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

Form 10-KSB

(Mark One)

| | [X] | ANUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                    1934 For the period ended July 31, 2005
| | --- | ------------------------------------------------------------------------------------------------------------------------------------

| | [    ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No
Fee Required] For the transition period from______ to _______
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------

Commission
File number 0-21019

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

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

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

619 596 8600Issuers telephone
number

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

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

The issuers revenues for its
most recent fiscal year: $155,806

Aggregate market value of the voting
stock held by non-affiliates of the registrant: Approximately $14,583,000 as of October
28, 2005.

Indicate the number of shares
outstanding of each of the issuers classes of common stock: 17,563,306 shares of
common stock as of October 28, 2005.

Documents incorporated by
reference: Certain Exhibits

---



PART I

Item 1. Description of
Business



OverviewPURE Bioscience (formerly Innovative
Medical Services) began as a provider of pharmaceutical water purification products.
Although revenues during the fiscal year were still primarily from the pharmacy industry,
we have expanded from our niche pharmacy market into other, broader markets with new,
proprietary bioscience products based upon our patented silver ion antimicrobial
technologies and patent pending boric acid based pesticide technologies. In November 2003,
we announced that we signed a definitive agreement to sell our water treatment business to
Data Recovery Continuum, Inc. (DRCI), a Delaware corporation based in California. The
original buyer did not perform on the contract and we began negotiations with a new party
to sell the Water Treatment Division assets and related liabilities. In May 2005, we sold
the assets of our Water Treatment Division to Maryland-based Innovative Medical Services,
LLC for $2,375,000. At closing, we received $1,950,000 in cash and a promissory note in
the amount of $425,000. In June, we received a cash payment of $225,000, and in August,
subsequent to the end of the fiscal year, we received the balance of $200,000 plus
interest on the promissory note. We used a portion of the proceeds of the sale to retire
substantially all debt and are using the remainder to capitalize the continuing
commercialization of our current and future bioscience products.

Bioscience TechnologiesOur flagship
bioscience technology is an aqueous disinfectant, silver dihydrogen citrate (SDC). A
patented new molecule, 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 produce and market pre-formulated, ready-to-use products, as well as varying
strengths of SDC concentrate as an additive or raw material for inclusion in other
companies products.

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

Water Treatment Division
(Discontinued Operation)The Fillmaster® pharmaceutical water purification, dispensing
and measuring products included the Pharmapure® water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster bar code reader. We also marketed proprietary National Sanitation
Foundation certified replacement filters for the Fillmaster Systems. Our Nutripure®
line of water treatment and filtration systems included a line of Nutripure whole-house
water softening systems, a line of Nutripure reverse osmosis point-of-use systems, the
Nutripure 2000 countertop water filtration system and the Nutripure Sport filtered sport
bottle. Results from this division are shown separately as Discontinued
Operations.

HistoryPURE Bioscience was incorporated in
the State of California on August 24, 1992, to pursue the immediate business of
manufacturing and marketing the Fillmaster and subsequently a broadly based business of
delivering advanced technology, equipment and supplies to not only the pharmacy industry
but also other healthcare markets and to retail consumers.

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

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

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

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

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

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

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

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

2

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In September 2003, we announced the
first significant commercialization of our SDC-based hard surface disinfectant, Axen30,
which is sold by EnvirOx L.L.C. of Danville, Illinois, as Critical Care, a new
commercial disinfectant-fungicide-virucide.

Also in September 2003, the Company
announced an agreement with Therapeutics, Incorporated, a drug development company based
in La Jolla, California, for the development and commercialization of Food and Drug
Administration (FDA) regulated SDC-based products. Therapeutics, Incorporated funds and
directs all development activities and FDA regulatory filings and is initially focusing on
development of SDC-based products for the treatment of bacterial, viral and fungal
mediated diseases and conditions.

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

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

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

Also in May 2004, Therapeutics,
Incorporated began development of the first two groups of products subject to FDA
regulation that use SDC antimicrobial technology: womens health products and acne
products.

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

In August 2004, we filed a utility
patent application to protect our proprietary silver dihydrogen citrate disinfectant in
combination with other antimicrobial compounds, including quaternary ammonia, oxidizers or
halogens such as chlorine, bromine or iodine.

In November 2004, we filed a utility
patent application to protect anhydrous, or crystalline, silver dihydrogen citrate
antimicrobial compositions, processes of making and methods of use.

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

In May 2005, we sold the assets of
our Water Treatment Division to Maryland-based Innovative Medical Services, LLC for
$2,375,000. At closing, we received $1,950,000 in cash and a promissory note in the amount
of $425,000. In June, we received a cash payment of $225,000, and in August, subsequent to
the end of the fiscal year, we received the balance of $200,000 plus interest on the
promissory note.

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

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

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

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

3

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| |  | Residual
Kill ActivityThe 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | BacteriaAdditional 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

In September 2003, we announced the
first significant commercialization of our SDC-based hard surface disinfectant, Axen30,
which is sold by EnvirOx LLC of Danville, Illinois, as Critical Care, a new
commercial disinfectant-fungicide-virucide.

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

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

We plan to pursue additional EPA and
FDA regulatory approvals for other applications. For example, in September 2003, we
announced an agreement with Therapeutics, Incorporated, a drug development company based
in La Jolla, California, for the development and commercialization of Food and Drug
Administration (FDA) regulated silver dihydrogen citrate-based products. Therapeutics,
Incorporated. funds and directs all development activities and FDA regulatory filings and
is initially focusing on development of silver dihydrogen citrate-based products for the
treatment of bacterial, viral and fungal mediated diseases and conditions. In May 2004,
Therapeutics, Incorporated began development of the first two groups of products subject
to FDA regulation that use silver dihydrogen citrate antimicrobial technology:
womens health products and acne products. Therapeutics, Incorporated expects its
development work will result in multiple Investigational New Drug (IND) filings with the
US FDA.

Triglycylboride Our bioscience
division also includes a line of pesticide technologies. Branded as Innovex, the
product line launched in October 2001 with our EPA-approved, patent-pending RoachX®.
Subsequently, we have developed and launched additional products in the Innovex product
line, including the EPA-approved AntX75®, EPA-exempt non-toxic TrapX rodent lure and
EPA approved CleanKill, the SDC-based hard surface disinfectant for the pest control
industry. We have taken a high level, executive-to-executive marketing approach with
leading national pest control companies. We also offer a private label program to fortify
sales to pest control professionals as well as provide a cost-effective entry into the
consumer retail marketplace.

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

Like the silver dihydrogen citrate
antimircrobial technology, the boric acid based pesticides are very competitive with
regard to efficacy when compared to leading brands while maintaining lower toxicity
ratings.



Principal Products and
Markets: Water Treatment Division (Discontinued Operation)

The principal products in our Water
Treatment Division included the Fillmaster® dispensing apparatus, connected to the
Pharmapure® reverse osmosis water filtration system, which provides measured amounts
of purified water for reconstitution of liquid oral antibiotics and certain other pharmacy
applications. We also marketed filter replacements for the Fillmaster system. Significant
customers consisted primarily of domestic retail chain pharmacies. In addition, the Water
Treatment Division included our Nutriprue 2000 Countertop Water Filtration System.

4

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CompetitionThe markets for silver dihydrogen
citrate and pesticide products are highly competitive because we must work to displace
traditional disinfecting technologies sold by well-known international industry leaders.
The markets in which we will sell any such products are dominated by a number of large,
well-capitalized corporations, which may impact our ability to successfully market our
products or maintain any technological advantage we might develop. We recognize that
innovative marketing methods are required in such competitive markets. We work to focus on
the high quality and value price of our products in their markets.



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

The Medifier patent, which expires in
March 2010, protects a device for use as a magnifying implement which has a housing member
designed to accommodate prescription bottles of various popular sizes therein in a fixed
position. A longitudinally moveable magnifying lens slideably mounted in the housing
member is utilized to magnify the print contained on an instruction label located on the
side of the prescription bottle. Alternate embodiments allow different size medicine
bottles to be alternately mounted in concentric fashion, or with the side of the medicine
bottles facing the lens in a fixed position.

Until the sale of the Water Treatment
Division, we owned the Fillmaster 1000e patent which expires in August 2017 and protects a
method and apparatus for dispensing fluids in response to a user request for a specified
amount of the fluid. This patent was sold to Innovative Medical Services, LLC as an asset
of the Water Treatment Division. We have, however, retained rights to this technology for
non-pharmaceutical applications which do not compete with the pharmaceutical water
dispensing business of Innovative Medical Services, LLC.

On November 30, 2001, we acquired the
patent for our silver dihydrogen citrate and its method of making. We previously licensed
the use of this patent. We purchased the patent for 700,000 shares of our common stock
plus certain expenses.

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

In May 2004, we filed an additional
United States patent covering multiple potential uses for our SDC technology including the
treatment of specific types of bacteria, fungus and viruses, as well as medical treatment
and the preservation of consumable and non-consumable products. The additional
Disinfectant and Method of Use patent application was the seventh SDC related patent
application filed in the United States covering inventive aspects of manufacturing,
composition and formulations of our SDC technology. In addition, in August 2004, we filed
a utility patent application to protect our proprietary silver dihydrogen citrate
disinfectant in combination with other antimicrobial compounds, including quaternary
ammonia, oxidizers or halogens such as chlorine, bromine or iodine.

In August 2004, we filed a utility
patent application to protect our proprietary silver dihydrogen citrate disinfectant in
combination with other antimicrobial compounds, including quaternary ammonia, oxidizers or
halogens such as chlorine, bromine or iodine.

In November 2004, we filed a utility
patent application to protect anhydrous, or crystalline, silver dihydrogen citrate
antimicrobial compositions, processes of making and methods of use.

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

We own the registered trademarks or
trademark applications for PURE Bioscience, Axenohl®, Axen®,
Silvérion®, Kinderguard, Innovex, RoachX®, AntX®,
TrapX® and Medifier®.



ManufacturingWe manufacture and blend the silver
dihydrogen citrate products in our manufacturing facility at our corporate headquarters.
As production quantities increase, we may choose to outsource blending and packaging
operations; however, we plan to maintain the manufacturing operation for our silver
dihydrogen citrate concentrate. Silver, the primary active ingredient, is a readily
available commodity, and the other active and inactive ingredients of silver dihydrogen
citrate are readily available from chemical supply companies.

We manufacture RoachX, AntX and TrapX
in our manufacturing facility at our corporate offices and outsource some of the packaging
functions. The active and inactive ingredients of these products are readily available
through multiple manufacturers in the US and abroad.



Research and DevelopmentResearch and Development costs that
have no alternative future uses are charged to operations when incurred and are included
in operating expenses. The total amounts charged to Research and Development expense were
$1,357,000 and $1,133,000 in the fiscal years ended July 31, 2005 and 2004, respectively.

