from July 31, 2007, and no long-term
debt. The increase in cash, cash equivalents and short-term investments for Fiscal 2008
primarily relates to $7,741,000 raised in a private placement of common stock (as
described below) and $2,254,000 in cash received from the exercise of stock options and
warrants, partially offset by $4,404,600 of cash used in operations for the year.

In October 2007, we completed a
private placement in which we sold 1,677,596 unregistered securities units to accredited
investors, at $5.03 per unit (the 2007 Private Placement). Each unit consisted
of one share of our common stock and one quarter of a five-year warrant to purchase our
common stock at a price of $7.17 per share. A total of 419,394 of such five-year warrants
were issued to the investors and the fair value of the warrants, based on their fair value
relative to the common stock issued, was $1,143,676. Additionally, Taglich Brothers, Inc.
acted as placement agent in the 2007 Private Placement and received a cash fee of $675,065
and a five-year warrant to purchase 167,759 shares of our common stock at $8.60 per share.
The fair value of the 167,759 placement agent warrants, based on their fair value relative
to the common stock issued, was $441,970. Other cash fees paid to third parties, for legal
and other fees associated with the 2007 Private Placement, were $22,277. The gross
proceeds of the 2007 Private Placement were $8,438,308 and the net proceeds to us, after
fees and expenses, were $7,741,000.

We received $2,253,963 from the
exercise of stock options and warrants during Fiscal 2008.

Total current assets at July 31, 2008
were $7,889,600, an increase of $6,195,500 from July 31, 2007. In addition to the
$5,188,600 increase in cash, cash equivalents and short-term investments, accounts
receivable at July 31, 2008 increased by $827,200 from July 31, 2007, inventory increased
by $127,100 and prepaid expenses increased by $52,600. The increase in accounts receivable
relates primarily to sales made in July 2008 to two new customers who are developing
markets for us in Latin America. The increase in inventory is primarily due to the
purchase of raw materials for our concentrate manufacturing and our bottling processes.
The increase in prepaid expenses is primarily due to the payment in December 2007 of our
insurance policies for the succeeding year. In Fiscal 2007 we financed the insurance
policies and paid the premiums, and interest, each month.

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. The capitalized value
of our patents at July 31, 2008 declined by $160,000 from July 31, 2007, to $2,016,400. In
addition to an impairment charge of $109,300 related to our Triglycylboride technology,
there was an excess of patent amortization over capitalization during the year of $13,800.
Total property, plant and equipment at July 31, 2008 of $1,034,800 increased by $66,100
from July 31, 2007, as our investments exceeded asset depreciation. 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.

23

---



At July 31, 2008 we had current
liabilities of $981,500, an increase of $479,100 from July 31, 2007. In addition to an
increase of $222,300 in accounts payable and accrued liabilities during Fiscal 2008, we
recorded $250,000 of deferred revenue related to a non-refundable fee received subject to
an agreement whereby we have allowed a third party a limited time period to exclusively
evaluate our SDC technology.

# Fiscal 2007 versus
Fiscal 2006

At July 31, 2007, we had cash, cash equivalents
and short-term investments of $1,443,700, a decline of $3,276,700 from July 31, 2006.

During Fiscal 2007, cash used in
operating activities was $2,672,000, compared with $2,436,400 during Fiscal 2006. Included
in the net cash outflows for Fiscal 2006 was the receipt of $332,500 related to the May
2005 sale of our Water Treatment Division.

During Fiscal 2007, cash used in
investing activities was $1,787,900, compared with $381,900 used in investing activities
during Fiscal 2006. A net amount of $708,100 of the cash used in investing activities
during Fiscal 2007 was for the acquisition of short-term investments. We also invested
$204,200 in capitalized patents, spent $567,100 to redevelop the manufacturing and office
areas of our El Cajon facility, invested approximately $165,000 in additional
manufacturing assets that included an automated bottling and labeling line, and purchased
a company vehicle for $55,900. During Fiscal 2007 we also significantly expanded our SDC
manufacturing capability and installed SDC concentrate, blending and packaging equipment.

In Fiscal 2006, net cash provided by
financing activities was $7,132,800, which consisted of $6,766,600 from the sale of
4,992,208 shares of common stock in private placements and $366,200 from the exercise of
554,333 shares of common stock underlying options and warrants; whereas during fiscal 2007
cash flows from financing activities were $475,200, primarily from option exercises.

We expect to continue to invest in
our manufacturing processes, to improve efficiency and to ensure that we are able to meet
anticipated demand. Additionally, during the next twelve months we anticipate making
significant investments 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. However, we believe that our existing cash
resources are sufficient to meet our anticipated needs during the next twelve months.

OFF BALANCE SHEET ARRANGEMENTSWe do not have any off balance sheet arrangements.

# CONTRACTUAL OBLIGATIONS

|                                             | Payments due by period | 
|-------------------------------------------- | ---------------------- | 
|
|Long-Term Debt Obligations                   |                        | 
|                                             |                        | 
|Capital Lease Obligations                    |                        | 
|                                             |                        | 
|Operating Lease Obligations                  |                        | 
|                                             |                        | 
|Purchase Obligations                         |                        | 
|                                             |                        | 
|Other Long-Term Liabilities Reflected on the |                        | 
|Registrant's Balance Sheet under GAAP        |                        | 
|                                             |                        | 
|Total                                        |                        | 

24

---



# ITEM 7A.   QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk is
related to our investment portfolio, which consists largely of debt instruments and other
securities of high quality corporate issuers and the U.S. government and its agencies.
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), Prime-1 (Moodys) or F1 (Fitch) short-term corporate debt obligations;
U.S. Treasury Securities, or U.S. Government obligations issued by or backed by a federal
agency of the U.S. 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 U.S. We do not and have never invested in auction rate securities.
While our available for sale securities are subject to interest rate risk and would fall
in value if market interest rates increased, we estimate that the fair value of our
investment portfolio would not decline by a material amount in the event of an increase in
market interest rates. A hypothetical 1% adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our financial
instruments that are exposed to changes in 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 on our investments.

We have operated mainly in the U.S.,
and the majority of our sales since inception have been made in U.S. dollars. Further, all
of our sales to international markets have been to independent parties in transactions
conducted in U.S. dollars. Accordingly, we have not had any material exposure to foreign
currency rate fluctuations.

25

---



# ITEM 8.   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, 2008 and 2007, and the
related consolidated statements of operations, stockholders equity and cash flows
for each of the years then ended. 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, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the years then ended, 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, 2008, 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 14, 2008 expressed an unqualified opinion thereon.

