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| x      |   | ANNUAL      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES      EXCHANGE ACT OF 1934 |
|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                          |
|   |   | For      the fiscal year ended September 30, 2008                                                        |
|   |   |                                                                                                          |
|   |   | or                                                                                                            |
|   |   |                                                                                                          |
| o      |   | TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES      EXCHANGE ACT OF 1934  |
|   |   |                                                                                                          |
|   |   | For      the transition period      from          to        |

| Nevada                        |   | 20-1563395                                |
|-------------------------------|--------|-------------------------------------------|
| (State      of incorporation) |   | (I.R.S.      Employer Identification No.) |

| 5611      Baird CourtHouston, Texas      77041(Address      of principal executive offices) |
|---------------------------------------------------------------------------------------------|

| Large      accelerated filer  o |   | Accelerated      filer  x |   | Non-accelerated      filer  o |   | Smaller      reporting company  o |
|-------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------|

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TABLE OF CONTENTS

|        | PART I                                                                                                              |
|-------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.     | Business                                                                                                                 |
| Item 1A.    | Risk Factors                                                                                                             |
| Item 1B.    | Unresolved Staff Comments                                                                                                |
| Item 2.     | Properties                                                                                                               |
| Item 3.     | Legal Proceedings                                                                                                        |
| Item    4.  | Submission of Matters to      a Vote of Security Holders                                                                 |
|        |                                                                                                                     |
|        | PART II                                                                                                             |
| Item 5.     | Market for Registrant’s Common Equity, Related Stockholder      Matters and Issuer Purchasers of Equity Securities |
| Item 6.     | Selected Financial Data                                                                                                  |
| Item    7.  | Management’s Discussion      and Analysis of Financial Condition and Results of Operation                          |
| Item    7A. | Quantitative and      Qualitative Disclosures About Market Risk                                                          |
| Item    8.  | Financial Statements and      Supplementary Data                                                                         |
| Item    9.  | Changes in and      Disagreements with Accountants on Accounting and Financial Disclosure                                |
| Item 9A.    | Controls and Procedures                                                                                                  |
| Item 9B.    | Other Information                                                                                                        |
|        |                                                                                                                     |
|        | PART III                                                                                                            |
| Item 10.    | Directors, Executive Officers and Corporate Governance                                                                   |
| Item 11.    | Executive and Director      Compensation                                                                                 |
| Item    12. | Security Ownership of      Certain Beneficial Owners and Management and Related Stockholder Matters                      |
| Item    13. | Certain Relationships and      Related Transactions and Director Independence                                            |
| Item    14. | Principal Accountant Fees      and Services                                                                              |
|        |                                                                                                                     |
|        | PART IV                                                                                                             |
| Item 15.    | Exhibits and Financial Statement Schedules                                                                               |

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| ·   | the      distraction of management and potential disruption of operations, which      could have an adverse effect on our ongoing  operations; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the      inability to successfully achieve the benefits of any strategic      alternative undertaken by us; |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | the      potential loss of business opportunities as management focuses on the      pursuit of various strategic alternatives;and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------|

| ·   | perceived      uncertainties as to our future as a going concern that can result in loss      of potential customers and difficulties motivating, recruiting and      retaining personnel. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | • | the      level of demand for oil and naturalgas; |
|--------|---------|--------------------------------------------------|

|   | • | worldwide      political, military and economic conditions, including, but not limited      to, the ability of the Organization of Petroleum Exporting Countries to      set and maintain production levels and prices for  oil; |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | oil      and natural gas production/inventorylevels; |
|--------|---------|------------------------------------------------------|

|   | • | the      policies of governments regarding the exploration for and production and      development of their oil and natural gas  reserves; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | global      weather conditions; |
|--------|---------|---------------------------------|

|   | • | interest      rates and cost of capital; and |
|--------|---------|----------------------------------------------|

|   | • | tax      laws. |
|--------|---------|----------------|

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|   | • | personal      injury; |
|--------|---------|-----------------------|

|   | • | loss      of life; |
|--------|---------|--------------------|

|   | • | damage      to or destruction of property, equipment and the environment;      and |
|--------|---------|------------------------------------------------------------------------------------|

|   | • | suspension      of operations. |
|--------|---------|--------------------------------|

|   | • | the      oil and natural gas industry; and |
|--------|---------|--------------------------------------------|

|   | • | worker      safety and environmentalprotection. |
|--------|---------|-------------------------------------------------|

|   | • | revocation      of permits; |
|--------|---------|-----------------------------|

|   | • | issuance      of corrective action orders; |
|--------|---------|--------------------------------------------|

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|   | • | assessment      of administrative, civil or criminal penalties;  and |
|--------|---------|----------------------------------------------------------------------|

|   | • | issuance      of injunctions restricting or prohibiting our  operations. |
|--------|---------|--------------------------------------------------------------------------|

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|                                           |   | High   |   |   | Low    |   |
|------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Fiscal      Year Ended September 30, 2007 |   |   |   |   |   |   |
| First      Quarter                             |   | $      | 4.50   |   |   | $      | 2.37 |   |
| Second      Quarter                            |   | $      | 4.39   |   |   | $      | 3.34 |   |
| Third      Quarter                             |   | $      | 4.25   |   |   | $      | 2.05 |   |
| Fourth      Quarter                            |   | $      | 3.42   |   |   | $      | 1.91 |   |
|                                           |   |   |   |   |   |   |   |   |
| Fiscal      Year Ended September 30, 2008 |   |   |   |   |   |   |   |   |
| First      Quarter                             |   | $      | 3.70   |   |   | $      | 2.30 |   |
| Second      Quarter                            |   | $      | 2.70   |   |   | $      | 1.40 |   |
| Third      Quarter                             |   | $      | 3.20   |   |   | $      | 1.75 |   |
| Fourth      Quarter                            |   | $      | 2.83   |   |   | $      | 0.01 |   |