5

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EmployeesAs of October 28, 2005, PURE
Bioscience employed eleven people, all of whom are full-time employees.



Item 2. PropertiesOur business operates in a 13,067
square foot facility located in a light industrial/office park in El Cajon, California.
This location houses all administrative, executive, sales, manufacturing and shipping
functions. The space is leased from an unaffiliated third party under a sixty-five month
agreement commencing on July 1, 1996. On May 14, 1996, we entered into an operating lease
agreement for our home office which expires (under extension) in October 2006. As part of
the agreement to sell the assets of the Water Treatment Division to Innovative Medical
Services, LLC, we entered into a sublease agreement with IMS LLC which terminates
concurrently with our master lease. Under the sublease agreement, IMS LLC occupies
approximately 28% of the square footage of the facility and pays us $3,760 per month in
rent. However the obligation for making payments under the master lease remains with us
until the end of the current lease term.



Item 3. Legal ProceedingsOn August 8, 2002, Billy Stapleton
and Susie Stapleton filed a complaint for patent infringement in the United States
District Court Eastern District of Tennessee at Knoxville, against our product RoachX. On
August 12, 2002 Billy and Susie Stapleton filed an amended complaint. On May 2, 2003 we
filed our answer to the amended complaint, denying the allegations generally and
specifically, and stating nine affirmative defenses to the amended complaint. The trial
has been continued until August 3, 2006. We believe Stapletons amended complaint is
frivolous and without merit.

In November 2004, we received a $14.2
million award resulting from its arbitration proceeding against NVID International, Inc.
through the American Arbitration Association International Center for Dispute Resolution.
In addition, due to the Arbitrators determination of material breach by NVID
International, our royalty and other contractual obligations to NVID are legally
terminated. The award is the result of our October 2003 arbitration action against NVID
International and Falken Industries, Ltd. We sought damages and relief from continued and
ongoing public dissemination of false, misleading and disparaging statements as well as
complete cooperation in enforcing and defending the Axenohl patent and related technology.
The arbitration was bifurcated and we proceeded first against NVID. In October 2005, we
received a further $3.4 million award plus costs of $241,000 resulting from the binding
arbitration proceeding against Falken Industries. The November 2004 arbitration award is
set to be confirmed in the US District Court, Southern District of California on or about
November 14, 2005. We have also filed the October 2005 arbitration award with the US
District Court, Southern District of California and are awaiting the assignment of a
confirmation hearing date. We are evaluating the issue of collectibility and potential
liability of all related individuals and entities.

In June 2004, we filed an arbitration
action against Nickel Ltd. and Falken Industries Ltd., case number 50 T 133 00319 04, for
breach of contract regarding a license for Axen30. Nickel resisted arbitration; however,
on September 30, 2005, the US District Court, Southern District of California ruled that
Nickel was to arbitrate. The arbitration is in progress and currently set for hearing on
the merits on April 10, 2006. We anticipate the arbitral hearing regarding Falken will
proceed separately and that the actions against Falken and Nickel will resolve favorably
to us as they have in the past.



Item 4. Submission Of
Matters To A Vote Of Security HoldersNo matters were submitted to
shareholders in the fourth quarter of the fiscal year.

6

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PART II

Item 5. Market for the Registrant's
Common Equity and Related Stockholder Matters

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

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

|Fiscal 2005      | Fiscal 2004
|---------------- | -----------
|
|July 31, 2005    |            
|April 30, 2005   |            
|January 31, 2005 |            
|October 31, 2004 |            

| | (3) | Security
Holders: As of October 28, 2005, we had approximately 200 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 28, 2005 was                $0.88.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

7

---



Item 6. Managements Discussion
and Analysis of Financial Condition and Results of OperationsExcept for the historical
information contained herein, the following discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results may differ substantially from
those referred to herein due to a number of factors, including but not limited to risks
described in the section entitled Competition and elsewhere in this Form 10KSB. Our
consolidated financial data includes Export Company of America, Inc., Ampromed Comercia
Importacao e Exportacao Ltda., ETI-H2O Corporation, and Nutripure Water Corporation. The
following discussion and analysis should be read in conjunction with the audited financial
statements of PURE Bioscience.

Results of Operations for the Year Ended July 31, 2005 Versus Year Ended July 31, 2004PURE Bioscience (formerly Innovative
Medical Services) began as a provider of pharmaceutical water purification products.
Although revenues for the years ended July 31, 2005 and 2004 were still primarily derived
from the Water Treatment business, the focus of our investments has expanded from our
niche pharmacy market into other, broader markets with new, proprietary bioscience
products based upon our patented silver ion antimicrobial technologies and patent pending
boric acid based pesticide technologies.

In November 2003, we announced that
we had signed a definitive agreement to sell our Water Treatment business to Data Recovery
Continuum, Inc. (DRCI), a Delaware corporation based in California. DRCI did not perform
on the contract and we began negotiations with a new party to sell the Water Treatment
Division assets and related liabilities. Effective May 25 2005, we sold the assets of our
Water Treatment Division to Maryland-based Innovative Medical Services, LLC (IMS LLC) for
$2,375,000. IMS LLC also assumed all liabilities associated with the Division. At closing,
we received $1,950,000 in cash and a promissory note in the amount of $425,000. In June,
we received a cash payment of $225,000, and in August, subsequent to the end of the fiscal
year, we received the balance of $200,000 plus interest on the promissory note.

Although we recorded the Water
Treatment business as a discontinued operation during the year ended July 31, 2005, we
continued to operate and retain the profits from that division until its sale on May 25,
2005. The realized gain to us on the sale of the Water Treatment Division, as shown in our
statement of operations for the year ended July 31, 2005, was $2,187,136 before the effect
of taxes. The sale of the Water Treatment Division assets to Innovative Medical Services,
LLC will be a transaction taxable for United States federal and California income tax
purposes. The tax liability related to the sale is estimated to be approximately $937,000,
however we expect that other losses and carryforwards for the year ended July 31, 2005
will offset the tax liability on the sale. See Note 13 for a more detailed discussion of
the tax consequences of the sale of the Water Treatment Division. As a result of the sale,
we are now strategically focused on developing our bioscience technology.

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

On November 30, 2001, we acquired the
patent (the Axenohl patent) for silver dihydrogen citrate, a silver ion based
technology which is the basis for our silver ion products. We purchased the patent for
700,000 shares of common stock plus certain expenses, valuing the patent at $1,540,600
based on the market price of the stock exchanged, and agreed to make certain royalty
payments to NVID. In October 2003, we filed an arbitration action against NVID
International and Falken Industries to demand a cease and desist from continued and
ongoing public dissemination of false, misleading and disparaging statements and complete
cooperation in enforcing and defending the silver dihydrogen citrate patent and related
technology, pursuant to the Core Settlement Agreement between PURE Bioscience and NVID
International. In November 2004, we won a $14.2 million award resulting from the action
against NVID. In addition to the $14.2 million award against NVID, the arbitrator also
clarified that PUREs royalty obligations to NVID were legally terminated by
NVIDs material breach of the Core Settlement Agreement, resulting in the elimination
of approximately $17 million in potential future royalty payments from PURE to NVID over
the life of the Axenohl patent. In October 2005, we received a further $3.4 million award
plus costs of $241,000 resulting from a related binding arbitration proceeding against
Falken Industries. The award, from the American Arbitration Association International
Center for Dispute Resolution, is a binding ruling. We are evaluating the issues of
collectibility of the awards, however due to the uncertainty of our ability to collect we
have not recorded the awards or any part of them as assets on the balance sheet as at July
31, 2005. We do believe that the rulings enable us to accelerate the development of our
core silver dihydrogen citrate technology.

For the year ended July 31, 2005,
bioscience segment revenues were $155,806, a 41% decrease from revenues of $263,499 in the
prior year. The antimicrobial market is highly competitive, and we anticipate that market
acceptance of our novel technology may be a long term achievement. 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
to pursue research, testing and regulatory approval for silver dihydrogen citrate products
will continue to be significant. However, now that we have prevailed in our arbitration
proceedings and have sold our Water Treatment Division, we believe we are in a position to
accelerate additional regulatory approvals and negotiate distribution agreements for the
inclusion of silver dihydrogen citrate into multiple global products. We expect sales of
our silver dihydrogen citrate products to accelerate in future periods.

Gross profit for the year ended July
31, 2005 was $104,212 versus $132,595 in the prior year. Our gross profit percentage
improved from 50% in 2004 to 67% in 2005, primarily due to a higher mix in 2005 of silver
dihydrogen citrate sales versus pesticide sales. Margins for sales of silver dihydrogen
citrate are greater than those for pesticides.

8

---



Our net loss before tax from
continuing operations for the year ended July 31, 2005, excluding the gain realized on the
sale of the Water Treatment Division, was $3,011,818, versus a net loss of $2,820,863 for
the same period in 2004. Selling expenses, primarily for development of new markets, grew
by $121,000 or 40% in the year ended July 31, 2005 compared to the prior year. Over the
same period, General and Administrative expenses grew by 1% to $1,331,000. General and
Administrative expense for each year includes the cost of prosecuting our interests in the
arbitration proceedings discussed earlier. Research and Development costs of $1,357,000
for the year ended July 31, 2005 increased by $224,000 or 20% compared to the same period
in 2004, as we aggressively expanded our global patent portfolio to support future
initiatives within multiple international markets for our silver dihydrogen citrate
technology. Of the loss before taxes in the period ending July 31, 2005, $1,076,469 is
attributable to non-cash items: $808,139 of services and interest paid with stock and
warrants and $268,330 of amortization and depreciation. Of the loss in the prior year,
$738,217 was attributable to non-cash items: $462,770 of services and interest paid with
stock and warrants, and $275,447 of amortization and depreciation.

The net effect of taxes on the
consolidated statement of income for the year ended July 31, 2005 is a tax liability of
$2,800, the minimum franchise taxes paid to the State of California regardless of income
or loss. The tax liability on the sale of the assets of the Water Treatment and on the
income from the operation of the Division through May 25, 2005, are estimated to be
$937,000 and $230,500 respectively; a total of approximately $1,167,500. We expect that
this amount will be offset by a tax benefit of approximately $1,164,700 from current year
losses and available net operating loss carryforwards relating to our continuing
operations.



Discontinued OperationDuring the year ended July 31, 2005,
we received the benefit from the revenues and incurred the expenses of the Water Treatment
Division through the date of the sale of the Division on May 25, 2005. Income from this
discontinued operation for the year ended July 31, 2005 (effectively through May 25, 2005)
consisted of revenues of $1,699,955, cost of sales of $937,958 and other costs of
$251,586, resulting in a net income from discontinued operations before taxes of $510,411.
Income tax related to the operation of the Division through May 25, 2005 is estimated to
be $230,500, however this amount is offset by the realization of a corresponding tax
benefit from current year losses and available net operating loss carryforwards relating
to our continuing operations.