/s/ Mayer Hoffman McCann P.C.

San Diego, CaliforniaOctober
14, 2008

26

---



The Board of DirectorsPURE
Bioscience

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

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

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

/s/ MILLER AND McCOLLOMMILLER AND McCOLLOMCertified
Public Accountants4350 Wadsworth Boulevard, Suite 300Wheat Ridge, Colorado 80033

October 25, 2006

27

---



# PURE BioscienceCONSOLIDATED BALANCE SHEETS

|                                                            | July 31, | 
|----------------------------------------------------------- | -------- | 
|
|ASSETS                                                      |          | 
|Current Assets                                              |          | 
|Cash and cash equivalents                                   |          | 
|Short-term investments                                      |          | 
|Accounts receivable, net of allowance for doubtful accounts |          | 
|of $0 at July 31, 2007 and $0 at July 31, 2008              |          | 
|Inventories, net                                            |          | 
|Prepaid expenses                                            |          | 
|Total current assets                                        |          | 
|                                                            |          | 
|Total property, plant and equipment, net                    |          | 
|                                                            |          | 
|Other Assets                                                |          | 
|Prepaid consulting                                          |          | 
|Deposits                                                    |          | 
|Patents                                                     |          | 
|                                                            |          | 
|Total assets                                                |          | 
|                                                            |          | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                        |          | 
|Current Liabilities                                         |          | 
|Accounts payable                                            |          | 
|Accrued liabilities                                         |          | 
|Deferred revenue                                            |          | 
|Taxes payable                                               |          | 
|Total current liabilities                                   |          | 
|                                                            |          | 
|Deferred rent                                               |          | 
|                                                            |          | 
|Total liabilities                                           |          | 
|                                                            |          | 
|Stockholders' Equity                                        |          | 
|Preferred Stock, no par value:                              |          | 
|5,000,000 shares authorized, no shares issued               |          | 
|Class A common stock, no par value:                         |          | 
|50,000,000 shares authorized                                |          | 
|24,961,805 issued and outstanding at July 31, 2007, and     |          | 
|29,573,936 issued and outstanding at July 31, 2008          |          | 
|Additional Paid-In Capital                                  |          | 
|Warrants:                                                   |          | 
|391,698 issued and outstanding at July 31,2007, and         |          | 
|880,351 issued and outstanding at July 31, 2008             |          | 
|Accumulated other comprehensive income                      |          | 
|Accumulated deficit                                         |          | 
|                                                            |          | 
|Total stockholders' equity                                  |          | 
|                                                            |          | 
|Total liabilities and stockholders' equity                  |          | 

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

28

---



# PURE BioscienceCONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      | For the Years Ended July 31, | 
|----------------------------------------------------- | ---------------------------- | 
|
|Net revenues                                          |                              | 
|Cost of sales                                         |                              | 
|                                                      |                              | 
|Gross profit                                          |                              | 
|                                                      |                              | 
|Selling expenses                                      |                              | 
|General and administrative expenses                   |                              | 
|Research and development                              |                              | 
|Impairment of capitalized assets                      |                              | 
|                                                      |                              | 
|Total operating expenses                              |                              | 
|                                                      |                              | 
|Loss from operations                                  |                              | 
|                                                      |                              | 
|Other income and (expense):                           |                              | 
|Interest income                                       |                              | 
|Interest expense                                      |                              | 
|Other                                                 |                              | 
|                                                      |                              | 
|Total other income (expense)                          |                              | 
|                                                      |                              | 
|Net loss before income taxes                          |                              | 
|Income tax provision                                  |                              | 
|                                                      |                              | 
|Loss from continuing operations                       |                              | 
|                                                      |                              | 
|Discontinued operations:                              |                              | 
|Income taxes on discontinued operations               |                              | 
|                                                      |                              | 
|Net loss                                              |                              | 
|                                                      |                              | 
|Net loss per common share, basic and diluted          |                              | 
|Continuing operations                                 |                              | 
|Discontinued operations                               |                              | 
|Net Loss                                              |                              | 
|                                                      |                              | 
|Weighted average common shares used in                |                              | 
|computing basic and diluted net loss per common share |                              | 

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

29

---



# PURE BioscienceCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                   | For the Years Ended July 31, | 
|------------------------------------------------------------------ | ---------------------------- | 
|
|Cash flows from operating activities:                              |                              | 
|                                                                   |                              | 
|Net loss                                                           |                              | 
|                                                                   |                              | 
|Adjustments to reconcile net loss to net cash                      |                              | 
|used in operating activities:                                      |                              | 
|Amortization and depreciation                                      |                              | 
|Impairment of capitalized assets                                   |                              | 
|Stock-based compensation                                           |                              | 
|Changes in assets and liabilities:                                 |                              | 
|Accounts receivable                                                |                              | 
|Other receivables and interest receivable                          |                              | 
|Notes and other amounts receivable (Water Treatment Division sale) |                              | 
|Prepaid expense                                                    |                              | 
|Inventories                                                        |                              | 
|Deferred rent                                                      |                              | 
|Deferred revenue                                                   |                              | 
|Accounts payable and accrued liabilities                           |                              | 
|Increase (decrease) in income tax payable                          |                              | 
|                                                                   |                              | 
|Net cash (used) in operating activities                            |                              | 
|                                                                   |                              | 
|Cash flows from investing activities                               |                              | 
|                                                                   |                              | 
|Investment in patents                                              |                              | 
|Purchase of property, plant and equipment                          |                              | 
|Purchases of short-term investments                                |                              | 
|Sales of short-term investments                                    |                              | 
|                                                                   |                              | 
|Net cash (used) in investing activities                            |                              | 
|                                                                   |                              | 
|Cash flows from financing activities                               |                              | 
|                                                                   |                              | 
|Proceeds from short-term loans                                     |                              | 
|Payment of short-term loans                                        |                              | 
|Net proceeds from the sale of common stock                         |                              | 
|Proceeds from exercise of stock options and warrants               |                              | 
|Proceeds from section 16(b) short-swing profits                    |                              | 
|                                                                   |                              | 
|Net cash provided by (used in) financing activities                |                              | 
|                                                                   |                              | 
|Net increase (decrease) in cash and cash equivalents               |                              | 
|                                                                   |                              | 
|Cash and cash equivalents at beginning of period                   |                              | 
|                                                                   |                              | 
|Cash and cash equivalents at end of period                         |                              | 
|                                                                   |                              | 
|Supplemental disclosures of cash flow information                  |                              | 
|Cash paid for taxes                                                |                              | 
|Cash paid for interest                                             |                              | 