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| Plan category                                                | Number of securities to be issued upon exercise of outstanding options,warrants and rights |   | Weighted-averageexerciseprice of outstanding options, warrants and rights |   | Number of securities remaining available forfuture issuance underequity compensationplans (excludingsecurities reflected in column (a)) |
|-------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                              | (a)                                                                                                                                                    |   | (b)                                                                                                     |   | (c)                                                                                                                                                                                                      |
| Equity      compensation plans approved by security holders*      | 175,000                                                                                                                                                |   | 2.21                                                                                                    |   | 631,750                                                                                                                                                                                                  |
| Equity      compensation plans not approved by security holders** | 5,585,716                                                                                                                                              |   | $                                                                                                       | 1.91   |                                                                                                                                                                                                     | 34,750 |
|                                                              |                                                                                                                                                   |   |                                                                                                    |   |                                                                                                                                                                                                     |
| Total                                                             | 5,760,716                                                                                                                                              |   | $                                                                                                       | 1.92   |                                                                                                                                                                                                     | 666,500 |

| * | In      March 2007, our shareholders approved and adopted the Particle      Drilling Technologies, Inc. 2007 Stock Incentive Plan. This plan      provides for the issuance of up to 1,500,000 shares of common stock      pursuant to incentive stock options, non-statutory stock options and      restricted stock grants to our directors, employees and consultants.      Awards may be granted at not less than the fair market value (as defined      in this plan) on the date the awards are granted. The options expire ten      years after the date of grant unless otherwise specified in the award      agreement. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ** |  The      following equity compensation plans have not been approved by security      holders: |
|----|-----------------------------------------------------------------------------------------------------|

|   | • | In      April 2004, the Board of Directors of Particle Drilling, Inc.      approved and adopted the 2004 Stock Plan. The stockholders of PDTI adopted      this plan in August 2004. This plan provides for the issuance of      incentive stock options, non-statutory stock options and restricted stock      grants to our directors, employees and consultants. This plan provides for      the issuance of options and restricted stock awards to purchase or issue      up to 3,500,000 shares of common stock. Awards may be granted at not less      than the fair market value (as defined in this plan) on the date such      awards are granted. The options expire ten years from the date granted      unless otherwise specified in the award  agreement. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | In      March 2005, our Board of Directors approved and adopted the Particle      Drilling Technologies, Inc. 2005 Stock Incentive Plan. This plan      provides for the issuance of non-statutory stock options and restricted      stock grants to our directors, employees and consultants. This plan      provides for the issuance of options and restricted stock awards to      purchase or issue up to 2,000,000 shares of common stock. Awards may be      granted at not less than the fair market value (as defined in this plan)      on the date the awards are granted. The options expire ten years after      date of grant unless otherwise specified in the award      agreement. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | On      April 30, 2004, Particle Drilling, Inc. granted warrants to ten      consultants as consideration for services provided to Particle      Drilling, Inc. Pursuant to these warrants, the ten consultants have      the right to purchase up to an aggregate of 19,000 shares of common stock      of Particle Drilling, Inc. (consisting of warrants to purchase 5,000      shares, 5,000 shares, 5,000 shares, and 4,000 shares). On June 17,      2004, Particle Drilling, Inc. granted warrants to an additional      consultant for services provided to Particle Drilling, Inc., pursuant      to which such consultant has the right to purchase up to 10,000 shares of      common stock of Particle Drilling, Inc. The warrants described in      this paragraph have an exercise price of $0.12 and a maximum term of five      years from the date granted. All of these warrants were converted into      warrants to purchase common stock of PDTI in connection with the merger of      Particle Drilling, Inc. into PDTI, and were then assumed by our      company in connection with our acquisition of  PDTI. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | On      November 1, 2004, PDTI granted warrants to two consultants as      consideration for services provided to PDTI, pursuant to which such      consultants have the right to purchase up to 10,000 shares and 2,500      shares, respectively, of common stock of PDTI. The warrants described in      this paragraph have an exercise price of $3.00 per share and maximum term      of five years from the date granted. In connection with our acquisition of      PDTI, we assumed these warrants. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | On      January 11, 2005, PDTI granted warrants to eight parties affiliated      with the placement agent as compensation for their services in connection      with the private placement of PDTI Series A preferred stock in      January 2005. Pursuant to these warrants, the parties affiliated with      the placement agent have the right to purchase up to an aggregate of      42,641 shares of our common stock (consisting of warrants to purchase      32,641 shares and 10,000 shares). The warrants described in this paragraph      have an exercise price of $2.00 and a maximum term of five years from the      date granted. In connection with our acquisition of PDTI, we assumed these      warrants. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | • | On      February 9, 2005, we granted warrants to seven parties affiliated      with the placement agent in connection with the private placement of our      common stock in February 2005 as consideration for services provided      to us. Pursuant to these warrants, the parties affiliated with the      placement agent have the right to purchase up to an aggregate of 205,000      shares of our common stock (consisting of warrants to purchase 135,000      shares, 30,000 shares, 25,000 shares and 15,000 shares). The warrants      described in this paragraph have an exercise price of $2.00 per share and      a maximum term of ten years from the date  granted. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |  On October 17,      2006, we granted warrants to parties in connection with the private      placement of our common stock in October 2006. Pursuant to these      warrants, the parties affiliated with the placement agent have the right      to purchase up to an aggregate of 1,500,000 shares of our common stock.      The warrants described in this paragraph have an exercise price of $3.25      per share and a maximum term of ten years from the date      granted. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                          |   |                                                       Year Ended September 30, |        |   |   |   |
|---------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|--------|--------|--------|
|                                                          |   | 2008                                                                                                                                                                                                                                                                                                                                          |        |   | 2007   |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement      of Operations Data:                            |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                      |   | $                                                                                                                                                                                                                                                                                                                                             | —     |   |   | $      | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Operating      expenses:                                      |   |                                                                                                                                                                                                                                                                                                                                          | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Research      and development                                 |   |                                                                                                                                                                                                                                                                                                                                          | 6,074,173   |   |   |   | 5,894,101 |   |   |   | 5,964,438 |   |   |   | 2,802,155 |   |   |   | 621,752 |   |
| General      and administrative                               |   |                                                                                                                                                                                                                                                                                                                                          | 5,050,508   |   |   |   | 4,942,621 |   |   |   | 4,581,604 |   |   |   | 3,182,313 |   |   |   | 2,683,024 |   |
| Impairment      of asset                                      |   |                                                                                                                                                                                                                                                                                                                                          | —     |   |   |   | 295,260 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Gain      on sale of assets                                   |   |                                                                                                                                                                                                                                                                                                                                          | (756,469    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Loss      from operations                                     |   |                                                                                                                                                                                                                                                                                                                                          | (10,368,212 | )      |   |   | (11,131,982 | ) |   |   | (10,546,042 | ) |   |   | (5,984,468 | ) |   |   | (3,304,776 | ) |
| Other      income (expenses)                                  |   |                                                                                                                                                                                                                                                                                                                                          | 81,273      |   |   |   | 377,713 |   |   |   | 356,455 |   |   |   | 260,050 |   |   |   | (26,224 | ) |
| Net      loss                                                 |   | $                                                                                                                                                                                                                                                                                                                                             | (10,286,939 | )      |   | $      | (10,754,269 | ) |   | $ | (10,189,587 | ) |   | $ | (5,724,418 | ) |   | $ | (3,331,000 | ) |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic      and Diluted Net Loss Per Share:                    |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from operations                                     |   | $                                                                                                                                                                                                                                                                                                                                             | (0.32       | )      |   | $      | (0.37 | ) |   | $ | (0.43 | ) |   | $ | (0.27 | ) |   | $ | (0.257 | ) |
| Net      loss                                                 |   | $                                                                                                                                                                                                                                                                                                                                             | (0.32       | )      |   | $      | (0.36 | ) |   | $ | (0.42 | ) |   | $ | (0.26 | ) |   | $ | (0.25 | ) |
| Weighted      average shares outstanding                      |   |                                                                                                                                                                                                                                                                                                                                          | 32,490,392  |   |   |   | 30,185,030 |   |   |   | 24,520,619 |   |   |   | 22,150,365 |   |   |   | 13,364,183 |   |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash      Flow Data:                                          |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      cash used in operating activities                    |   | $                                                                                                                                                                                                                                                                                                                                             | (7,769,269  | )      |   | $      | (6,870,071 | ) |   | $ | (7,192,123 | ) |   | $ | (4,625,184 | ) |   | $ | (1,714,691 | ) |
| Net      cash provided by (used in) investing activities      |   |                                                                                                                                                                                                                                                                                                                                          | 521,215     |   |   |   | (1,629,629 | ) |   |   | (843,515 | ) |   |   | (1,723,254 | ) |   |   | (267,546 | ) |
| Net      cash (used in) provided by financing      activities |   |                                                                                                                                                                                                                                                                                                                                          | 5,082,268   |   |   |   | 10,670,043 | ) |   |   | (177,422 | ) |   |   | 16,832,721 |   |   |   | 1,999,098 |   |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Data (at end of period):                   |   |                                                                                                                                                                                                                                                                                                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash      and cash equivalents                                |   | $                                                                                                                                                                                                                                                                                                                                             | 2,296,143   |   |   | $      | 4,461,929 |   |   | $ | 2,291,586 |   |   | $ | 10,504,646 |   |   | $ | 20,363 |   |
| Working      capital surplus (deficiency)                     |   |                                                                                                                                                                                                                                                                                                                                          | 1,259,076   |   |   |   | 4,329,347 |   |   |   | 1,411,485 |   |   |   | 9,386,096 |   |   |   | (1,301,027 | ) |
| Total      assets                                             |   |                                                                                                                                                                                                                                                                                                                                          | 5,364,157   |   |   |   | 7,827,079 |   |   |   | 5,483,362 |   |   |   | 13,548,413 |   |   |   | 1,570,585 |   |
| Long-term      debt                                           |   |                                                                                                                                                                                                                                                                                                                                          | 15,381      |   |   |   | 24,537 |   |   |   | 15,305 |   |   |   | 9,463 |   |   |   | 20,201 |   |
| Total      stockholders’ equity                         |   |                                                                                                                                                                                                                                                                                                                                          | 3,915,492   |   |   |   | 6,491,247 |   |   |   | 3,967,629 |   |   |   | 12,148,107 |   |   |   | 118,459 |   |