Net income from this discontinued
operation for the full fiscal year ending July 31, 2004 consisted of revenues of
$1,800,600, cost of sales of $861,100 and other costs of $423,600, resulting in a net
income from discontinued operations before tax of $515,900.



Liquidity and Capital
ResourcesFrom inception through the present,
we have financed our operations primarily through our initial public offering in August of
1996, by subsequent private placement stock sales, and in May 2005 by the sale of our
Water Treatment Division. In addition, in September 2002 we renegotiated an existing line
of credit and extended it until November 2003. The extension included an increase in
principal from $500,000 to $600,000 at an interest rate of 11⁄2 % per month, secured
against the entire assets of the Company excluding the Axenohl patent. During the year
ended July 31, 2004, we became in default and in December 2003, two parties filed an
action in District Court of Arizona against PURE Bioscience for our failure to perform
under the terms of their loan agreements. In May 2005, the $600,000 line of credit plus
$103,000 of accrued interest was paid off as part of a settlement of the outstanding
litigation.

In July 2003, we issued a $300,000
convertible debenture at an interest rate of 10% per annum due on July 24, 2004. The
debenture was contained in a Unit Purchase Agreement in which the holder of the note
received 300,000 five-year warrants to purchase our common stock at an exercise price of
$0.75. The note contained provisions for convertibility to our common stock if held to
maturity. This note was in technical default as of July 25, 2004, but was guaranteed by a
third party and subsequently paid off in cash in March 2005.

In August 2003, we completed a
financing arrangement which included the acquisition of a $2,000,000 Note and Trust Deed
bearing a rate of interest of 10% with principal and all interest due and payable on or
before June 12, 2004. In addition to the Trust Deed, the arrangement included a $435,000
unsecured offsetting loan payable. The Trust Deed, offset by the loan, was acquired in
exchange for 2,000,000 unregistered shares of our common stock, at a fair value of $0.80
per share, issued to a party unrelated to the grantor.

In late 2003 we entered into an
agreement to sell substantially all of the assets and certain related liabilities of our
Water Treatment Division to Data Recovery Continuum, Inc. (DRCI) for $2.75 million in cash
at closing to include the purchase of the Trust Deed at face value, and additional amounts
one year after closing based on certain criteria relating to sales of water treatment
systems. At this time, DRCI paid to us a deposit of $100,000 in cash, secured by a
promissory note for that amount. Prior to the due date on the Trust Deed, the debtors
requested an extension to complete an in-process financing plan for the payment of the
principal and interest, which we granted, however the debtor failed to perform during the
term of the extension.

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

In November 2004 we received a
$90,000 loan from a director/shareholder, with an interest rate of 8% per annum and a
warrant to purchase 18,000 shares of common stock. The note was originally due in 30 days
but was extended to April 29, 2005 in exchange for an additional warrant to purchase
18,000 shares. In April 2005, a $30,000 payment was made to reduce the $90,000 loan and in
May 2005, the balance of the loan plus accrued interest was paid off.

9

---



Effective May 25, 2005, we sold the
assets of our Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. IMS LLC also assumed all liabilities associated with the
Division. At closing, we received $1,950,000 in cash and a promissory note in the amount
of $425,000. In June, we received a cash payment of $225,000, and in August, subsequent to
the end of the fiscal year, we received the balance of $200,000 plus interest on the
promissory note. We agreed to continue to fund the working capital of IMS LLC subsequent
to the sale of the Water Treatment Division, until such time as IMS LLC had in place their
appropriate legal and tax registrations, in order to enable the continuation of payroll
and an uninterrupted supply of materials and components for the business. At July 31, 2005,
we had funded $132,521 of working capital on IMS LLCs behalf. In August, in addition
to the payment of the promissory note and after the end of our fiscal year, IMS LLC
reimbursed us for the working capital we had provided subsequent to the sale. We are no
longer providing any working capital for IMS LLC.

The realized gain to us on the sale
of the Water Treatment Division was $2,187,136. The sale of the Water Treatment Division
assets to Innovative Medical Services, LLC will be a transaction taxable for United States
federal and California income tax purposes, however the estimated tax liability of
$937,000 will be offset by current year losses and available net operating loss
carryforwards relating to our continuing operations. See Note 13.

From July 31, 2004 to July 31, 2005,
accounts receivable declined by $165,226 and inventory declined by $120,874, in each case
primarily due to the sale of the Water Treatment Division. Non-current assets at July 31,
2005 of $2,313,707 consist almost entirely of Patents and Licenses.

Net cash outflows from continuing
operations were $2,897,330 for the year ended July 31, 2005 and $2,018,347 for the prior
year. The increase in cash outflows is primarily related to investment in research and
development and in protecting our technology through arbitration. Cash investments in
patents and licenses also increased by $74,000, and expenditure on fixed assets by
$78,000, over the prior year.

Cash flows from financing activities
were $781,000 in the year ended July 31, 2005 and $1,282,075 in the previous year. During
the most recent fiscal year, we repaid $900,000 of pre-existing debt as discussed earlier.
This amount was offset by $1,681,000 of proceeds from the sale of common stock during the
year ended July 31, 2005, as follows:

In the quarter ended October 31, 2004
we conducted a private placement which consisted of 125,000 shares of common stock at a
price of $.39 per share and a one-year warrant to purchase 12,500 shares of common stock
at $1.50 valued at $1,154 ($0.01 per share based on the Black Scholes Option Pricing Model
assuming no dividend yield, volatility of 137.78% and a risk-free interest rate of 2.25%)
for a total of $50,000, and issued 80,000 shares of common stock valued at $40,000 or
$0.50 per share. During the three months ending January 31, 2005, we conducted two private
placements valued at $200,000 (366,667 shares of common stock at an average price of
$0.5455 per share); received $150,000 from the exercise of 300,000 shares of common stock
at $0.50 per share; conducted a further private placement of 60,000 shares of common stock
at $0.49 per share and a one-year warrant to purchase 6,000 shares of common stock at
$1.00 valued at $674 ($0.01 per share based on the Black Scholes Option Pricing Model
assuming no dividend yield, volatility of 137.78% and a risk-free interest rate of 2.25%)
for a total of $30,000; and received $10,500 from the exercise of an employee option.
During the three months ending April 30, 2005 we conducted two private placements which
consisted of 1,330,000 shares of common stock issued between $0.30 and $0.50 per share for
a total value of $605,000; conducted a further private placement in which we sold 400,000
shares of common stock at a price of $.449 per share and a one-year warrant to purchase
100,000 shares of common stock at $1.00 valued at $20,392 ($0.051 per share based on the
Black Scholes Option Pricing Model assuming no dividend yield, volatility of 112.30% and a
risk-free interest rate of 2.25%) for a total value of $200,000; received $40,500 from the
exercise of options; conducted a private placement which consisted of 458,329 shares of
common stock issued a $.60 per share for a value of $275,000; and received $80,000 from
the exercise of options.

During the year ended July 31, 2004,
we borrowed $100,000 from a private lender. We also conducted private placements in which
we issued 250,000 shares of common stock at a price of $0.50 per share, for a total of
$125,000. We also issued a security which included 700,000 shares of common stock at a
price of $0.60 per share and a one-year warrant to purchase 84,000 shares of common stock
at $0.80 per share. The warrants were valued at $21,220 ($0.25 per share based on the
Black Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%). Additionally, we conducted another private placement in
which we sold two units of Company securities. Each unit consisted of 200,000 shares of
common stock at a price of $0.50 per share and a one-year warrant to purchase 50,000
shares of common stock at $1.00 valued at $20,296 ($0.20 per share based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%). Later in the same fiscal year we conducted two more
private placements in which we issued 395,833 shares of common stock at a weighted average
price of $0.44 per share for a total of $175,000. In the last quarter of that year we
conducted two additional private placements in which we issued 582,389 shares of common
stock at $0.45 per share which included warrants to purchase 63,794 shares of common stock
at $1.50 per share. The warrants were valued at $7,905 ($0.12 per share based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%. Also during the same quarter of the year ended July 31,
2004 we issued 295,000 shares at $0.55 per share in exchange for consulting services
valued at $162,500, and options on 50,000 shares were exercised.

With respect to sales made during the
two years reported, we relied on Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities. The
securities were offered solely to accredited or sophisticated investors who were provided
all of the current public information available on the Company.

At July 31, 2005 we had current
assets of $939,000, current liabilities of $353,000 and no outstanding debt. However, our
existing working capital will not be sufficient to fund our development plans. We are
therefore currently seeking additional sources of capital to fund investment in planned
expansion. Such investments are expected to include development and expansion of our
infrastructure and manufacturing capacity, product launches, research and development
projects and regulatory submissions.

10

---





Risks Related to our
Plans to Raise CapitalWe are seeking additional capital
through the issuance of debt, equity, convertible securities or through other means, any
one of which may reduce the value to us, perhaps substantially, of the commercialization
of our bioscience technology. The issuance of debt or equity, or convertible securities,
may also lead to the dilution of our existing shareholders. There is no guarantee that we
will be able to obtain capital on terms acceptable to us, or at all. Insufficient funds
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.



Other Risks Related to
our BusinessBy selling the Water Treatment
Division, we lost the most significant contributor to our historical revenue stream and
became less diversified. We are now a bioscience company focused on the marketing, selling
and continued development of our silver dihydrogen citrate antimicrobial technology and
our Triglycylboride pesticide technology. While the rewards in these fields are
potentially great, the risks, the regulatory hurdles and the costs of doing business are
also high.

Our silver dihydrogen citrate is a
platform technology rather than a single use applied technology. As such, products
developed from the platform fall under the jurisdiction of multiple U.S. and international
regulatory agencies. We currently have Environmental Protection Agency (EPA) registration
for our 2400-parts per million (ppm) technical grade SDC concentrate (trade name
Axenohl®) as well as for our Axen® and Axen®30 hard surface disinfectant
products for commercial, industrial and consumer applications including restaurants, homes
and medical facilities. We intend to fund and manage additional EPA regulated product
development internally and in conjunction with current regulatory consultants, however the
introduction of additional EPA regulated antimicrobial products could take several months.

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

If we are successful in bringing
additional EPA or FDA regulated products to market, there is no assurance that we will be
able to successfully manufacture or market the products or that potential customers will
buy them. For example, a current or future competitive product may have, or be perceived
as having, greater efficacy or cost effectiveness. In addition, the market in which we
will sell any such products is dominated by a number of large, well-capitalized
corporations, which may impact our ability to successfully market our products or maintain
any technological advantage we might develop. We may also be subject to changes in
regulations governing the manufacture and marketing of our products, which could increase
our costs, reduce any competitive advantage we may have, or adversely affect our marketing
effectiveness.