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

30

---



# PURE Bioscience
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                        | Common Stock |  | Additional
Paid-In |            | Warrants |   | Comprehensive |  | Accumulated |           | Total      
Stockholders' | 
|--------------------------------------- | ------------ |  | ------------------ | ---------- | -------- | - | ------------- |  | ----------- | --------- | ------------------------- | 
|
|Balance, July 31, 2005                  |              |  |                    | 17,713,306 |          | $ | 18,577,058    |  | $           | 739,943   |                           | 
|                                        |              | 
|Net loss                                |              |  |                    |           |          |   |              |  |             |          |                           | 
|Private placement of common stock, net  |              |  |                    | 4,992,208  |          |   | 6,530,755     |  |             |          |                           | 
|Common stock issued for services        |              |  |                    | 75,000     |          |   | 139,130       |  |             |          |                           | 
|Stock options issued for services       |              |  |                    |           |          |   |              |  |             | 1,003,627 |                           | 
|Stock options exercised                 |              |  |                    | 1,002,488  |          |   | 366,210       |  |             |          |                           | 
|Expired / terminated warrants           |              |  |                    |           |          |   | 69,013        |  |             |          |                           | 
|Exercised Warrants                      |              |  |                    | 200,000    |          |   | 119,487       |  |             |          |                           | 
|Balance, July 31, 2006                  |              |  |                    | 23,983,002 |          | $ | 25,801,653    |  | $           | 1,743,570 |                           | 
|                                        |              | 
|Net loss                                |              |  |                    |           |          |   |              |  |             |          |                           | 
|Common stock issued for services        |              |  |                    | 30,000     |          |   | 65,100        |  |             |          |                           | 
|Stock options issued for services       |              |  |                    |           |          |   |              |  |             | 91,290    |                           | 
|Share-based compensation - options      |              |  |                    |           |          |   |              |  |             | 651,969   |                           | 
|Share-based compensation - stock grants |              |  |                    | 60,000     |          |   | 177,600       |  |             |          |                           | 
|Stock options exercised                 |              |  |                    | 978,803    |          |   | 475,190       |  |             |          |                           | 
|Canceled shares                         |              |  |                    | (90,000    | )        |   |              |  |             |          |                           | 
|Balance, July 31, 2007                  |              |  |                    | 24,961,805 |          | $ | 26,519,543    |  | $           | 2,486,829 |                           | 
|                                        |              | 
|Comprehensive loss:                     |              | 
|Net loss                                |              |  |                    |           |          |   |              |  |             |          |                           | 
|Change in unrealized gains              |              |  |                    |           |          |   |              |  |             |          |                           | 
|Comprehensive loss                      |              |  |                    |            |          |   |               |  |             |           |                           | 
|                                        |              | 
|Private placement of common stock, net  |              |  |                    | 1,677,596  |          |   | 6,155,321     |  |             |          |                           | 
|Common stock issued for services        |              |  |                    | 12,500     |          |   | 43,750        |  |             |          |                           | 
|Stock options issued for services       |              |  |                    |           |          |   |              |  |             | 192,550   |                           | 
|Share-based compensation - options      |              |  |                    |           |          |   |              |  |             | 1,406,223 |                           | 
|Share-based compensation - stock grants |              |  |                    | 90,000     |          |   | 463,500       |  |             |          |                           | 
|Section 16(b) short-swing profits       |              |  |                    |           |          |   |              |  |             | 4,693     |                           | 
|Stock options exercised                 |              |  |                    | 2,761,053  |          |   | 2,228,403     |  |             |          |                           | 
|Exercised warrants                      |              |  |                    | 70,982     |          |   | 25,560        |  |             | 65,313    |                           | 
|Canceled shares                         |              |  |                    |           |          |   |              |  |             |          |                           | 
|Balance, July 31, 2008                  |              |  |                    | 29,573,936 |          | $ | 35,436,077    |  | $           | 4,155,608 |                           | 

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

31

---



# 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.

| | Basis
of Presentation and Principles of Consolidation
| | -----------------------------------------------------

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

| | 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.

| | Reclassifications
| | -----------------

Certain comparative figures for prior
periods have been reclassified. Specifically, in our report on Form 10-K for the year
ended July 31, 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 the period ended July 31,
2007. On the face of the Consolidated Statements of Cash Flows for the year ended July 31,
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.

| | Revenue
Recognition
| | -------------------

During the periods presented herein
our revenue was derived from the sale of SDC concentrate, the sale of finished packaged
products containing SDC, and the sale of SDC blending systems. We recognize revenue from
sales of these products under the provisions of Staff Accounting Bulletin
(SAB) 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
amounts recorded as deferred revenue in the consolidated balance sheets at July 31, 2008.

| | Accounts
Receivable
| | -------------------

We generally sell on terms of cash or
net 30 days. Invoices not paid within stated terms are considered delinquent. We analyze
our accounts receivable periodically and recognize an allowance for doubtful accounts
based on estimated collectability, however at July 31, 2008 and 2007 we deemed all
customer accounts to be collectable and therefore recorded no such allowance.

| | Intangible
Assets / Long-Lived Assets
| | -------------------------------------

Our intangible assets primarily
consist of the worldwide patent portfolio of our silver ion technologies, and to a lesser
extent our Triglycylboride technology. Outside legal costs and filing fees related to
obtaining patents are capitalized as incurred. The total amounts capitalized for pending
patents was $125,100 and $204,200 in the fiscal years ended July 31, 2008 (Fiscal
2008), and 2007 (Fiscal 2007), respectively. Patents are stated net of
accumulated amortization of $1,080,265 and $988,742 at July 31, 2008 and July 31, 2007
respectively.