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|                                                                                         |   | Payments Due by Period |      |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
| Contractual Obligations                                                                 |   | Total                                 |      |   | Less than 1year |   |   | 1 - 3 years |   |   | 3 - 5 years |   |   | More than 5years |   |
|                                                                                         |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-Term      Debt Obligation and Short Term      Notes Payable (including current portion) |   | $                                     | 108,309   |   |   | $ | 92,928 |   |   | $ | 15,381 |   |   | $ | — |   |   | $ | — |   |
| Equipment      Purchase Commitments                                                          |   |                                  | 59,002    |   |   |   | 59,002 |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Operating      Lease Obligations                                                             |   |                                  | 1,849,132 |   |   |   | 432,257 |   |   |   | 1,416,875 |   |   |   | — |   |   |   | — |   |
|                                                                                         |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                        |   | $                                     | 2,016,443 |   |   | $ | 584,187 |   |   | $ | 1,432,256 |   |   | $ | — |   |   | $ | — |   |

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| Management’s Report on Internal Control      over Financial Reporting                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                  |
| Reports of Independent Registered Public      Accounting Firm                                                                                                                                         |
|                                                                                                                                                                                                  |
| Consolidated Balance Sheets as of September 30,      2008 and 2007                                                                                                                               |
|                                                                                                                                                                                                  |
| Consolidated Statements of Operations for the      years ended September 30, 2008, 2007, and 2006, and for the period      from June 9, 2003 (date of inception) to September 30, 2008 |
|                                                                                                                                                                                                  |
| Consolidated Statements of Stockholders’      Equity for the period from June 9, 2003 (date of inception) to      September 30, 2008                                                  |
|                                                                                                                                                                                                  |
| Consolidated Statements of Cash Flows for the years ended      September 30, 2008, 2007, 2006, and for the period from June 9,      2003 (date of inception) to September 30, 2008     |
|                                                                                                                                                                                                  |
| Notes to Consolidated Financial Statements                                                                                                                                                            |

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING

Our company’s management is responsible forestablishing and maintaining adequate internal control over financial reporting,as such term is defined in Exchange Act Rule 13a-15(f). Internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of ourconsolidated financial statements for external purposes in accordance withgenerally accepted accounting principles. Under the supervision and with theparticipation of our company’s management, including the Chief Executive Officerand the Chief Financial Officer, we conducted an evaluation of the effectivenessof our internal control over financial reporting based on the framework in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of theTreadway Commission.