Valuation of Intangible
AssetsSFAS 142 requires that goodwill and
other intangible assets be tested for impairment on an annual basis and between annual
tests in certain circumstances. Recoverability of assets to be held for use is based on
expectations of future discounted cash flows from the related operations, and when
circumstances dictate, we adjust the asset to the extent the carrying value exceeds the
fair value of the asset. Our impairment review process is based on the discounted future
cash flow approach that uses our estimates of revenue driven by assumed market segment
share and estimated costs. Also included in our analysis is an estimate of revenues
expected from our agreement with Therapeutics, Incorporated We have entered into an
agreement with Therapeutics Inc. for the development and commercialization of FDA
regulated silver dihydrogen citrate based products, where Therapeutics is responsible for
all development activities and regulatory filings. In the agreement, Therapeutics Inc. has
agreed to reimburse the Company for $2.2 million of pre-contract acquisition and
development costs of the silver dihydrogen citrate intellectual property as well as
reimbursement for ongoing intellectual property costs associated with silver dihydrogen
citrate. Following the reimbursement of both Therapeutics and our costs, depending
on the type of product we will receive a minimum of 40% of all sales proceeds, licensing
fees, royalty payments and all other forms of cash and non-cash consideration received by
the two parties. We will also realize revenues from the sale of silver dihydrogen citrate
raw material as an active ingredient.

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

11

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The Board of DirectorsPURE
 Bioscience

We have audited the accompanying
consolidated balance sheets of PURE Bioscience as of July 31, 2005 and 2004, and the
related statements of operations, stockholders equity and cash flows for the years
ended July 30, 2005 and 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of PURE Bioscience. and the results of its operations and its cash
flows for the years ended July 31, 2005 and 2004, 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 28, 2005

12

---



CONSOLIDATED BALANCE SHEETS

---

|                                                     | July 31 | 
|---------------------------------------------------- | ------- | 
|
|ASSETS                                               |         | 
|Current Assets                                       |         | 
|Cash and cash equivalents                            |         | 
|Accounts receivable, net of allowance for doubtful   |         | 
|accounts of $ 59,000 at July 31, 2004                |         | 
|8,000 at July 31, 2005                               |         | 
|Other receivables                                    |         | 
|Notes receivable                                     |         | 
|Inventories                                          |         | 
|Prepaid expenses                                     |         | 
|Interest receivable                                  |         | 
|                                                     |         | 
|Total current assets                                 |         | 
|                                                     |         | 
|Property, Plant and Equipment                        |         | 
|Property, plant and equipment                        |         | 
|                                                     |         | 
|Total property, plant and equipment                  |         | 
|                                                     |         | 
|Other Assets                                         |         | 
|Trust deed receivable                                |         | 
|Deposits                                             |         | 
|Patents and licenses                                 |         | 
|                                                     |         | 
|Total other assets                                   |         | 
|                                                     |         | 
|Assets of the water division held for resale         |         | 
|Total assets                                         |         | 
|                                                     |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY                  |         | 
|Current Liabilities                                  |         | 
|Accounts payable                                     |         | 
|Accrued liabilities                                  |         | 
|Income taxes payable                                 |         | 
|Notes payable                                        |         | 
|Loans from shareholders                              |         | 
|                                                     |         | 
|Total current liabilities                            |         | 
|                                                     |         | 
|Liabilities of the water division held for resale    |         | 
|                                                     |         | 
|Stockholders' Equity                                 |         | 
|Preferred Stock                                      |         | 
|Class A common stock, no par value:                  |         | 
|50,000,000 shares authorized                         |         | 
|15,457,310 issued and outstanding July 31, 2004, and |         | 
|17,713,306 issued and outstanding July 31, 2005      |         | 
|Warrants:                                            |         | 
|1,385,223 issued and outstanding July 31, 2004, and  |         | 
|640,929 issued and outstanding July 31, 2005         |         | 
|Accumulated deficit                                  |         | 
|                                                     |         | 
|Total stockholders' equity                           |         | 
|                                                     |         | 
|Total liabilities and stockholders' equity           |         | 
|                                                     |         | 

The accompanying notes are an
integral part of these financial statements

---



CONSOLIDATED STATEMENTS OF OPERATIONS

---

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

The accompanying notes are an
integral part of these financial statements

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|                                                            | For the Years Ended July 31 | 
|----------------------------------------------------------- | --------------------------- | 
|
|Cash flows from operating activities:                       |                             | 
|Net loss                                                    |                             | 
|                                                            |                             | 
|Adjustments to reconcile net income to net cash             |                             | 
|provided by operating activities:                           |                             | 
|Amortization                                                |                             | 
|Depreciation                                                |                             | 
|Services and interest paid for with stock and warrants      |                             | 
|Pre-tax income from discontinued operations                 |                             | 
|Pre-tax gain on sale of discontinued operations             |                             | 
|                                                            |                             | 
|Changes in assets and liabilities:                          |                             | 
|(Increase) decrease in accounts receivable                  |                             | 
|(Increase) decrease in due from officers and employees      |                             | 
|(Increase) decrease in prepaid expense                      |                             | 
|(Increase) decrease in interest receivable                  |                             | 
|(Increase) decrease in inventory                            |                             | 
|(Increase) decrease in deposits                             |                             | 
|Increase (decrease) in accounts payable                     |                             | 
|Increase (decrease) in accrued cash liabilities             |                             | 
|                                                            |                             | 
|Increase (decrease) in income tax payable                   |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Net cash (used) in operating activities                     |                             | 
|                                                            |                             | 
|Cash flows from investing activities                        |                             | 
|                                                            |                             | 
|Investment in patents and licenses                          |                             | 
|Purchase of property, plant and equipment                   |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Net cash (used) in investing activities                     |                             | 
|                                                            |                             | 
|Cash flows from financing activities                        |                             | 
|                                                            |                             | 
|Proceeds from debt obligations                              |                             | 
|Payment of notes payable                                    |                             | 
|Proceeds from loans from shareholders                       |                             | 
|Payment of loans from shareholders                          |                             | 
|Proceeds from sale of common stock                          |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Net cash provided by financing activities                   |                             | 
|                                                            |                             | 
|Cash flows from discontinued operations:                    |                             | 
|                                                            |                             | 
|Proceeds from sale of Water Treatment Division              |                             | 
|Cash flows from operation of Water Treatment Division       |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Net cash from discontinued operations                       |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Net increase (decrease) in cash and cash equivalents        |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Cash and cash equivalents at beginning of period            |                             | 
|                                                            |                             | 
|Cash and cash equivalents at end of period                  |                             | 
|                                                            |                             | 
|                                                            |                             | 
|Supplemental disclosures of cash flow information           |                             | 
|Cash paid for interest                                      |                             | 
|Cash paid for taxes                                         |                             | 
|Non-cash investing and financing activities:                |                             | 
|Issue / (reacquisition) of stock in exchange for trust deed |                             | 
|                                                            |                             | 
|                                                            |                             | 

The
accompanying notes are an integral part of these financial statements

---



Notes to Consolidated
Financial Statements See Independent
Accountants Report

Note 1. Organization and
Summary of Significant Accounting Policies

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

Organization
and Business Activity

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

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

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

Subsequent to the acquisition of
ETIH2O, our business activity was divided into two basic business segments, the Bioscience
Division and the Water Treatment Division. The Bioscience Division is our primary business
and consists of the production, sale and licensing of silver ion bioscience technologies
and boric acid based pesticides. In May 2005 we sold the assets of our Water Treatment
Division to Maryland-based Innovative Medical Services, LLC.

Basis
of Presentation and Principles of Consolidation

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

Revenue
Recognition

Generally, we recognize income based
upon concluded arrangements with customers and when all events have occurred by delivery
or performance.

Revenue for Bioscience products is
recognized as product is shipped to customers, free on board from either our facility or
third party packagers.

Revenue was recognized for products
and Customer Service Plans within the Water Treatment Division, prior to its divestiture
in May 2005, as revenue from discontinued operations. Customer acceptance provisions and
installation procedures accompanying delivery were minor in nature, and we did not
experience any material expense in satisfying warranties and returns. Most of the
Divisions chain customers had entered into multi-year contracts for the Customer
Service Plan 2000. The Plan provided an extended warranty on Fillmaster pharmacy products;
significant discounts on maintenance item costs; free software upgrades for the Fillmaster
1000e and Scanmaster; automatic replacement filter shipments; and simplified, annual
invoicing. When the customer bought a dispenser on the Customer Service Plan 2000 it
agreed to pay a fixed annual fee that covered replacement filters and parts. The filters
were normally replaced once a year. In order to match income with related costs, and for
simplicity in accounting and billing, we billed the customer the annual fee and recognized
revenue in the same month that we shipped replacement filters to the store. This was done
one year after the store was added to the Plan and each year thereafter. Subsequent to the
sale of the Water Treatment Division in May 2005, we no longer recognize revenue for
Fillmaster or Scanmaster products or Customer Service Plans.

Accounts
Receivable

We sell on terms of cash or net 30
days. Invoices not paid within stated terms are considered delinquent. We analyze our
accounts receivable periodically and recognize an allowance for doubtful accounts based on
estimated collectibility. Individual accounts deemed uncollectible are charged to the
allowance. At July 31, 2005, $8,000 was considered past due, determined at 90 days after
invoice date.

Stock-Based
Compensation

We follow FASB Statement No. 123,
Accounting for Stock-Based Compensation (FAS 123). The provisions
of FAS 123 allow companies to either expense the estimated fair value of stock options or
to continue to follow the intrinsic value method set forth in APB Opinion 25,
Accounting for Stock Issued to Employees (APB 25) but disclose the
pro forma effects on net income (loss) had the fair value of the options been expensed. We
have elected to continue to apply the methods of APB 25 in accounting for our stock option
plans. For awards that generate compensation expense as defined under APB 25, we calculate
the amount of expenses and recognize the expense over the vesting period of the award.

13

---



Research
and Development

Research and Development costs that
have no alternative future uses are charged to operations when incurred and are included
in operating expenses. The total amount charged to Research and Development expense was
$1,357,112 and $1,133,007 in the fiscal years ended July 31, 2005 and 2004, respectively.

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
Furniture and fixtures 
Website                
Vehicles | 7.0 years
10.0 years
 3.0 years
 5.0 years to 7.0 years

Leasehold improvements are being
depreciated over the life of the lease, which is equal to 120 months.

Amortization
of Intangible Assets

The cost of patents acquired is
amortized on a straight-line basis over the remaining lives of the patents. Licenses are
amortized on a straight-line basis over periods ranging from 15 to 20 years. The weighted
average amortization period for all patents and licenses is 17.69 years. The estimated
amortization expense over each of the next five years is $159,100. Amortization expense
for the years ended July 31, 2005 and July 31, 2004 was $158,200 and $177,045,
respectively.