32

---



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, 2008
the weighted average remaining amortization period for all patents was approximately 11.7
years. Amortization expense for Fiscal 2008, Fiscal 2007 and the year ended July 31, 2006
(Fiscal 2006), was $175,800, $164,500 and $157,400, respectively, and the
estimated amortization expense over each of the next five years is as follows:

|Year Ended July 31 |  | Estimated
Amortization |  
|------------------ |  | ---------------------- | -
|
|2009               |  |                        | $
|2010               |  |                        | $
|2011               |  |                        | $
|2012               |  |                        | $
|2013               |  |                        | $

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
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 2008, Fiscal 2007 and Fiscal 2006, we recorded impairment charges of $109,286, zero
and zero, respectively. See Note 10 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 2008, Fiscal 2007 or Fiscal 2006, 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 new
awards and to awards that were outstanding on the adoption date and were or are
subsequently modified or cancelled. As of July 31, 2006, all outstanding share-based
awards were fully vested, with the exception of consultant options recorded in our balance
sheets as prepaid consulting (as further discussed in Note 11).

| | 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 2008 we recorded $192,550 in selling expense, and $13,011 in
research and development expense; 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; and in Fiscal 2006 we recorded $188,863 in selling expense, $307,888
in general and administrative expense, and $107,962 in research and development expense.
Included in these amounts is the amortization of consultant options recorded in our
consolidated balance sheets as prepaid consulting and further discussed in
Note 11.

| | Depreciation
Method
| | -------------------

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

|                        | 
|----------------------- | 
|
|Computers and equipment | 
|Computer Software       | 
|Furniture and fixtures  | 
|Leasehold Improvements  | 

In May 2007, we completed a
redevelopment of our leasehold operating facility in El Cajon, California. All costs
associated with the facility redevelopment have been classified as leasehold improvements
and are being depreciated over the remaining life of the lease.  See Note 6 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.

33

---



| | 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 vailable-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 consolidated
statements of shareholders equity. All of our short-term investments as of July 31,
2007 or July 31, 2008 are carried at fair value, based upon market prices quoted on the
last day of the fiscal period, and are 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 2008,
2007 and 2006 were $124,181, zero and zero, respectively. All interest and dividends
received from short-term investments are included in interest income.

As of July 31, 2008 and 2007, 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), Prime-1
(Moody's) or F1 (Fitch) short-term corporate debt obligations; U.S. Treasury Securities,
or U.S. Government obligations issued by or backed by a federal agency of the U.S.
Government.

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
loss
| | ------------------

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 2008, 2007 and 2006, our comprehensive loss was $6,521,731,
$4,654,877 and $3,682,926, respectively, and included unrealized holding gains on
available-for-sale securities at the end of the periods of $18,588, zero and zero,
respectively. During Fiscal 2007 and 2006, 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 2008, Fiscal 2007 and Fiscal
2006, we did not include common stock equivalent shares of 8,322,798, 10,685,448 and
12,025,698, 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 2008, Fiscal 2007 and Fiscal 2006 are based on the weighted average number of
shares of our common stock outstanding during the periods.

34

---



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

|                                                              | For the Years Ended | 
|------------------------------------------------------------- | ------------------- | 
|
|Shares outstanding                                            |                     | 
|                                                              |                     | 
|Weighted average number of common shares actually outstanding |                     | 
|Stock options                                                 |                     | 
|Warrants                                                      |                     | 
|Total weighted average shares                                 |                     | 
|                                                              |                     | 
|Net loss                                                      |                     | 
|                                                              |                     | 
|Net loss per common share, basic and diluted                  |                     | 
|Continuing operations                                         |                     | 
|                                                              |                     | 
|Discontinued operations                                       |                     | 
|Net loss                                                      |                     | 

| | Income
Taxes
| | ------------

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

| | 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. This pronouncement is effective for fiscal years beginning after November 15, 2007
(our fiscal year ending July 31, 2009). We are continuing to evaluate the impact of SFAS
No. 159, however we do not currently expect the adoption of SFAS No. 157 to have a
material impact on our consolidated financial statements or results of operations.

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. SFAS No. 159 is
effective as of the beginning of the first fiscal year that begins after November 15, 2007
(our fiscal year ending July 31, 2009). We are continuing to evaluate the impact of SFAS
No. 159, however as our financial instruments are made up primarily of U.S. Treasury
Bills, Money Market Funds and FDIC-insured bank accounts, we do not currently expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.

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
requires the acquirer in a business combination achieved in stages (sometimes referred to
as a step acquisition) to recognize the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). In addition, SFAS 141Rs
requirement to measure the non-controlling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. SFAS 141R amends SFAS No. 109,
Accounting for Income Taxes, to require the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the combination,
or directly in contributed capital, depending on the circumstances. It also amends SFAS
142, Goodwill and Other Intangible Assets, to provide guidance on the impairment
testing of acquired research and development intangible assets and assets that the
acquirer intends not to use. SFAS 141R applies prospectively to business combinations 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). We
do not currently expect the adoption of the provisions of SFAS 141R to have a material
effect on our financial condition, results of operations or cash flows.

35

---



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.

# Note 2.   Deferred Revenue

Any amounts received prior to
satisfying our revenue recognition criteria are recorded as deferred revenue in the
consolidated balance sheets. At July 31, 2008, our deferred revenue includes a
non-refundable fee of $250,000 received subject to an agreement whereby we have allowed a
third party a limited time period to exclusively evaluate our SDC technology for use
within specified indications and for certain products. Based on the terms of the
evaluation agreement, we will recognize the $250,000 as revenue in future periods, either
on the expiration of the agreed evaluation period or as defined in any commercialization
agreement we may reach with the third party prior to the expiration of the evaluation
period.

# Note 3.   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 4.   Inventory

Inventories are stated at the lower
of cost or net realizable value using the weighted average cost method. Inventories at
July 31, 2008 and 2007 consisted of:

|                 | 2008 |  | 2007 |        
|---------------- | ---- |  | ---- | -------
|
|Raw Materials    |      |  | $    | 252,491
|Work in Progress |      |  |      |       
|Finished Goods   |      |  |      | 117,552
|                 |      |  | $    | 370,043

# Note 5.   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, 2008 |  | July 31, 2007 |          
|------------------------------ | ------------- |  | ------------- | ---------
|
|Computers and equipment        |               |  | $             | 782,480  
|Furniture and fixtures         |               |  |               | 30,566   
|Leasehold improvements         |               |  |               | 604,436  
|                               |               |  |               | 1,417,482
|Less: accumulated depreciation |               |  |               | 382,647  
|Total                          |               |  | $             | 1,034,835

In May 2007, we completed a
redevelopment of our leasehold facility in El Cajon, California. Construction costs
totaling $567,100 were capitalized as leasehold improvements. During Fiscal 2008 and
Fiscal 2007 we recorded $128,187 and $31,505, respectively, of depreciation expense
related to the facility redevelopment. Total depreciation expense for Fiscal 2008, Fiscal
2007 and Fiscal 2006 was $229,930, $92,600 and $69,500, respectively.

36

---



During Fiscal 2007 we also wrote down
the value of our capitalized property, plant and equipment by $167,600, based on our
evaluation of impairment and the disposal of assets that were replaced during the facility
redevelopment, and recorded this amount as Other within Other income and
(expense) in the consolidated statements of operations for Fiscal 2007.