Our internal control over financial reportingincludes those policies and procedures that: (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation ofour consolidated financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and(3) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use or disposition of our assets that could have amaterial effect on our consolidated financial statements.

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

Based on our evaluation under the framework in Internal Control — IntegratedFramework, the management of our company concluded that our internalcontrol over financial reporting was effective as of September 30,2008.

Our internal control over financial reporting as ofSeptember 30, 2008 has been audited by UHY LLP, an independent registeredpublic accounting firm, as stated in their report that follows.

| /s/ J. Chris Boswell                                                                                            |
|-----------------------------------------------------------------------------------------------------------------|
| Senior Vice President and Chief Financial      Officer                                                          |
|                                                                                                            |
| /s/ Jim B.      Terry                |
| President and Chief Executive      Officer                                                                      |
|                                                                                                            |
| Houston, Texas                                                                                                  |
| December 15,  2008                                                                                              |

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directors andStockholders

Particle DrillingTechnologies, Inc.

Houston, Texas

We have audited Particle Drilling Technologies,Inc.’s (the “Company”) internal control over financial reporting as ofSeptember 30, 2008, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

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

In our opinion Particle Drilling Technologies, Inc.maintained, in all material respects, effective internal control over financialreporting as of September 30, 2008, based on criteria established inInternal Control—Integrated Framework issued by COSO.

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of the Company as of September 30, 2008 and2007, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period endedSeptember 30, 2008, and for the period from June 9, 2003 (date ofinception) to September 30, 2008 and our report dated December 15,2008 expressed an unqualified opinion on those consolidated financialstatements.

| /s/ UHY LLP            |   |   |
|------------------------|--------|--------|
|                   |   |   |
| Houston, Texas         |   |   |
| December 15, 2008 |   |   |

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directors andStockholders

Particle DrillingTechnologies, Inc.

Houston, Texas

We have audited the accompanying consolidatedbalance sheets of Particle Drilling Technologies, Inc. (a development stagecompany) as of September 30, 2008 and 2007, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2008, and for the period fromJune 9, 2003 (date of inception) to September 30, 2008. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

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

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Particle Drilling Technologies, Inc. asof September 30, 2008 and 2007, and the consolidated results of theiroperations and their cash flows for each of the three years in the period endedSeptember 30, 2008, and for the period from June 9, 2003 (date ofinception) to September 30, 2008, in conformity with accounting principlesgenerally accepted in the United States of America.

The accompanying consolidated financial statementshave been prepared assuming the Company will continue as a goingconcern.  As discussed in Note 2 to the consolidated financialstatements, the Company is in the development stage, has incurred losses sinceinception, has an accumulated deficit of approximately $40.8 million, andcontinues to experience negative cash flow from operations.  These andother factors raise substantial doubt about its ability to continue as a goingconcern.  Management’s plans regarding these matters are described inNote 2.  The consolidated financial statements do not include anyadjustments that might result from the outcome of thisuncertainty.

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofSeptember 30, 2008, based on the criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated December 15, 2008 expressed anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

| /s/ UHY LLP            |   |   |
|------------------------|--------|--------|
|                   |   |   |
| Houston, Texas         |   |   |
| December 15, 2008 |   |   |

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PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                             |   | September 30,2008 |        |   | September 30,2007 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |
| ASSETS                                                                                                                                                                                                                                                           |   |                   |        |   |                   |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |
| Current assets:                                                                                                                                                                                                                                                  |   |                   |        |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                        |   | $                      | 2,296,143   |   |                   | $      | 4,461,929 |   |
| Short term investments                                                                                                                                                                                                                                           |   |                   | —     |   |                   |   | — |   |
| Assets held for sale                                                                                                                                                                                                                                             |   |                   | —     |   |                   |   | 900,000 |   |
| Prepaid expenses                                                                                                                                                                                                                                                 |   |                   | 260,686     |   |                   |   | 233,174 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Total current assets                                                                                                                                                                                                                                             |   |                   | 2,556,829   |   |                   |   | 5,595,103 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Property, plant & equipment,      net                                                                                                                                                                                                                   |   |                   | 1,213,918   |   |                   |   | 867,168 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Intangibles, net                                                                                                                                                                                                                                                 |   |                   | 1,552,266   |   |                   |   | 1,312,246 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Other assets                                                                                                                                                                                                                                                     |   |                   | 41,144      |   |                   |   | 52,562 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Total assets                                                                                                                                                                                                                                                     |   | $                      | 5,364,157   |   |                   | $      | 7,827,079 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’      EQUITY                                                                                                                                                                                                                  |   |                   |        |   |                   |   |   |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                 |   | $                      | 850,944     |   |                   | $      | 1,028,999 |   |
| Short-term notes payable                                                                                                                                                                                                                                         |   |                   | 84,277      |   |                   |   | 88,258 |   |
| Current portion of long-term      debt                                                                                                                                                                                                                           |   |                   | 8,651       |   |                   |   | 13,511 |   |
| Accrued liabilities                                                                                                                                                                                                                                              |   |                   | 353,881     |   |                   |   | 134,988 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Total current liabilities                                                                                                                                                                                                                                        |   |                   | 1,297,753   |   |                   |   | 1,265,756 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Long-term debt                                                                                                                                                                                                                                                   |   |                   | 15,381      |   |                   |   | 24,537 |   |
| Deferred Rent                                                                                                                                                                                                                                                    |   |                   | 135,531     |   |                   |   | 45,539 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Commitments and contingencies - See Note      12                                                                                                                                                                                                                 |   |                   | —     |   |                   |   | — |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                      |   |                   |        |   |                   |   |   |   |
| Common stock, $.001 par value, 100,000,000      shares authorized, 38,767,018 shares issued and 35,763,932 shares      outstanding at September 30, 2008, and 34,632,987 shares issued and      31,629,901 shares outstanding at September 30,    2007 |   |                   | 38,768      |   |                   |   | 34,634 |   |
| Additional paid-in capital                                                                                                                                                                                                                                       |   |                   | 46,217,538  |   |                   |   | 38,510,488 |   |
| Treasury stock at cost, 3,003,086 shares at      September 30, 2008 and 2007                                                                                                                                                                                |   |                   | (1,511,817  | )      |                   |   | (1,511,817 | ) |
| Deficit accumulated during the development      stage                                                                                                                                                                                                            |   |                   | (40,828,997 | )      |                   |   | (30,542,058 | ) |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Total stockholders’ equity                                                                                                                                                                                                                                 |   |                   | 3,915,492   |   |                   |   | 6,491,247 |   |
|                                                                                                                                                                                                                                                             |   |                   |        |   |                   |   |   |   |
| Total liabilities and stockholders’      equity                                                                                                                                                                                                            |   | $                      | 5,364,157   |   |                   | $      | 7,827,079 |   |