Long-Lived
Assets

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

Inventory

Inventories are stated at the lower
of cost or net realizable value using the average cost method. Inventories at July 31,
2005 consisted of:

|                 | 2005 | 2004
|---------------- | ---- | ----
|Finished Goods   |      |     
|Work in Progress |      |     
|Raw Materials    |      |     
|                 |      |     
|                 |      |     
|                 |      |     
|                 |      |     

Use
of Estimates

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

Fair
Value of Financial Instruments

The carrying amounts for receivables
and payables approximate fair value because of their short maturity, generally less than
three months. The fair value of the note receivable as at July 31, 2005 cannot be
estimated because of the unique nature of such instruments. Whenever shares are issued for
assets, services or interest, we use market prices of our common stock to estimate the
fair value of the shares issued. Whenever options or warrants are issued for assets,
services or interest, we use the Black Scholes Option Pricing Model to estimate the fair
value of the equity instrument, using market prices of our common stock and prevailing
risk-free interest rates.

Advertising
and Promotional Costs

Cost of advertising and promotion are
expensed as incurred. Such costs were $427,452 and $306,243 for the years ended July 31,
2005 and July 31, 2004, respectively.

Net
Income (Loss) Per Common Share

We have adopted FASB Statement No.
128, Earnings Per Share (SFAS 128), which is effective for periods ending
after December 15, 1997. Entities that have both common stock and other equity instruments
outstanding, such as options and warrants, are required to present both basic and diluted
per share amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock instruments, including options and warrants, unless the
effect is to reduce a loss or increase the income per common share from continuing
operations. Both the basic and diluted loss per common share for the years ended July 31,
2005 and July 31, 2004 are based on the weighted average number of shares of our common
stock outstanding during the periods.

14

---

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

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

Income
Taxes

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

Other

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

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

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

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

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

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

| |  | For
purposes of the consolidated balance sheet and statement of cash flows, we consider all
highly liquid investments with a maturity of three months or less when purchased to be
cash equivalents. At July 31, 2005 and at July 31, 2004, we had no deposits in excess of
FDIC insured limits.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2.  Sale of Water
Treatment Division and Discontinued Operations

Effective May 25 2005, we sold the
assets of our Water Treatment Division to Maryland-based Innovative Medical Services, LLC
(IMS LLC) for $2,375,000. IMS LLC also assumed all liabilities associated with the
Division. At closing, we received $1,950,000 in cash and a promissory note in the amount
of $425,000. In June, we received a cash payment of $225,000. The balance on the
promissory note of $200,000 is shown as Notes Receivable on the balance sheet
as at July 31, 2005. In August, subsequent to the end of the fiscal year, we received the
balance of $200,000 plus interest on the promissory note. See Note 16.

We agreed to continue to fund the
working capital of IMS LLC subsequent to the sale of the Water Treatment Division, until
such time as IMS LLC had in place their appropriate legal and tax registrations, in order
to enable the continuation of payroll and an uninterrupted supply of materials and
components for the business. At July 31, 2005, we had funded $132,521 of working capital on
IMS LLCs behalf. This amount is shown as Other receivables on the
consolidated balance sheet as at July 31, 2005. In August, in addition to the payment of
the promissory note and after the end of our fiscal year, IMS LLC reimbursed us for the
working capital we had provided subsequent to the sale. We are no longer providing any
working capital for IMS LLC. See Note 16.

The realized gain to us on the sale
of the Water Treatment Division was $2,187,136 before the effect of taxes. The sale of the
Water Treatment Division assets to Innovative Medical Services, LLC will be a transaction
taxable for United States federal and California income tax purposes. The tax liability
related to the sale is estimated to be approximately $937,000, however this will be offset
by current year losses and available net operating loss carryforwards relating to our
continuing operations. For a further discussion of the tax consequences of the sale, see
Note 13.

The Water Treatment Division has been
reported as a discontinued operation since October 2003 when we made the decision to
dispose of the segment, however we continued to operate and retain the profits from that
division until its sale on May 25, 2005. For details of the results of operations for the
Water Treatment Division for the year ended July 31, 2004 and for the subsequent period
through the sale of the Division on May 25, 2005, see Note 14.

15

---



In accordance with SFAS 144, the
assets and liabilities of the Water Division were historically classified as held for sale
and are presented separately on the balance sheet as at July 31, 2004. No assets or
liabilities relating to the Water Division remained on the balance sheet as at July 31,
2005, with the exception of the Note receivable and Other
receivable as discussed previously in this note.

Note 3.  Trust Deed
Receivable

In August 2003, we completed a
financing arrangement which included the acquisition of a $2,000,000 Note and Trust Deed
bearing a rate of interest of 10% with principal and all interest due and payable on or
before June 12, 2004. The Trust Deed and accrued interest of $35,000 was shown in the
consolidated balance sheet as at July 31, 2004 as a Trust deed receivable. In
addition to the Trust Deed, the arrangement included a $435,000 unsecured offsetting loan
payable, included in Loans from shareholders in the consolidated balance sheet
as at July 31, 2004. See Note 6. The Trust Deed was acquired in exchange for 2,000,000
unregistered shares of our common stock issued to a party unrelated to the grantor, which
was recorded at $1,600,000 or $0.80 per share based on fair market value at the date of
the transaction.

In late 2003 we entered into an
agreement to sell substantially all of the assets and certain related liabilities of the
Water Treatment Division to Data Recovery Continuum, Inc. (DRCI) for $2.75 million in cash
at closing to include the purchase of the Trust Deed at face value, and additional amounts
one year after closing based on certain criteria relating to sales of water treatment
systems. At this time, DRCI paid to us a deposit of $100,000 in cash, secured by a
promissory note for that amount which was also included in Loans from
shareholders in the consolidated balance sheet as at July 31, 2004.

Prior to the due date on the Trust
Deed, the debtors requested an extension to complete an in-process financing plan for the
payment of the principal and interest, which we granted, however the debtor failed to
perform during the term of the extension.

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

Note 4.  Property, Plant
and Equipment

The following is a summary of
property, plant, and equipment  at cost less accumulated depreciation:

|                                                | July 31, 2005 |  |   | July 31, 2004 | 
|----------------------------------------------- | ------------- |  | - | ------------- | 
|Computers and equipment                         |               |  | $ | 746,880       | 
|Furniture and fixtures                          |               |  |   | 82,325        | 
|Vehicle                                         |               |  |   |              | 
|Leasehold improvements                          |               |  |   | 309,830       | 
|                                                |               |  |   |              
|                                                |               |  |   | 1,139,036     | 
|Less: accumulated depreciation and amortization |               |  |   | 987,046       | 
|                                                |               |  |   |              
|Total                                           |               |  | $ | 151,990       | 
|                                                |               |  |   |              

Depreciation charged to general and
administrative expense for the years ended July 31, 2005 and July 31, 2004 was $137,700
and $161,000, respectively.

Note 5. Notes Payable

There were no notes payable as at
July 31, 2005.

The note payable as at July 31, 2004
consisted of a convertible debenture with interest payable quarterly at 10%. The debenture
was originally due on July 24, 2004 and was contained in a Unit Purchase Agreement in
which the holder of the note received 300,000 five-year warrants to purchase our common
stock at an exercise price of $0.75. The recorded value of the note payable and the
warrants were apportioned based on their respective fair values. This resulted in the note
being recorded at its discounted value of $180,513. The discount of $119,487 was amortized
over the one-year life of the note. The note contained provisions for convertibility to
our common stock if held to maturity. This note was in technical default as of July 25,
2004, but was guaranteed by a third party and subsequently paid off in cash in March,
2005.

Note 6. Loans from
Shareholders

There were no shareholder loans
outstanding at July 31, 2005.

The shareholder loans of $1,135,000
as at July 31, 2004 included a $600,000 line of credit with interest at 18%, secured by
the total assets of the Company excluding the Axenohl patent. During the year ended July
31, 2004, we became in default and in December 2003, two parties filed an action in
District Court of Arizona against PURE Bioscience for our failure to perform under the
terms of their loan agreements. In May 2005, the $600,000 line of credit plus $103,000 of
accrued interest was paid off as part of a settlement of the outstanding litigation.

In August 2003, we completed a
financing arrangement which included the acquisition of a Note and Trust Deed and a
$435,000 unsecured offsetting loan payable. In late 2003, a related party paid to us a
deposit of $100,000 in cash, secured by a promissory note for that amount which was also
included in Loans from shareholders in the consolidated balance sheet as at
July 31, 2004. The $535,000 in loans payable was included in Loans from
shareholders in the consolidated balance sheet as at July 31, 2004. The loans were
forgiven as part of a settlement in March, 2005. See Note 3.

16

---



In November 2004, we received a
$90,000 loan from a director/shareholder, with an interest rate of 8% per annum and a
warrant to purchase 18,000 shares of common stock. The note was originally due in 30 days
but was extended to April 29, 2005 in exchange for an additional warrant to purchase
18,000 shares. The warrants were valued at $9,971 ($0.28 per share based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%). In April 2005, a $30,000 payment was made to reduce the
$90,000 loan and in May 2005, the balance of the loan plus accrued interest was paid off.

Note 7. Warranty
Liabilities

In November 2002, the FASB issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. Subsequent to
the sale of the Water Treatment Division in May 2005, we no longer have liability for
warranties previously provided on Water Division systems, and do not provide replacement
warranties on Bioscience products. The warranty liability as at July 31, 2004 is shown on
the consolidated balance sheet as Liabilities of the water division held for
resale. Prior to the sale of the Water Treatment Division, we provided a standard
warranty of two years for replacement parts on all Fillmaster systems sold. Most of our
chain customers entered into multi-year contracts for customer service plans with fixed
annual fees that provided an extended warranty on systems, discounts on maintenance item
costs, software upgrades, and replacement filters. We monitored the costs of providing
products and services, other than filters, under the plans. This cost remained steady over
time as a percentage of related revenues. The following is a summary of changes in our
product warranty liability.

|                         | Beginning
Liability |  | Ending
Liability |       
|------------------------ | ------------------- |  | ---------------- | ------
|Year ended July 31, 2005 |                     |  | $                | 44,464
|                         |                     |  |                  |       
|Year ended July 31, 2004 |                     |  | $                | 42,430
|                         |                     |  |                  |       

Note 8. Commitments

On May 14, 1996, we entered into an
operating lease agreement for our home office which expires (under extension) in October
2006. The rental expense recorded in general and administrative expenses for the years
ended July 31, 2005 and July 31, 2004 was $152,295 and $181,370, respectively.

As part of the agreement to sell the
assets of the Water Treatment Division to Innovative Medical Services, LLC, we entered
into a sublease agreement with IMS LLC which terminates concurrently with our master
lease. Under the sublease agreement, IMS LLC occupies approximately 28% of the square
footage of the facility and pays us $3,760 per month in rent. However the obligation for
making payments under the master lease remains with us until the end of the current lease
term.