# Note 6.   Commitments and
Contingencies, and Legal Proceedings

In January 2007, 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 2008, Fiscal 2007 and Fiscal
2006 was $185,300, $173,300 and $137,000, 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 |  | Amount |  
|------------------ |  | ------ | -
|
|2009               |  |        | $
|2010               |  |        | $
|2011               |  |        | $
|2012               |  |        | $
|                   |  |        | $

We have an employment contract with
our Chief Executive Officer and President which provides, among other things, that Mr.
Krall is to be paid an amount equal to 3% of our net income before taxes during any fiscal
year in which we are profitable as determined in accordance with GAAP.

During Fiscal 2008 we issued 12,500
shares of our common stock with a fair value of $43,750 and paid an additional $30,000 for
a legal settlement. We also paid $105,000 for a legal settlement resulting from a claim
made during the year for services provided to us in a prior year.

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.

In November 2001, we acquired the
patent for SDC, a silver ion based technology which is the basis for our silver ion
products, from NVID International, Inc. In October 2003, we filed an arbitration action
against NVID International and other parties and in November 2004 we won a $14.2 million
award against NVID International through the American Arbitration Association
International Centre for Dispute Resolution. We believe it is unlikely that we will ever
be able to collect any part of this award, and we have therefore not recorded any amount
as an asset on the consolidated balance sheets as at July 31, 2007 or 2008.

In April 2008, we obtained a judgment
of $6.53 million from the 18th Judicial Circuit Court in the State of Illinois against an
internet message board poster. The judgment was awarded for defamation and tortious
interference. We are currently evaluating the extent to which we will be able to collect
on the award, however we have not recorded any part of the award as an asset on our
consolidated balance sheets at July 31, 2008 as the collectability of the award is
currently unknown.

# Note 7.   Private Placement

On October 19, 2007, we sold
1,677,596 unregistered securities units to accredited investors, at $5.03 per unit (the
2007 Private Placement). Each unit consisted of one share of our common stock
and one quarter of a five-year warrant to purchase our common stock at a price of $7.17
per share. A total of 419,394 of such five-year warrants were issued to the investors and
the fair value of the warrants, based on their fair value relative to the common stock
issued, was $1,143,676 (based on the Black-Scholes Option Pricing Model assuming no
dividend yield, volatility of 95.38% and a risk-free interest rate of 4.75%).
Additionally, Taglich Brothers, Inc. acted as placement agent in the 2007 Private
Placement and received a cash fee of $675,065 and a five-year warrant to purchase 167,759
shares of our common stock at a price of $8.60 per share. The fair value of the 167,759
placement agent warrants, based on their fair value relative to the common stock issued,
was $441,970 (based on the Black-Scholes Option Pricing Model assuming no dividend yield,
volatility of 95.38% and a risk-free interest rate of 4.75%). Other cash fees paid to
third parties, for legal and other fees associated with the 2007 Private Placement, were
$22,277. The gross proceeds of the 2007 Private Placement were $8,438,308 and the net
proceeds to us, after fees and expenses, were $7,740,967. Based on the relative fair value
of the common stock and warrants, during Fiscal 2008 we recorded $6,155,321 to common
stock and $1,585,646 to warrants; a total of $7,740,967 of net proceeds recorded within
shareholders equity on the consolidated balance sheets.

# Note 8.   Other Equity and
Common Stock Transactions

We paid no cash dividends during
Fiscal 2008, Fiscal 2007 or Fiscal 2006, and we have never paid cash dividends.

In August 2007, we issued 12,500 unregistered
shares of our common stock to a third party as part of a legal settlement, with an
estimated fair value of $43,750.

During the three months ended October
31, 2007, we received an aggregate of $318,750 from the exercise of non-employee options
to purchase 390,000 shares of our common stock at an average exercise price of $0.82,
received $45,000 from the exercise of options to purchase 75,000 shares of our common
stock issued under employee stock option plans, received $25,560 from the exercise of
warrants to purchase 10,000 shares of our common stock at an average exercise price of
$2.56, and recorded $24,822 of employee stock option expense. Additionally, during the
three months ended October 31, 2007, there were net exercises of 88,500 warrants that
resulted in the issuance of 60,982 shares of our common stock.

37

---



In November 2007, we issued options
to purchase 25,000 shares of our common stock in exchange for business development
services, at an exercise price of $7.50, valued at $51,736 (based on the Black-Scholes
Option Pricing Model assuming no dividend yield, volatility of 66.12% and a risk-free
interest rate of 4.50%).

In December 2007, we issued options
to purchase 50,000 shares of our common stock in exchange for business development
services, at an exercise price of $5.29, valued at $140,814 (based on the Black-Scholes
Option Pricing Model assuming no dividend yield, volatility of 102.22% and a risk-free
interest rate of 4.25%).

In January 2008, we appointed Paul V.
Maier to our Board and, on appointment to the Board, Mr. Maier was granted an option to
purchase 100,000 shares of our common stock, at an exercise price of $5.73, valued at
$350,997 (based on the Black-Scholes Option Pricing Model assuming no dividend yield,
volatility of 107.34% and a risk-free interest rate of 3.50%). The full fair value of the
award was recorded as general and administrative expense within the consolidated statement
of operations for the three months ended January 31, 2008 as the award vested immediately
and was made as compensation for Mr. Maier joining the Board. The stock options granted to
Mr. Maier were issued under the 2007 Equity Incentive Plan.

In January 2008, there were net
exercises of options which were due to expire and which were issued under the 2002
Non-Qualified Stock Option Plan. Options to purchase 250,000 shares were exercised,
resulting in the issuance of 228,950 shares of our common stock. As these shares were net
exercised as permitted under the respective option agreements, we did not receive any
cash. Additionally, during the three months ended January 31, 2008, we received $111,500
from the exercise of options to purchase 150,000 shares of our common stock by two of our
directors, at an average exercise price of $0.74, and received an aggregate of $279,250
from the exercise of non-employee options to purchase 295,000 shares of our common stock
at an average exercise price of $0.95. We also received $12,000 from the exercise of
options to purchase 6,250 shares of our common stock issued under employee stock option
plans, and recorded $24,836 of employee stock option expense.

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 determined the fair value of the extension of these
options by using the Black-Scholes Option Pricing Model to determine the difference
between the estimated fair value of the options immediately before and immediately after
the extension. We recorded the fair value of the extension, which we determined to be
$23,040, as general and administrative expense within the consolidated statement of
operations for the three month period ended April 30, 2008.