The accompanying notes are an integral part of thesestatements.

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PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                          |   |                                    |        |   |               |   |        |   |   |   | Period from June 9, 2003(date of inception) to |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|--------|--------------------|--------|-------------|--------|--------|--------|-----------------------------------------------------------------------------------|--------|
|                                                                                          |   | Year Ended September 30, |        |   | September 30, |   |
|                                                                                          |   | 2008                                    |        |   | 2007               |   |        | 2006   |   |   | 2008                                                                              |   |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |
| Revenues                                                                                      |   | $                                       | —     |   |               | $      | —     |   |   | $      | —                                                                           |   |   | $ | — |   |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Operating expenses:                                                                           |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Research and development                                                                      |   |                                    | 6,074,173   |   |               |   | 5,894,101   |   |   |   | 5,964,438                                                                         |   |   |   | 21,396,245 |   |
| General and administrative                                                                    |   |                                    | 5,050,508   |   |               |   | 4,942,621   |   |   |   | 4,581,604                                                                         |   |   |   | 20,943,228 |   |
| Impairment of asset                                                                           |   |                                    | —     |   |               |   | 295,260     |   |   |   | —                                                                           |   |   |   | 295,260 |   |
| Gain on sale of assets                                                                        |   |                                    | (756,469    | )      |               |   | —     |   |   |   | —                                                                           |   |   |   | (756,469 | ) |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Total operating expenses                                                                      |   |                                    | 10,368,212  |   |               |   | 11,131,982  |   |   |   | 10,546,042                                                                        |   |   |   | 41,878,264 |   |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Loss from operations                                                                          |   |                                    | (10,368,212 | )      |               |   | (11,131,982 | )      |   |   | (10,546,042                                                                       | )      |   |   | (41,878,264 | ) |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Other income (expenses)                                                                       |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Interest income                                                                               |   |                                    | 87,888      |   |               |   | 384,484     |   |   |   | 260,914                                                                           |   |   |   | 942,591 |   |
| Rental income - related    party                                                              |   |                                    | —     |   |               |   | —     |   |   |   | 46,565                                                                            |   |   |   | 73,727 |   |
| Gain on debtextinguishment                                                                    |   |                                    | —     |   |               |   | —     |   |   |   | —                                                                           |   |   |   | 35,283 |   |
| Other                                                                                         |   |                                    | —     |   |               |   | —     |   |   |   | 55,614                                                                            |   |   |   | 55,614 |   |
| Interest expense                                                                              |   |                                    | (6,615      | )      |               |   | (6,771      | )      |   |   | (6,638                                                                            | )      |   |   | (57,948 | ) |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Total other income    (expenses)                                                              |   |                                    | 81,273      |   |               |   | 377,713     |   |   |   | 356,455                                                                           |   |   |   | 1,049,267 |   |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Net loss                                                                                      |   | $                                       | (10,286,939 | )      |               | $      | (10,754,269 | )      |   | $      | (10,189,587                                                                       | )      |   | $ | (40,828,997 | ) |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Net loss per common share, basic and      diluted                                             |   | $                                       | (0.32       | )      |               | $      | (0.36       | )      |   | $      | (0.42                                                                             | )      |   | $ | (1.50 | ) |
|                                                                                          |   |                                    |        |   |               |   |        |   |   |   |                                                                              |   |   |   |   |   |
| Weighted average number of common shares      outstanding — basic and diluted |   |                                    | 32,490,392  |   |               |   | 30,185,030  |   |   |   | 24,520,619                                                                        |   |   |   | 27,173,234 |   |

The accompanying notes are an integral part of thesestatements.

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PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY

For the Period from June 9, 2003 (date ofinception)