Future minimum rental payments
required for each of the 5 succeeding years assuming exercise of the option, and assuming
we rent 100% of the existing facility, are as follows:

| | Year Ended July 31                                                                                   | Amount                                                                                              | 
| | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | 
| | 2006          
         2007          
         2008          
         2009          
         2010 | $           176,302
$           183,354
$           190,688
$           198.316
$           206,248 | 

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

Note 9. Equity and Common
Stock

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

In August 2004 we issued 200,000
options to purchase common stock in exchange for consulting and legal services valued at
$125,000. Also in August 2004 we conducted a private placement which consisted of 125,000
shares of common stock at a price of $.39 per share and a one-year warrant to purchase
12,500 shares of common stock at $1.50 valued at $1,154 ($0.01 per share based on the
Black Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%) for a total of $50,000, and issued 80,000 shares of
common stock valued at $40,000 or $0.50 per share. In September 2004 we issued 7,000
shares valued at $2,275 ($0.33 per share) for payment of directors expenses. In
addition, in the same month we issued 200,000 shares valued at $90,000 ($0.45 per share)
in exchange for the assignment of two patent rights.

In November 2004 we issued 200,000
shares of common stock valued at $100,000 ($0.50 per share) in exchange for consulting and
legal services. We also issued options on 250,000 shares in exchange for consulting
services with exercise prices ranging from $0.50 to $0.80 valued at $88,057 (based on the
Black Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%) In December 2004 we issued 300,000 shares of common
stock ($0.50 per share) for consulting services valued at a fair value of $150,000. In the
same month we also conducted two private placements which in aggregate were valued at
$200,000 (366,667 shares of common stock at an average price of $0.5455 per share). We
also received $10,500 from the exercise of employee options, and $150,000 from the
exercise of 300,000 shares of common stock at $0.50 per share.

17

---



In January 2005 we issued 5,000
shares of common stock ($0.87 per share) valued at $4,350 (based on the market price of
the stock at the time the services were rendered) in exchange for business services. We
also conducted a private placement which consisted of 60,000 shares of common stock at a
price of $.49 per share and a one-year warrant to purchase 6,000 shares of common stock at
$1.00, valued at $674 ($0.01 per share based on the Black Scholes Option Pricing Model
assuming no dividend yield, volatility of 137.78% and a risk-free interest rate of 2.25%)
for a total of $30,000. The value of the shares and warrants were apportioned based on
their relative market values.

In February 2005 we issued 50,000
shares of common stock at a price of $.436 per share and a one year warrant to purchase an
additional 100,000 shares of common stock, valued at $13,182 ($0.263 per share based on
the Black Scholes Option Pricing Model assuming no dividend yield, volatility of 112.30%
and a risk-free interest rate of 2.25%) for a total value of $35,000, in exchange for
business services. In addition, we issued a three-year option on 350,000 shares at an
exercise price of $0.75 in exchange for consulting services valued at $160,982 (based on
the Black Scholes Option Pricing Model assuming no dividend yield, volatility of 112.3%
and a risk-free interest rate of 2.25%)

In March 2005 we conducted two
private placements which consisted of 1,330,000 shares of common stock issued between
$0.30 and $0.50 per share, for a total value of $605,000 (average price of $.45 per
share). We also conducted a private placement in which we sold two units of our
securities, each unit consisted of 200,000 shares of common stock at a price of $.449 per
share and a one-year warrant to purchase 50,000 shares of common stock at $1.00, valued at
$10,196 ($0.051 per share based on the Black Scholes Option Pricing Model assuming no
dividend yield, volatility of 112.30% and a risk-free interest rate of 2.25%), for a total
value of $100,000 per unit. Also in March 2005 we issued 30,000 shares of common stock
valued at $33,000 ($1.10 per share based on the market price of the stock at the time the
services were rendered) in exchange for consulting services. We also issued a one-year
option on 25,000 shares at an exercise price of $0.50 for consulting services valued at
$12,374, and two-year option on 225,000 shares at an exercise price of $1.00 for
consulting services valued at $134,631 (each based on the Black Scholes Option Pricing
Model assuming no dividend yield, volatility of 112.3% and a risk-free interest rate of
2.25%). In the same month we received $40,500 from the exercise of options on 100,000
shares.

In April 2005 we conducted a private
placement which consisted of 458,329 shares of common stock issued at $.60 per share, for
the total value of $275,000. We also issued 30,000 shares of common stock valued at
$30,000 ($1.00 per share based on the market price of the stock when the services were
rendered) in exchange for consulting services. Additionally, we received $80,000 from the
exercise of options on 200,000 shares.

In May 2005 we issued 74,000 shares
of common stock valued at $74,000 ($1.00 per share based on the market price of the stock
when the services were rendered) in exchange for consulting services.

During the year ended July 31, 2005,
347,794 warrants valued in prior years at $49,421 expired. In addition, in 2003 we
recorded 651,000 warrants at a valuation of $635,376 based upon a contractual obligation,
however the warrants were never issued. During the year ended July 31, 2005 our
contractual obligation to issue the warrants was terminated. The adjustments related to
these events are recorded in the equity schedule below on the line Expired /
Terminated Warrants.

The following schedule summarizes the
change in equity for the fiscal years ended July 31, 2005 and 2004:

|                                | Common
Stock
(Shares) |  | Common
Stock
($) |            | Warrants
Issued |   | Warrant
Valuation
($) |   | Accumulated
Deficit |           | Total ($) |  
|------------------------------- | --------------------- |  | ---------------- | ---------- | --------------- | - | --------------------- | - | ------------------- | --------- | --------- | -
|Balance, July 31, 2003          |                       |  |                  | 10,594,088 |                 | $ | 14,758,203            |   |                     | 1,037,429 |           | $
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|Shares Issued for Trust Deed    |                       |  |                  | 2,000,000  |                 |   | 1,600,000             |   |                     |          |           |  
|Private Placement               |                       |  |                  | 2,438,222  |                 |   | 1,132,653             |   |                     | 347,794   |           |  
|Shares Issued for Services      |                       |  |                  | 515,000    |                 |   | 343,283               |   |                     |          |           |  
|Net Income / (Loss)             |                       |  |                  |           |                 |   |                      |   |                     |          |           |  
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|                                |                       |  |                  |            |                 |  
|Balance, July 31, 2004          |                       |  |                  | 15,547,310 |                 | $ | 17,834,139            |   |                     | 1,385,223 |           | $
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|                                |                       |  |                  |            |                 |  
|Shares Returned re. Trust Deed  |                       |  |                  | (2,000,000 | )               |   | (1,735,700            | ) |                     |          |           |  
|Private Placement               |                       |  |                  | 2,739,996  |                 |   | 1,337,779             |   |                     | 112,500   |           |  
|Shares Issued for Patent Rights |                       |  |                  | 200,000    |                 |   | 90,000                |   |                     |          |           |  
|Shares Issued for Services      |                       |  |                  | 896,000    |                 |   | 936,486               |   |                     | 142,000   |           |  
|Options Exercised               |                       |  |                  | 330,000    |                 |   | 169,500               |   |                     |          |           |  
|Expired / Terminated Warrants   |                       |  |                  |           |                 |   | 684,797               |   |                     | (998,794  | )         |  
|Net Income / (Loss)             |                       |  |                  |           |                 |   |                      |   |                     |          |           |  
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|                                |                       |  |                  |            |                 |  
|Balance, July 31, 2005          |                       |  |                  | 17,713,306 |                 |   | 19,317,001            |   |                     | 640,929   |           |  
|                                |                       |  |                  |            |                 |   |                       |   |                     |           |           |  
|                                |                       |  |                  |            |                 |  

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

18

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The following schedule summarizes the
outstanding warrants:

|Issued For        | Date
Issued | # of
Warrants | Warrant
Valuation
($) | Weighted
Average
Exercise
Price | Expiration
Date
|----------------- | ----------- | ------------- | --------------------- | ------------------------------- | ---------------
|
|Services          |             |               |                       | 6/14/02                         |                
|Private Placement |             |               |                       | 1/31/03                         |                
|Private Placement |             |               |                       | 7/24/03                         |                
|Private Placement |             |               |                       | 8/19/04                         |                
|Services          |             |               |                       | 11/29/04                        |                
|Services          |             |               |                       | 1/14/05                         |                
|Services          |             |               |                       | 2/7/05                          |                
|Private Placement |             |               |                       | 3/16/05                         |                
|Private Placement |             |               |                       | 3/16/05                         |                
|                  |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                
|Total             |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                
|                  |             |               |                       |                                 |                

Note 10. Related Party
Transactions

See Note 6.

Note 11. Stock Option
Plans

The Company has the following stock
option plans (the Plans) pursuant to which options to acquire common stock have been
granted.

1996 Directors And Officers Stock
Option Plan: On April 17, 1996, the Companys Board of Directors approved a Directors
and Officers Stock Option Plan. The Plan is administered by the entire Board of Directors.
The Plan became effective on April 17, 1996 by the Board of Directors, was not subject to
Shareholder approval and shall terminate on April 17, 2006. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Directors and
Officers. The Plan may be terminated, modified or amended by the Board of Directors.

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

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

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

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

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

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

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

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

19

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We estimate a fair value method of
accounting for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). In accordance with SFAS 123, we have chosen to continue to account for employee
stock-based compensation utilizing the intrinsic value method. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair market price of our
common stock at the date of grant over the amount an employee must pay to acquire the
stock. Also, in accordance with SFAS 123, we have provided footnote disclosure with
respect to stock-based employee compensation. The cost of stock-based employee
compensation is measured at the grant date based on the value of the award and is
recognized over the service period. The value of the stock based award is determined using
a pricing model whereby compensation cost is the excess of the fair value of the stock as
determined by the model at grant date or other measurement date over the amount an
employee must pay to acquire the stock.

We account for non-employee stock
based compensation by recording the fair value of the stock options granted over the
anticipated service period.

The effect of applying FAS 123 on the
years ended July 31, 2005 and 2004 pro forma net loss as stated below is not necessarily
representative of the effects on reported net loss for future years due to, among other
things, the vesting period of the stock options and the fair value of additional stock
options in future years. Had compensation cost for our stock option plans been determined
based upon the fair value at the grant date for awards under the plans consistent with the
methodology prescribed under FAS 123, our net loss in the years ended July 31, 2005 and
2004 would have been approximately $1,631,359 and $3,552,985 or $(0.10) per share and
$(0.26) per share, respectively, on a diluted basis. Compensation cost for non-employees
of $396,043 was charged to income in the year ended July 31, 2005 and $125,000 in the year
ended July 31, 2004. The weighted average fair value for all options granted during the
years ended July 31, 2005 and 2004 are estimated at $0.50 per share and $1.24 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model. The
weighted average fair value non-employee options granted during the years ended July 31,
2005 and 2004 are estimated at $0.49 per share and $0.75 per share, respectively using the
Black-Scholes option-pricing model. The following assumptions were used for grants in
2005; no dividend yield, volatility of between 112.3% and 137.78%, and a risk-free
interest rate of between 2.25% and 3.75%. Assumptions for grants awarded in 2004 were: no
dividend yield, volatility of 137.78%, and a risk-free interest rate of 1.75%.