In April 2008, we granted options to
purchase 275,000 shares of our common stock, which vested on their grant date, to certain
of our directors and officers at an exercise price of $5.70, valued at $905,518 (based on
the Black-Scholes Option Pricing Model assuming no dividend yield, volatility of 117.58%
and a risk-free interest rate of 2.25%). Additionally, in the same month we granted 30,000
shares of our common stock to each of three of our directors. The aggregate of 90,000
shares were valued at $463,500. The stock options and stock granted to directors and
officers in April 2008 were issued under the 2007 Equity Incentive Plan.

In addition, during the three month
period ended April 30, 2008, we received $513,775 from the exercise of options to purchase
476,070 shares of our common stock by certain of our directors and officers, at an average
exercise price of $1.08, and received an aggregate of $499,875 from the exercise of
non-employee options to purchase 827,500 shares of our common stock at an average exercise
price of $0.62. We also received $20,000 from the exercise of options to purchase 32,500
shares of our common stock issued under employee stock option plans, and recorded $34,010
of employee stock option expense.

During the three months ended July
31, 2008, we received $15,785 from the exercise of options to purchase 29,783 shares of
our common stock by certain directors and officers, at an average price of $0.53, and
received an aggregate of $412,500 for the exercise of non-employee options to purchase
250,000 shares of our common stock at an average exercise price of $1.65, and recorded
$43,001 of employee stock option expense.

At July 31, 2008 we had outstanding
warrants to purchase 880,351 shares of common stock with exercise prices ranging from
$0.50 to $8.60. These warrants expire at various times between March 2009 and October
2012.

# Note 9.   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.

38

---



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 for the Company.

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

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. At
July 31, 2006, all outstanding share-based awards were fully vested, with the exception of
the consultant options recorded in our balance sheets as prepaid consulting
(as further discussed in Note 11). 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 2008 and Fiscal 2007:

|                               | For the years ended July 31 | 
|------------------------------ | --------------------------- | 
|
|Expected price volatility      |                             | 
|Risk-free interest rate        |                             | 
|Expected rate of forfeiture    |                             | 
|Expected dividend yield        |                             | 
|Weighted average expected term |                             | 

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.

39

---



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
the Fiscal 2008 and Fiscal 2007 resulting from share-based compensation awarded to our
employees, directors and third party service providers, excluding the amortization of
prepaid consulting as detailed in Note 11:

|                                                                 | Fiscal 2008 |  | Fiscal 2007 |          
|---------------------------------------------------------------- | ----------- |  | ----------- | ---------
|
|Share-based compensation for employees and directors:            |             |  |             |          
|Selling expense                                                  |             |  | $           | 98,784   
|General and administrative expenses                              |             |  |             | 1,622,764
|Research and development                                         |             |  |             | 148,176  
|Total share-based compensation for employees and directors       |             |  |             | 1,869,724
|                                                                 |             | 
|Share-based compensation for third party service providers:      |             | 
|Selling expense                                                  |             |  | $           | 51,736   
|General and administrative expenses                              |             |  |             | 43,750   
|Research and development                                         |             |  |             |         
|Total share-based compensation for third party service providers |             |  |             | 95,486   
|                                                                 |             | 
|Total share-based compensation expense                           |             |  | $           | 1,965,210

For comparative purposes to our
Consolidated Statements of Operations for Fiscal 2008 and Fiscal 2007, the following table
illustrates the pro forma effect on net loss and net loss per common share of applying the
fair value recognition provisions of SFAS 123 to share-based compensation during Fiscal
2006.

|                                                                        | Fiscal 2006 | 
|----------------------------------------------------------------------- | ----------- | 
|
|Net loss, as reported                                                   |             | 
|Employee stock-based compensation expense under fair-value method       |             | 
|Employee stock-based compensation expense included in reported net loss |             | 
|Pro forma net loss                                                      |             | 
|Net loss per share:                                                     |             | 
|As reported                                                             |             | 
|Pro forma                                                               |             | 

40

---



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, 2005    |                  |  |                                 | 6,485,960  |                                    | $0.64
|Granted                     |                  |  |                                 | 6,558,333  |                                    | $1.56
|Exercised                   |                  |  |                                 | (1,002,488 | )                                  | $0.64
|Forfeited / Cancelled       |                  |  |                                 | (407,805   | )                                  | $1.57
|Balance at July 31, 2006    |                  |  |                                 | 11,634,000 |                                    | $1.12
|Granted                     |                  |  |                                 | 575,000    |                                    | $2.86
|Exercised                   |                  |  |                                 | (978,803   | )                                  | $0.67
|Forfeited / Cancelled       |                  |  |                                 | (936,447   | )                                  | $1.86
|Balance at January 31, 2007 |                  |  |                                 | 10,293,750 |                                    | $1.18
|Granted                     |                  |  |                                 | 593,300    |                                    | $5.48
|Exercised                   |                  |  |                                 | (2,761,053 | )                                  | $0.85
|Forfeited / Cancelled       |                  |  |                                 | (683,550   | )                                  | $1.41
|Balance at July 31, 2008    |                  |  |                                 | 7,442,447  |                                    | $1.62

|               | Outstanding |  | Exercisable |          
|-------------- | ----------- |  | ----------- | ---------
|
|$0.50 to $0.75 |             |  |             | 2,557,981
|$0.80 to $1.20 |             |  |             | 829,166  
|$1.50 to $7.50 |             |  |             | 4,055,300
|               |             |  |             | 7,442,447

Cash received from options and
warrants exercised for Fiscal 2008, Fiscal 2007 and Fiscal 2006 was $2,253,964, $475,190
and $366,210, respectively. 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. During Fiscal 2007 there were net exercises of options to purchase 450,000
shares which resulted in the issuance of 338,533 shares of common stock. The intrinsic
value of all options exercised during Fiscal 2008, Fiscal 2007 and Fiscal 2006 was
$12,874,047, $2,012,600 and $1,798,200, respectively. The weighted-average grant date fair
value of equity options granted during Fiscal 2008, Fiscal 2007 and Fiscal 2006 was $2.99,
$1.45 and $1.36 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).

During the first quarter of Fiscal
2007, Mr. Michael Sitton resigned from our Board of Directors. At that time, the Board
agreed to modify a stock option agreement for 100,000 shares of common stock. We expensed
$19,237 to general and administrative expense during Fiscal 2007 based on this
modification, in accordance with SFAS 123(R).

As of July 31, 2008, there was
$301,905 of unrecognized non-cash compensation cost related to unvested options, which
will be recognized over a weighted average period of 1.5 years.