to September 30, 2008

|                                                                                                                                                      |              |   |                |    |    |        |       |    | Deficit     |   |                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--------|---------------------|---------|---------|-------------|------------|---------|-------------|--------|---------------------|--------|
|                                                                                                                                                      |              |   |                |    |    |        |       |    | Accumulated |   | Total               |   |
|                                                                                                                                                      |              |   |                |    |    |        | Additional |    | During      |   | Stockholders’ |   |
|                                                                                                                                                      | Common Stock |   | Treasury Stock | Paid-in |    | Development |       | Equity  |        |
|                                                                                                                                                      | Shares            |   | Amount              |    | Shares  | Amount      | Capital    |    | Stage       |   | (Deficit)           |   |
| Retroactive restatement of stockholders’      equity prior tomerger forrecapitalization                                                             | 1,550,000         |   | $                   | 1,550   |    | —     | $          | — | $           | (1,550 | )                   | $      | — |   | $ | — |   |
| Common stock issued to      foundersat $0.001 per share in      June 2003                                                                            | 9,000,000         |   | 9,000               |    | — | —     | —    |    | —     |   | 9,000               |   |
| Common stock issued inprivateplacement for cash at $2.00per share from June 2003to September 2003, lessoffering expense of    $436,096          | 504,500           |   | 505                 |    | — | —     | 572,399    |    | —     |   | 572,904             |   |
| Common stock issued for      servicesprovided at $2.00 per sharein July 2003                                                                         | 15,000            |   | 15                  |    | — | —     | 29,985     |    | —     |   | 30,000              |   |
| Net loss                                                                                                                                                  | —           |   | —             |    | — | —     | —    |    | (542,784    | )      | (542,784            | )      |
| Balance, September 30,      2003                                                                                                                     | 11,069,500        |   | 11,070              |    | — | —     | 600,834    |    | (542,784    | )      | 69,120              |   |
| Common stock issued inprivateplacement for cash at $2.00per share from      October 2003to February 2004, less      offeringexpense of $166,322 | 196,800           |   | 197                 |    | — | —     | 227,080    |    | —     |   | 227,277             |   |
| Common stock issued for services provided at      $2.00 per share in October 2003                                                                    | 27,000            |   | 27                  |    | — | —     | 53,973     |    | —     |   | 54,000              |   |
| Common stock issued for cash      at$2.00 per share from October2003 to March 2004                                                                   | 325,000           |   | 325                 |    | — | —     | 649,675    |    | —     |   | 650,000             |   |
| Common stock issued for cash      at$1.82 per share in      October 2003                                                                             | 2,750             |   | 2                   |    | — | —     | 4,998      |    | —     |   | 5,000               |   |
| Common stock issued in      exchangefor note payable at $2.00 pershare in January 2004                                                               | 25,000            |   | 25                  |    | — | —     | 49,975     |    | —     |   | 50,000              |   |
| Common stock issued for services provided at      $2.00 per share in January 2004                                                                    | 12,000            |   | 12                  |    | — | —     | 23,988     |    | —     |   | 24,000              |   |
| Common stock issued for cash      at$0.72 per share in      March 2004                                                                               | 69,508            |   | 70                  |    | — | —     | 49,930     |    | —     |   | 50,000              |   |
| Common stock issued for cash      at$0.97 per share in      March 2004                                                                               | 15,480            |   | 15                  |    | — | —     | 14,985     |    | —     |   | 15,000              |   |
| Common stock issued for cash      at$0.75 per share in      March 2004                                                                               | 35,000            |   | 35                  |    | — | —     | 26,215     |    | —     |   | 26,250              |   |
| Common stock issued for services provided at      $2.00 per share in March 2004                                                                      | 70,000            |   | 70                  |    | — | —     | 139,930    |    | —     |   | 140,000             |   |
| Common stock issued for services provided at      $2.00 per share in March 2004                                                                      | 75,000            |   | 75                  |    | — | —     | 149,925    |    | —     |   | 150,000             |   |
| Common stock issued for cash      at$0.74 per share in      April 2004                                                                               | 23,500            |   | 23                  |    | — | —     | 17,477     |    | —     |   | 17,500              |   |
| Common stock issued in      exchangeof accounts payable at $0.12per share upon exercise ofwarrants inApril 2004                                      | 50,000            |   | 50                  |    | — | —     | 6,850      |    | —     |   | 6,900               |   |
| Common stock issued for cash      at$0.12 per share upon exerciseof warrants from      April 2004to June 2004                                   | 113,909           |   | 114                 |    | — | —     | 15,605     |    | —     |   | 15,719              |   |