A summary of stock option activity is
as follows:

|                         | Number of
Shares |  | Weighted-Average
Exercise Price ($)
|------------------------ | ---------------- |  | -----------------------------------
|Balance at July 31, 2003 |                  |  |                                    
|Granted                  |                  |  |                                    
|Exercised                |                  |  |                                    
|Forfeited                |                  |  |                                    
|                         |                  |  |                                    
|Balance at July 31, 2004 |                  |  |                                    
|                         |                  |  |                                    
|Granted                  |                  |  |                                    
|Exercised                |                  |  |                                    
|Forfeited                |                  |  |                                    
|                         |                  |  |                                    
|Balance at July 31, 2005 |                  |  |                                    
|                         |                  |  |                                    

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

Note 12. Pension Plan

We participate in a Small SEP program under
which we may make contributions to a SEP, which includes a salary reduction arrangement
(SARSEP). Employees who participate in the SARSEP may elect to have us: (a) make
contributions to the SEP on their behalf, or (b) pay them cash. A salary reduction
arrangement 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 of an employer
under a SEP are excluded from the participants gross income. No employer
contributions were made during the years ending July 31, 2005 or July 31, 2004.

Note 13. Income Taxes

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

The sale of the Water Treatment
Division to Innovative Medical Services, LLC (IMS LLC) is a transaction taxable for United
States federal and California income tax purposes. We recognized taxable income equal to
the amount realized on the sale, consisting of the cash received plus the amount of
related liabilities assumed by IMS LLC, in excess of the tax basis in the assets sold. The
realized gain to us on the sale was $2,187,136, giving rise to an estimated tax liability
of $937,000. In addition, income tax related to the operation of the Division through May
25, 2005 is estimated to be $230,500. The total taxes relating to the discontinued
operation are therefore approximately $1,167,500. This amount is offset by the realization
of a tax benefit of approximately $1,164,700 from current year losses and available net
operating loss carryforwards relating to our continuing operations.

20

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The net tax effect of these amounts
gives rise to the current provision for income taxes of $2,800 for the year ended July 31,
2005 and $2,700 for the year ended July 31, 2004, which is the minimum franchise tax paid
to the State of California regardless of income or loss.

At July 31, 2005, we had federal and
California tax net operating loss carryforwards of approximately $14,460,600 and
$3,683,800 respectively. At July 31, 2004, we had federal and California tax net operating
loss carryforwards of approximately $13,939,500 and $5,995,900 respectively. The
difference between federal and California tax loss carryforwards is primarily due to
limitations on California loss carryforwards. The federal tax loss carryforwards will
begin expiring in the year ending July 31, 2016 unless previously utilized, and will
completely expire in the year ending July 31, 2024. The California tax loss carryforwards
began to expire in the year ended July 31, 2005 and will completely expire in the year
ending July 31, 2016.

Significant components of our
deferred tax assets are as follows:

|                                            | July 31, 2005 |  | July 31, 2004 |           
|------------------------------------------- | ------------- |  | ------------- | ----------
|Net operating loss carryforward             |               |  | $             | 5,242,300 
|Stock options and warrants                  |               |  |               | 532,400   
|Other timing differences and allowances     |               |  |               | (83,000   
|                                            |               |  |               |           
|Total deferred tax assets                   |               |  |               | 5,691,700 
|Valuation allowance for deferred tax assets |               |  |               | (5,691,700
|                                            |               |  |               |           
|Net deferred tax assets                     |               |  | $             |          
|                                            |               |  |               |           

Realization of our deferred tax
assets, which relate to operating loss carryforwards and timing differences, is dependant
on future earnings. The timing and amount of future earnings are uncertain and therefore a
valuation allowance has been established. The increase in the valuation allowance on the
deferred tax asset during the year ended July 31, 2005 was $30,500.

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

|                                                   | 2005 |  | 2004 |    
|-------------------------------------------------- | ---- |  | ---- | ---
|Federal tax benefit at the expected statutory rate |      |  |      | 34 
|State income tax, net of federal tax benefit       |      |  |      | 9  
|Valuation allowance                                |      |  |      | (43
|                                                   |      |  |      |    
|Income tax benefit - effective rate                |      |  |      | 0  
|                                                   |      |  |      |    

Note 14. Business Segment
and Sales Concentrations

In accordance with the provisions of
SFAS No. 131, certain information is disclosed based on the way management organizes
financial information for making operating decisions and assessing performance. In
determining operating segments, we 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.

Our business activity was
historically divided into two distinct business segments, the Water Treatment segment and
the Bioscience segment. These two segments were determined by management based upon the
inherent differences in the end use of the products, the inherent differences in the value
added processes made by the Company, the differences in the regulatory requirements and
the inherent differences in the strategies required to successfully market finished
products. The Water Treatment segment included Commercial Water and Residential Retail
products and the Nutripure Water Dealer program. Bioscience includes the silver dihydrogen
citrate antimicrobial and the Innovex line of pest control products. As we have planned
for a considerable period of time to sell the Water Treatment segment, it has been
reported as Discontinued Operations in the financial statements. For the year ended July
31, 2005, earnings for the discontinued Water Treatment Division relate to the period from
August 1, 2004 to May 25, 2005, the date on which the Division assets were sold.
Subsequent to the sale, we retained no interest in the assets, liabilities or earnings of
Innovative Medical Services LLC, the acquiring entity.

Segment information is presented in
accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related
Information. This standard is based on a management approach, which requires segmentation
based upon our internal organization and disclosure of revenue and operating income based
upon internal accounting methods. Our financial reporting systems present various data for
management to run the business, including internal profit and loss statements prepared on
a basis not consistent with U.S. Generally Accepted Accounting Principles. Reconciling
amounts consist of unallocated general and administrative expenses.

21

---

|2004                                    |  | Water
Treatment
(Discontinued) |   | Biosciences |  | Reconciling
Amounts |           | Consolidated |  
|--------------------------------------- |  | ------------------------------ | - | ----------- |  | ------------------- | --------- | ------------ | -
|
|Commercial Water Treatment              |  |                                |   |             |  |                     |           |              |  
|Fillmaster Products                     |  |                                | $ | 1,035,300   |  | $                   |          |              | $
|Replacement Filters (Includes CSP 2000) |  |                                |   | 640,600     |  |                     |          |              |  
|Residential Water Treatment             |  |                                |   | 49,900      |  |                     |          |              |  
|Water Dealer Program                    |  |                                |   | 36,000      |  |                     |          |              |  
|Silver Dihydrogen Citrate               |  |                                |   |            |  |                     | 83,800    |              |  
|Pesticide                               |  |                                |   |            |  |                     | 179,700   |              |  
|                                        |  |                                |   |             |  |                     |           |             
|Total Revenues                          |  |                                | $ | 1,800,600   |  | $                   | 263,500   |              | $
|                                        |  |                                |   |             |  |                     |           |             
|Operating Income/(Loss) before taxes    |  |                                | $ | 515,900     |  | $                   | (248,600  | )            | $
|                                        |  |                                |   |             |  |                     |           |             
|Segment Assets                          |  |                                | $ | 108,136     |  | $                   | 2,510,408 |              |  
|                                        |  |                                |   |             |  |                     |           |             
|                                        |  |                                |   |            

|2005                                    |  |  |   |          
|--------------------------------------- |  |  | - | ---------
|
|Commercial Water Treatment              |  |  |   |          
|Fillmaster Products                     |  |  | $ | 985,187  
|Replacement Filters (Includes CSP 2000) |  |  |   | 717,257  
|Residential Water Treatment             |  |  |   | (2,489   
|Water Dealer Program                    |  |  |   |         
|Silver Dihydrogen Citrate               |  |  |   |         
|Pesticide                               |  |  |   |         
|                                        |  |  |   |          
|Total Revenues                          |  |  | $ | 1,699,955
|                                        |  |  |   |          
|Operating Income/(Loss) before taxes    |  |  | $ | 510,411  
|                                        |  |  |   |          
|Segment Assets (post-sale)              |  |  | $ |         
|                                        |  |  |   |          

Significant customers for each fiscal
year primarily consisted of domestic retail chain pharmacies. Sales concentrations to
major chain stores were approximately $703,990 and export sales were $231,569 for the year
ended July 31, 2005. Sales concentrations to major chain stores were approximately
$1,449,000 and export sales were $76,800 for the year ended July 31, 2004. Three major
retail chain pharmacies accounted for 41% of consolidated sales.

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

Note 15. Patents

On November 30, 2001, we acquired the
patent (the Axenohl patent) for silver dihydrogen citrate, a silver ion based
technology which is the basis for our silver ion products. We previously licensed the use
of this patent. We purchased the patent for 700,000 shares of common stock plus certain
expenses, and valued the patent at $1,540,600 based on the market price of the stock
exchanged.

As a condition of the purchase
agreement of the Axenohl patent, we originally agreed to make certain royalty payments to
NVID. In October 2003, we filed an arbitration action against NVID International and
Falken Industries to demand a cease and desist from continued and ongoing public
dissemination of false, misleading and disparaging statements and complete cooperation in
enforcing and defending the silver dihydrogen citrate patent and related technology,
pursuant to the Core Settlement Agreement between PURE Bioscience and NVID International.
In November 2004, we won a $14.2 million award resulting from the action against NVID. In
addition to the $14.2 million award against NVID, the arbitrator also clarified that
PUREs royalty obligations to NVID were legally terminated by NVIDs material
breach of the Core Settlement Agreement, resulting in the elimination of approximately $17
million in potential future royalty payments from PURE to NVID over the life of the
Axenohl patent. In October 2005, we received a further $3.4 million award plus costs of
$241,000 resulting from a related binding arbitration proceeding against Falken
Industries. The award, from the American Arbitration Association International Center for
Dispute Resolution, is a binding ruling. We are evaluating the issues of collectibility of
the awards, however due to the uncertainty of our ability to collect we have not recorded
the awards or any part of them as assets on the balance sheet as at July 31, 2005.

Note 16. Subsequent Events

In August 2005 we received the
balance of $200,000 plus interest on the promissory note from IMS LLC that constitutes all
of the Notes receivable on the consolidated balance sheet as at July 31, 2005.
At the same time, we were also reimbursed by IMS LLC for the working capital we had
provided subsequent to the sale of the Water Treatment Division in May. The amount
reimbursed in August offset the entire amount recorded on the consolidated balance sheet
as at July 31, 2005 under Other receivables. See Note 2 for a more detailed
discussion of each of these transactions.

In October we received a $3.4 million
award plus costs of $241,000 resulting from a binding arbitration proceeding against
Falken Industries. See Note 15. The award, from the American Arbitration Association
International Center for Dispute Resolution, is a binding ruling. We are currently
evaluating the issue of collectibility of the award.