# Note 10.   Patent
Impairment and Related Expenses

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 11.   Prepaid
Consulting

In January 2006, we entered into a
two-year consulting agreement with Mr. Michael Sitton for domestic and international
business development, the compensation being a fee of $12,500 per month and an option to
purchase 2,000,000 shares of our unregistered common stock, vesting over three years. We
also entered into a two-year consulting agreement with Secretary Tommy Thompson, one of
our directors, for domestic and international business development, the compensation being
a fee of $12,500 per month and an option to purchase 300,000 shares of our unregistered
common stock, vesting over three years. Mr. Sitton subsequently transferred the rights to
700,000 options to Secretary Thompson. Mr. Sitton was therefore the beneficial owner of
1,300,000 and Secretary Thompson the beneficial owner of 1,000,000 of these options.

41

---



At the time of the grant in January
2006, we recorded the value of the aggregate of 2,300,000 unvested options as a prepaid
asset to be amortized over the life of the consulting agreements. The options were valued
at an aggregate of $598,372 based on their weighted average exercise prices of between
$1.00 to $2.75, and the Black-Scholes Option Pricing Model assuming no dividend yield,
volatility of 82.23% and a risk-free interest rate of 4.25%, to be amortized over the two
year life of the consulting agreements at $24,932 per month.

During Fiscal 2008 we amortized the
remaining balance of $13,011 recorded as prepaid consulting on the balance sheets at July
31, 2007, to selling expense. In August 2007, Mr. Sittons consulting agreement was
terminated, and Mr. Sittons 1,300,000 options are no longer exercisable.

In December 2007, we entered into a
separate six month consulting agreement with an independent third party for domestic
business development, the compensation being a fee of $13,683 per month and a two-year
fully vested option to purchase 50,000 shares of our common stock. At the time of the
grant in December 2007, we recorded the fair value of the 50,000 stock options as a
prepaid asset to be amortized over the six month term of the consulting agreement. The
options, which have an exercise price of $5.29, were valued at $140,814 using the
Black-Scholes Option Pricing Model and assuming no dividend yield, volatility of 102.22%
and a risk-free interest rate of 4.25%. During Fiscal 2008, the full fair value of
$140,814 was amortized to selling expense.

# Note 12.   Taxes

We file federal and California
consolidated tax returns with our subsidiaries. Our income tax provision for each of
Fiscal 2008 and 2007 was $2,400, which is the minimum franchise tax we pay to the State of
California regardless of income or loss.

At July 31, 2008, we had federal and
California tax net operating loss carry-forwards of approximately $40,350,300 and
$30,753,800, respectively. Included in these net operating loss carry-forward amounts is
$11,994,000 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, 2007, we had federal and California tax net operating loss
carry-forwards of approximately $23,509,700 and $13,915,600 respectively. The difference
between federal and California tax loss carry-forwards is primarily due to limitations on
California loss carry-forwards. 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, 2017 unless previously utilized, and will
completely expire in the year ending July 31, 2028. The California tax loss carry-forwards
will begin to expire in the year ending July 31, 2013 and will completely expire in the
year ending July 31, 2018.

Significant components of our
deferred tax assets are as follows:

|                                            | July 31, 2008 |  | July 31, 2007 |            
|------------------------------------------- | ------------- |  | ------------- | -----------
|Net operating loss carry-forward            |               |  | $             | 10,735,700 
|Stock options and warrants                  |               |  |               | 1,005,000  
|Other temporary differences                 |               |  |               | (87,400    
|Total deferred tax assets                   |               |  |               | 11,653,300 
|Valuation allowance for deferred tax assets |               |  |               | (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 2008 was $2,666,000.

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

|                                                   | 2008 |  | 2007 |      
|-------------------------------------------------- | ---- |  | ---- | -----
|Federal tax benefit at the expected statutory rate |      |  |      | 34.0 
|State income tax, net of federal tax benefit       |      |  |      | 5.8  
|Other                                              |      |  |      | 1.0  
|Valuation allowance                                |      |  |      | (40.8
|Income tax benefit - effective rate                |      |  |      | 0.0  

42

---



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, 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 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, 2007 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                                         | 
|Increases related to current year tax positions                  | 
|Expiration of statute of limitations for the assessment of taxes | 
|Other                                                            | 
|Balance at July 31, 2008                                         | 

# Note 13.   Retirement Plan

We participate in a Small SEP program
under which we are entitled to make contributions on an employees behalf. The
program includes a salary reduction arrangement (SARSEP), which may be used only in years
in which the SEP meets requirements that the IRS may impose to ensure distribution of
excess contributions. Annual contributions made by employers under a SEP may be excluded
from the participating employees gross income, however we made no contributions
during the years ending July 31, 2008, 2007 or 2006.

# Note 14.   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 have determined that based upon
the end use of our products, the value added contributions made by us, the regulatory
requirements, the 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 products that include our SDC
technology, and distributors who sell products containing SDC under multiple regulatory approvals.
During Fiscal 2008, 40% of our sales were made to one customer, and 84% of our sales were made to our
largest four customers.  During Fiscal 2007 and 2006, 90% and 92% of our sales, respectively, were made
to our largest four customers.

During Fiscal 2008, 2007 and
2006, 67%, 76% and 12% of our sales, respectively, were made to
international customers; and 33%, 24% and 88% of our sales, respectively, were made to U.S. domestic
customers.

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

43

---



# Note 15.   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
2008 and Fiscal 2007 are as follows:

|                                     | For the quarters ended | 
|------------------------------------ | ---------------------- | 
|
|2008:                                |                        | 
|Revenue                              |                        | 
|Gross profit                         |                        | 
|Net loss                             |                        | 
|Basic and diluted net loss per share |                        | 
|                                     |                        | 
|2007:                                |                        | 
|Revenue                              |                        | 
|Gross profit                         |                        | 
|Net loss                             |                        | 
|Basic and diluted net loss per share |                        | 

# Note 16.   Subsequent
Events

Subsequent to July 31, 2008 we
received $15,078 from the exercise of options to purchase 28,450 shares of our common
stock by certain directors and officers, at an exercise price of $0.53, and received
$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.

44

---



# ITEM 9.    CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

# ITEM 9A.   CONTROLS AND
PROCEDURES

Evaluation of Disclosure
Controls and ProceduresWe 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, 2008 our disclosure controls and procedures were
effective at the reasonable assurance level.

Changes in Our ControlsThere 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 ReportingOur 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, 2008.  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, 2008.
This report, which expressed an unqualified opinion on the effectiveness of our internal
control over financial reporting as of July 31, 2008, is included elsewhere herein.