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| Common stock issued for cash      at$0.12 per share upon exerciseof employee stock options inJune 2004                                   |   |   | 200,000    |   |   |   | 200     |   |   |   | —    |   |   |   | —    |   |   |   | 32,062     |   |   |   | —    |   |   |   | 32,262     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|---------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|
| Common stock issued in      connectionwith advisory agreement at$0.12 per share in      June 2004                                        |   |   | 5,000,000  |   |   |   | 5,000   |   |   |   | —    |   |   |   | —    |   |   |   | 595,000    |   |   |   | —    |   |   |   | 600,000    |   |
| Common stock issued at $1.50      pershare upon conversion of notepayable in June 2004,      lessoffering expense                        |   |   | 410,000    |   |   |   | 410     |   |   |   | —    |   |   |   | —    |   |   |   | 553,090    |   |   |   | —    |   |   |   | 553,500    |   |
| Common stock issued inprivateplacement for cash at $2.00per share from July 2004      toSeptember 2004, less      offeringexpense   |   |   | 375,000    |   |   |   | 375     |   |   |   | —    |   |   |   | —    |   |   |   | 717,125    |   |   |   | —    |   |   |   | 717,500    |   |
| Fair value of common stockwarrants issued for    services                                                                                     |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 2,880      |   |   |   | —    |   |   |   | 2,880      |   |
| Stock-based employeecompensation                                                                                                              |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 42,551     |   |   |   | —    |   |   |   | 42,551     |   |
| Net loss                                                                                                                                      |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | —    |   |   |   | (3,331,000 | )      |   |   | (3,331,000 | )      |
| Balance, September 30,      2004                                                                                                         |   |   | 18,095,447 |   |   |   | 18,095  |   |   |   | —    |   |   |   | —    |   |   |   | 3,974,148  |   |   |   | (3,873,784 | )      |   |   | 118,459    |   |
| Common stock issued inprivateplacement for cash at $2.00per share from      October 2004to February 2005, less      offeringexpense |   |   | 850,000    |   |   |   | 850     |   |   |   | —    |   |   |   | —    |   |   |   | 1,581,585  |   |   |   | —    |   |   |   | 1,582,435  |   |
| Common stock issued for      servicesprovided at $1.75 per shareinOctober 2004                                                           |   |   | 10,000     |   |   |   | 10      |   |   |   | —    |   |   |   | —    |   |   |   | 17,490     |   |   |   | —    |   |   |   | 17,500     |   |
| Common stock issued upon      cashlessexercise of warrants at $0.12per share in      December 2004                                       |   |   | 9,314      |   |   |   | 10      |   |   |   | —    |   |   |   | —    |   |   |   | (10        | )      |   |   | —    |   |   |   | —    |   |
| Common stock issued for cash      at$0.01 per share upon exerciseof warrants in      December 2004                                       |   |   | 33,333     |   |   |   | 33      |   |   |   | —    |   |   |   | —    |   |   |   | 302        |   |   |   | —    |   |   |   | 335        |   |
| Common stock cancelled at      $0.12per share in    January 2005                                                                         |   |   | (700,000   | )      |   |   | (700    | )      |   |   | —    |   |   |   | —    |   |   |   | (83,300    | )      |   |   | —    |   |   |   | (84,000    | )      |
| Common stock cancelled at      $0.001per share in    January 2005                                                                        |   |   | (50,000    | )      |   |   | (50     | )      |   |   | —    |   |   |   | —    |   |   |   | 50         |   |   |   | —    |   |   |   | —    |   |
| Common stock issued inprivateplacement for cash at $2.00per share in      February 2005,less offering expense                            |   |   | 9,000,000  |   |   |   | 9,000   |   |   |   | —    |   |   |   | —    |   |   |   | 14,605,332 |   |   |   | —    |   |   |   | 14,614,332 |   |
| Repurchase of common stock at$0.50 per share inFebruary 2005                                                                             |   |   | —    |   |   |   | — |   |   |   | (3,000,000 | )      |   |   | (1,500,000 | )      |   |   | —    |   |   |   | —    |   |   |   | (1,500,000 | )      |
| Restricted stock issued to      employeesat $4.90 per share in      May 2005                                                             |   |   | 140,000    |   |   |   | 140     |   |   |   | —    |   |   |   | —    |   |   |   | (140       | )      |   |   | —    |   |   |   | —    |   |
| Restricted stock issued to      employeesat $5.45 per share in      May 2005                                                             |   |   | 5,000      |   |   |   | 5       |   |   |   | —    |   |   |   | —    |   |   |   | (5         | )      |   |   | —    |   |   |   | —    |   |
| Common stock issued uponcashless exercise of warrantsat $0.12 per share inAugust 2005                                                    |   |   | 48,378     |   |   |   | 48      |   |   |   | —    |   |   |   | —    |   |   |   | (48        | )      |   |   | —    |   |   |   | —    |   |
| Fair value of common stockwarrants issued for    services                                                                                     |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 2,508,564  |   |   |   |       |   |   |   | 2,508,564  |   |
| Stock-based employeecompensation                                                                                                              |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 614,900    |   |   |   |       |   |   |   | 614,900    |   |
| Net loss                                                                                                                                      |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | —    |   |   |   | (5,724,418 | )      |   |   | (5,724,418 | )      |
| Balance, September 30,      2005                                                                                                         |   |   | 27,441,472 |   |   | $      | 27,441  |   |   |   | (3,000,000 | )      |   | $      | (1,500,000 | )      |   | $      | 23,218,868 |   |   | $      | (9,598,202 | )      |   | $      | 12,148,107 |   |
| Common stock issued for cash      at$0.12 per share upon exerciseof employee stock options inJanuary 2006                                |   |   | 53,750     |   |   |   | 54      |   |   |   |       |   |   |   |       |   |   |   | 6,396      |   |   |   |       |   |   |   | 6,450      |   |
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inFebruary 2006                                                  |   |   | 9,721      |   |   |   | 10      |   |   |   |       |   |   |   |       |   |   |   | (10        | )      |   |   |       |   |   |   |       |   |