22

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Note 17. Recent
Accounting Pronouncements

In December 2004, the FASB issued
Statement No. 123(R) (revised 2004) (FAS 123(R)). In addition, in March 2005
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
Topic 14, Share-Based Payment (SAB 107) which provides interpretations
regarding the interaction between FAS 123(R) and certain SEC rules and regulations and
provided the staffs views regarding the valuation of share-based payment
arrangements for public companies. FAS 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions, including stock option awards. FAS 123(R) revises FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25. FAS 123(R) will
require us to measure the cost of employee services received in exchange for stock option
awards based on the grant-date fair value of such awards. That cost will be recognized
over the period during which an employee is required to provide service in exchange for
the award, which is usually the vesting period. We will report such costs as part of our
general and administrative expenses. FAS 123(R) will be effective for us as of the
beginning of the first annual reporting period that begins after December 15, 2005, which
will be our fiscal year ending July 31, 2007. We will recognize the cumulative effect of
initially applying this statement as of the effective date. Currently, the cumulative
effect of initially applying FAS 123(R) has not been determined and is subject to change
depending on future events.

In December 2004, the FASB issued
Statement No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29
(FAS 153). FAS 153 eliminates the exception to recognize non-monetary
transactions at fair value for non-monetary exchanges of similar productive assets
previously allowed by APB Opinion No. 29, and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance. FAS 153 is
effective for non-monetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005.

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

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

ITEM 8A. CONTROLS AND PROCEDURES

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

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

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

ITEM 8B. OTHER INFORMATION:    None.

23

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PART III

ITEM 9. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

The executive officers and directors
of PURE Bioscience and their ages are as follows:

|Name                                                                                                                                                             | Age                              | Position                                                                                                                                                                                                                         | Held Position Since                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------
|Michael L. Krall       
Andrew J. Buckland     
Donna Singer           
Gary Brownell, CPA     
Dennis Atchley, Esq.   
Greg Barnhill          
Dennis Brovarone | 53 
 42 
 35 
 56 
 52 
 51 
 49 | President, CEO, Chairman, Director 
Chief Financial Officer            
Executive Vice President, Director 
Director                           
Secretary                          
Director                           
Director | 1992
 2005
 1998
 1996
 1996
 2001
 1996

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

Business Experience

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

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

DENNIS BROVARONE   Mr. Brovarone has
been practicing corporate and securities law since 1986 and as a sole practitioner since
1990. He was elected to the Companys Board of Directors in April 1996. From January
3002 to the present, Mr. Brovarone serves on the Board of Directors of Shannon
International Resources, Inc., a publicly held Nevada corporation. From December 1997 to
April 2001, Mr. Brovarone served as the President and Chairman of the Board of Directors
of Ethika Corporation, a publicly held, Mississippi corporation investment holding company
with its office in Littleton, Colorado.

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

ANDREW J. BUCKLAND   Mr. Buckland
joined PURE Bioscience as its Chief Financial Officer in 2005. Prior to joining PURE, as
Vice President of Finance at Cardionet, Inc., Mr. Buckland was responsible for all finance
and accounting functions for a venture capital funded healthcare corporation providing
real-time cardiac monitoring services. Mr. Buckland previously served as Chief Financial
Officer and as Chief Accounting Officer of Advanced Tissue Sciences, a public
biotechnology company based in San Diego. He has also served in senior financial
management positions at BAX Global in Irvine, California, at the European Region
headquarters of United Parcel Service (UPS), and at Bristol-Myers Squibb in the United
Kingdom. He earned an MBA from the University of California, Irvine and a BA (with Honors)
from the University of the West of England Business School.

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

DONNA 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.

Family Relationships

There is no family relationship
between any Director, executive or person nominated or chosen by PURE Bioscience to become
a Director or executive officer.

Audit Committee

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

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

24

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Board of Directors
Independence

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

Compliance with Section 16(a) of
Securities Exchange Act of 1934 To our knowledge, during the fiscal year ended July 31,
2005, our Directors and Officers complied with all applicable Section 16(a) filing
requirements. This statement is based solely on a review of the copies of such reports
that reflect all reportable transactions furnished to us by our Directors and Officers and
their written representations that such reports accurately reflect all reportable
transactions.

Code of Ethics

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

ITEM 10. EXECUTIVE COMPENSATION



Summary Compensation TableThe following table shows for the
fiscal year ending July 31, 2005, the compensation awarded or paid by the Company to its
Chief Executive Officer and any of the executive officers of the Company whose total
salary and bonus exceeded $100,000 during such year (The Named Executive
Officers):

|SUMMARY COMPENSATION TABLE    
|------------------------------
|
|
|
|Michael L. Krall President/CEO
|                              
|Michael L. Krall President/CEO
|                              
|Michael L. Krall President/CEO
|                              

No other executive officer earned
more than $100,000 during the current fiscal year.

Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year End Option/Values

The following table sets forth the
number and value of the unexercised options held by each of the Named Executive Officers
at July 31, 2005.

|Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
|-----------------------------------------------------------------------
|
|Michael L. Krall
  President/CEO                                       
|                                                                       

| | (1) | Option
value based on the difference between the exercise price of unexercised
                    options and the average closing price of $0.82 for the 30 trading
days ending                     July 31, 2005.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements and
Executive Compensation

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

Compensation of Directors

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

Other Arrangements:    None

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

25

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

The following
table sets forth the number of shares of the Companys Common Stock beneficially
owned as of October 28, 2005 by individual directors and executive officers and by all
directors and executive officers of the Company as a group. Based upon a review of the
Companys shareholders list as of October 28, 2005, there are no registered holders
of five percent or more of the Companys Common Stock. As of October 28, 2005 there
were 17,563,306 shares outstanding.

|Name and Address ofBeneficial Owner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Title                                                                                                                                                                        | Common StockOwnership                                                                                                       | Percentage of SharesOutstanding (%)                         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------
|Dennis Atchley                    
   1725 Gillespie Way
   El Cajon, CA  92020
   Gregory Barnhill                  
   1725 Gillespie Way
   El Cajon, CA  92020
   Dennis Brovarone                  
   1725 Gillespie Way
   El Cajon, CA  92020
   Gary Brownell                     
   1725 Gillespie Way
   El Cajon, CA  92020
   Andrew J. Buckland                
   1725 Gillespie Way
   El Cajon, CA  92020
   Michael L. Krall                  
   1725 Gillespie Way
   El Cajon, CA  92020
   Donna Singer                      
   1725 Gillespie Way
   El Cajon, CA  92020
   Directors and Officers as a Group
   (7 individuals) | Secretary               
Director                
Director                
Director                
Chief Financial Officer 
President, CEO/Chairman 
Executive VP, Director | 366,070 (1) 
   744,000 (2) 
   786,483 (3) 
   830,321 (4) 
    50,000 (5) 
 1,833,560 (6) 
   783,356 (7) 
 5,403,790 (8) | 2.10
   4.06
   4.29
   4.51
   0.28
   9.45
   4.27
  23.53

| | (1) | Includes
presently exercisable options to acquire up to 332,210 shares.
| | --- | -----------------------------------------------------------------------

| | (2) | Includes
presently exercisable options and warrants to acquire up to 569,000           shares.
| | --- | ----------------------------------------------------------------------------------------------

| | (3) | Includes
presently exercisable options to acquire up to 715,000 shares.
| | --- | -----------------------------------------------------------------------

| | (4) | Includes
presently exercisable options to acquire up to 780,000 shares.
| | --- | -----------------------------------------------------------------------

| | (5) | Includes
presently exercisable options to acquire up to 50,000 shares.
| | --- | ----------------------------------------------------------------------

| | (6) | Includes
presently exercisable options to acquire up to 1,211,250 shares.
| | --- | -------------------------------------------------------------------------

| | (7) | Includes
presently exercisable options to acquire up to 755,000 shares.
| | --- | -----------------------------------------------------------------------

| | (8) | Includes
presently exercisable options and warrants held by all of the above           officers
and directors to acquire up to 4,412,460 shares.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

26

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ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONSNone.

ITEM 13. EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

27

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B.  Reports on Form 8-K:

| | 1. | Current
Report Items 2.01 and 9.01 Completion of Acquisition or Disposition of           Assets
and Financial Statements and Exhibits filed on June 3, 2005.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Current
Report Item 9.01b Financial Information and Exhibits filed on July 30,           2005.
| | -- | ----------------------------------------------------------------------------------------------

| | 3. | Current
Report Item 5,02 Departure of Directors or Principal Officers; Election           of
Directors; Appointment of Principal Officers filed on July 6, 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Current
Report Item 8.01 Other Events filed on October 28, 2005
| | -- | ---------------------------------------------------------------

ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES

Audit Fees

Miller & McCollom, Certified
Public Accountants, have been our independent auditors for the fiscal years ending July
31, 2005 and 2004. Miller & McCollom was paid aggregate fees of $59,941 for the fiscal
year ended July 31, 2005 and $66,027 for the fiscal year ended July 31, 2004 for
professional services rendered for the audit of our annual financial statements, and for
review of the financial statements included in our quarterly reports on Form 10QSB during
these fiscal years.

Audit-Related Fees

Miller & McCollom was not paid
any additional fees for the fiscal years ended July 31, 2005 or 2004 for services related
to the performance of the audit or review of our financial statements.

Tax Fees

Deloitte & Touche USA LLP was
paid aggregate fees of $2,500 during the fiscal year ended July 31, 2005, and $11,300
during the fiscal year ended July 31, 2004, for professional services rendered for tax
compliance, tax advice and tax planning. No other independent advisors were paid fees
during either fiscal year for such professional services.

Other Fees

Neither Miller & McCollom nor
Deloitte & Touche USA LLP was paid other fees for professional services during the
fiscal years ended July 31, 2005 or 2004.

28

---



SIGNATURES

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

|PURE BIOSCIENCE                                                                                                                 | DATE                             
|------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
|
|/s/ MICHAEL L. KRALL
Michael L. Krall, Chairman/President/CEO/s/ ANDREW J. BUCKLAND
Andrew J. Buckland, Chief Financial Officer | October 28, 2005
October 28, 2005

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

|NAME                                                                                                                                                                        | TITLE                                                                                                                                                                                                 | DATE                                                                                     | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | 
|
|/s/ GREGORY BARNHILL
Gregory Barnhill/s/ DENNIS BROVARONE
Dennis Brovarone/s/ GARY BROWNELL
Gary Brownell/s/ MICHAEL L. KRALL
Michael L. Krall/s/ DONNA SINGER
Donna Singer | Director                               
Director                               
Director                               
President/CEO and Director             
Executive Vice President and Director | October 28, 2005
 October 28, 2005
 October 28, 2005
 October 28, 2005
 October 28, 2005 |