45

---



# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders PURE Bioscience

We have audited PURE
Biosciences internal control over financial reporting as of July 31, 2008, 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, 2008, 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 financial statements as of and for the year ended July 31, 2008 of PURE
Bioscience, and our report dated October 14, 2008 expressed an unqualified opinion
on those financial statements.

/s/ Mayer Hoffman McCann P.C.
San Diego, CaliforniaOctober
 14, 2008

# ITEM 9B. OTHER
INFORMATION

None.

46

---



# 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,
2009, which will be filed with the SEC no later than 120 days after the close of the
fiscal year ended July 31, 2008. 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 January 20,
2009, which will be filed with the SEC no later than 120 days after the close of the
fiscal year ended July 31, 2008.

# 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 January 20,
2009, which will be filed with the SEC no later than 120 days after the close of the
fiscal year ended July 31, 2008.

# 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 January 20,
2009, which will be filed with the SEC no later than 120 days after the close of the
fiscal year ended July 31, 2008.

# 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 January 20,
2009, which will be filed with the SEC no later than 120 days after the close of the
fiscal year ended July 31, 2008.

47

---



# 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 Incorporation
|--- | --- | ----------------------------

|3.1.1 | (2) | 
Articles of Amendment to Articles of Incorporation, dated March 11, 2002
|----- | --- | --------------------------------------------------------------------------

|4.3 | (3) | 
Amended and Restated Bylaws
|--- | --- | -----------------------------

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

|4.4 | (4) |  Form of Investor Warrant
|--- | --- | --------------------------

|4.5 | (5) |   Form of Placement Agent Warrant
|--- | --- | ----------------------------------

|10.1 | (1) |  Employment Agreement, by and between Pure Bioscience and Michael L. Krall, dated
as of April 1, 1996
|---- | --- | ------------------------------------------------------------------------------------------------------

|10.14 | (6) |  Placement Agreement, by and between Pure Bioscience and Taglich Brothers, Inc.,
dated as of October 19,  2007
|----- | --- | ---------------------------------------------------------------------------------------------------------------

|10.15.1 | (7) |  Innovative Medical Services Amended 1998 Directors and Officers Stock Option Plan
|------- | --- | -----------------------------------------------------------------------------------

|10.15.2 | (8) |  The Innovative Medical Services ETI H2O Option Plan
|------- | --- | -----------------------------------------------------

|10.15.3 | (9) |  Innovative Medical Services Consultant and Advisors Stock Option Plan
|------- | --- | -----------------------------------------------------------------------

|10.15.4 | (10) |  Innovative Medical Services 2001 Directors and Officers Stock Option Plan
|------- | ---- | ---------------------------------------------------------------------------

|10.15.5 | (11) |  Innovative Medical Services 2002 Employee Incentive Stock Option Plan
|------- | ---- | -----------------------------------------------------------------------

|10.15.6 | (12) |  Innovative Medical Services 2002 Non-Qualified Stock Option Plan incorporated by
reference from Exhibit 99.7 to Form S-8 filed with the SEC on May 20, 2002
|------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15.7 | (13) |  PURE Bioscience 2004 Consultant and Advisors Stock Option Plan
|------- | ---- | ----------------------------------------------------------------

|10.15.8 |  |  The
PURE Bioscience 2007 Equity Incentive Plan*
|------- |  | -------------------------------------------------

|10.16 |  | 
Consultant Stock Option Agreement by and between PURE Bioscience and  Tommy G. Thompson,
dated September 26, 2006*
|----- |  | --------------------------------------------------------------------------------------------------------------------

|14.1 | (14) |  Code of Ethics
|---- | ---- | ----------------

|16.1 | (15) |  Changes in the Registrants Certifying Accountant
|---- | ---- | ---------------------------------------------------

|21.1 | (2) |  Subsidiaries of the Registrant
|---- | --- | --------------------------------

|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
|--- | -------------------------------------------------------------------------------------------------------------------------------

48

---



|(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 October 25, 2007
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from Exhibit 10.14 to the Current Report on Form 8-K,
          filed with the SEC on October 25, 2007
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from Form S-8 filed with the SEC on December 23, 1998
|--- | -------------------------------------------------------------------------------

|(8) | Incorporated by reference from Exhibit 99.6 to Form S-8 filed with the SEC on
          January 30, 2001
|--- | --------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from Exhibit 99.5 to Form S-8 filed with the SEC on
          January 30, 2001
|--- | --------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference from Exhibit 99.4 to Form S-8 filed with the SEC on
          January 30, 2001
|---- | --------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from Exhibit 99.8 to Form S-8 filed with the SEC on
          May 20, 2002
|---- | ----------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference from Exhibit 99.7 to Form S-8 filed with the SEC on
          May 20, 2002
|---- | ----------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference from Exhibit 99 to Form S-8 filed with the SEC on
          April 23, 2004
|---- | ----------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference from Exhibit 14.1 on Form 8-K, filed with the SEC on
          February 25, 2008
|---- | ----------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference from the Report on Form 8-K  Current Report
          Items 4.01 and 9.01: Changes in the Registrants Certifying Accountant
          filed on September 24, 2007
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Filed herewith.

49

---



# 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 14, 2008
|Michael L. Krall, Chairman/President/CEO                                   |  |                 
|                                                                           |  |                 
|/s/ ANDREW J. BUCKLAND                                                     |  | October 14, 2008
|Andrew J. Buckland, Chief Financial Officer
(Principal 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 14, 2008
|Gregory Barnhill      |                                       |                 
|                      |                                       |                 
|/s/ DENNIS BROVARONE  | Director                              | October 14, 2008
|Dennis Brovarone      |                                       |                 
|                      |                                       |                 
|/s/ MURRAY H. GROSS   | Director                              | October 14, 2008
|Murray H. Gross       |                                       |                 
|                      |                                       |                 
|/s/ MICHAEL L. KRALL  | President/CEO and Director            | October 14, 2008
|Michael L. Krall      |                                       |                 
|                      |                                       |                 
|/s/ PAUL V. MAIER     | Director                              | October 14, 2008
|Paul V. Maier         |                                       |                 
|                      |                                       |                 
|/s/ DONNA SINGER      | Executive Vice President and Director | October 14, 2008
|Donna Singer          |                                       |                 
|                      |                                       |                 
|/s/ TOMMY G. THOMPSON | Director                              | October 14, 2008
|Tommy G. Thompson     |                                       |                 

50

---