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| Restricted stock issued to      employeeat $6.73 per share inJanuary 2006                                                   |   |   | 150,000    |   |   |   | 150     |   |   |   |       |   |   |   |       |   | (150   | )      |       |   |   |   |        |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|---------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|-------------|--------|
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inFebruary 2006                                     |   |   | 176,458    |   |   |   | 176     |   |   |   |       |   |   |   |       |   | (176   | )      |       |   |   |   |        |   |
| Restricted stock issued to      employeeat $5.87 per share inFebruary 2006                                                  |   |   | 20,000     |   |   |   | 20      |   |   |   |       |   |   |   |       |   | (20    | )      |       |   |   |   |        |   |
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inMarch 2006                                        |   |   | 66,000     |   |   |   | 66      |   |   |   |       |   |   |   |       |   | (66    | )      |       |   |   |   |        |   |
| Repurchase of common stock at$3.85 per share in      June 2006                                                              |   |   |       |   |   |   |    |   |   |   | (3,086     | )      |   |   | (11,817    | )      |   |   |       |   |   |   |        |   |   | (11,817 | ) |
| Restricted stock issued toemployee at $5.73 per sharein June 2006                                                           |   |   | 12,500     |   |   |   | 13      |   |   |   |       |   |   |   |       |   |   |   | (13        | )      |   |   |        |   |   |   |   |
| Restricted stock issued toemployee at $3.40 per sharein June 2006                                                           |   |   | 5,000      |   |   |   | 5       |   |   |   |       |   |   |   |       |   |   |   | (5         | )      |   |   |        |   |   |   |   |
| Restricted stock issued toemployee at $3.40 per sharein June 2006                                                           |   |   | 10,000     |   |   |   | 10      |   |   |   |       |   |   |   |       |   |   |   | (10        | )      |   |   |        |   |   |   |   |
| Restricted stock issued toemployee at $3.40 per sharein June 2006                                                           |   |   | 5,000      |   |   |   | 5       |   |   |   |       |   |   |   |       |   |   |   | (5         | )      |   |   |        |   |   |   |   |
| Restricted stock issued toemployee at $3.40 per sharein June 2006                                                           |   |   | 5,000      |   |   |   | 5       |   |   |   |       |   |   |   |       |   |   |   | (5         | )      |   |   |        |   |   |   |   |
| Restricted stock issued toemployee at $3.40 per sharein June 2006                                                           |   |   | 5,000      |   |   |   | 5       |   |   |   |       |   |   |   |       |   |   |   | (5         | )      |   |   |        |   |   |   |   |
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inApril 2006                                        |   |   | 29,390     |   |   |   | 29      |   |   |   |       |   |   |   |       |   |   |   | (29        | )      |   |   |        |   |   |   |   |
| Common stock issued for cash      at$0.12 per share upon exerciseof employee stock options inJuly 2006                      |   |   | 14,500     |   |   |   | 15      |   |   |   |       |   |   |   |       |   |   |   | (15        | )      |   |   |        |   |   |   |   |
| Restricted stock issued to      employeeat $3.51 per share in      July 2006                                                |   |   | 7,500      |   |   |   | 8       |   |   |   |       |   |   |   |       |   |   |   | (8         | )      |   |   |        |   |   |   |   |
| Common stock issued upon      exerciseof warrants at $2.00 per share      inAugust 2006                                     |   |   | 2,000      |   |   |   | 2       |   |   |   |       |   |   |   |       |   |   |   | (2         | )      |   |   |        |   |   |   |   |
| Stock-based employee      compensation                                                                                           |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 2,014,476  |   |   |   |        |   |   | 2,014,476 |   |
| Net loss                                                                                                                         |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | —    |   |   |   | (10,189,587 | )      |   |   | (10,189,587 | ) |
| Balance, September 30,      2006                                                                                            |   |   | 28,013,291 |   |   | $      | 28,014  |   |   |   | (3,003,086 | )      |   | $      | (1,511,817 | )      |   | $      | 25,239,221 |   |   | $      | (19,787,789 | )      |   | $ | 3,967,629 |   |
| Common stock issued inprivateplacement for cash at $2.35per shares in      October 2006,less offering expenses of$1,034,005 |   |   | 5,000,000  |   |   |   | 5,000   |   |   |   |       |   |   |   |       |   |   |   | 10,710,995 |   |   |   |        |   |   |   | 10,715,995 |   |
| Restricted stock issued toemployee at $3.08 per sharein October 2006                                                        |   |   | 3,000      |   |   |   | 3       |   |   |   |       |   |   |   |       |   |   |   | (3         | )      |   |   |        |   |   |   |   |   |
| Restricted stock issued toemployees at $2.85 per sharein October 2006                                                       |   |   | 68,250     |   |   |   | 68      |   |   |   |       |   |   |   |       |   |   |   | (68        | )      |   |   |        |   |   |   |   |   |
| Common stock issued uponexercise of warrants at $0.12per share in    October 2006                                           |   |   | 5,745      |   |   |   | 6       |   |   |   |       |   |   |   |       |   |   |   | (6         | )      |   |   |        |   |   |   |   |   |
| Common stock issued for cash      at$0.12 per share upon exerciseof employee stock optionsin November 2006                  |   |   | 6,000      |   |   |   | 6       |   |   |   |       |   |   |   |       |   |   |   | 714        |   |   |   |        |   |   |   | 720 |   |

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Table of Contents

| Common stock issued uponcashless exercise of warrantsat $0.12 per share inFebruary 2007                                  |   |   | 5,816      |   |   |   | 6       |   |   |   |       |   |   |   |       |   | (6     | )      |       |   |   |   |        |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|---------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|-------------|--------|
| Common stock issued uponexercise of warrants at $0.12per share in      February 2007                                     |   |   | 2,000      |   |   |   | 2       |   |   |   |       |   |   |   |       |   | 238    |   |       |   |   |   |        | 240    |   |
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inMarch 2007                                     |   |   | 486,558    |   |   |   | 487     |   |   |   |       |   |   |   |       |   | (487   | )      |       |   |   |   |        |   |   |
| Restricted stock issued tocertain directors at $3.93per share in    March 2007                                           |   |   | 30,000     |   |   |   | 30      |   |   |   |       |   |   |   |       |   | (30    | )      |       |   |   |   |        |   |   |
| Restricted stock issued toemployees at $3.69 per sharein April 2007                                                      |   |   | 4,000      |   |   |   | 4       |   |   |   |       |   |   |   |       |   | (4     | )      |       |   |   |   |        |   |   |
| Restricted stock cancelled inApril 2007                                                                                  |   |   | (3,375     | )      |   |   | (3      | )      |   |   |       |   |   |   |       |   | 3      |   |       |   |   |   |        |   |   |
| Common stock issued uponcashless exercise of warrantsat $0.12 per share inMay 2007                                       |   |   | 24,202     |   |   |   | 24      |   |   |   |       |   |   |   |       |   | (24    | )      |       |   |   |   |        |   |   |
| Common stock issued upon exercise of employee      stock options at $0.12 per share in June 2007                         |   |   | 37,500     |   |   |   | 37      |   |   |   |       |   |   |   |       |   | 4,463  |   |       |   |   |   |        | 4,500  |   |
| Common stock issued for cashat $0.12 per share uponexercise of employee stockoptions in July 2007                        |   |   | 300,000    |   |   |   | 300     |   |   |   |       |   |   |   |       |   | 35,700 |   |       |   |   |   |        | 36,000 |   |
| Restricted stock issued to anemployee at $2.18 per sharein August 2007                                                   |   |   | 500,000    |   |   |   | 500     |   |   |   |       |   |   |   |       |   | (500   | )      |       |   |   |   |        |   |   |
| Restricted stock issued toemployees at $2.54 per sharein September 2007                                                  |   |   | 150,000    |   |   |   | 150     |   |   |   |       |   |   |   |       |   | (150   | )      |       |   |   |   |        |   |   |
| Stock-based employee      compensation                                                                                        |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 2,520,432  |   |   |   |        |   |   | 2,520,432 |   |
| Net loss                                                                                                                      |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | —    |   |   |   | (10,754,269 | )      |   |   | (10,754,269 | ) |
| Balance, September 30,      2007                                                                                         |   |   | 34,632,987 |   |   | $      | 34,634  |   |   |   | (3,003,086 | )      |   | $      | (1,511,817 | )      |   | $      | 38,510,488 |   |   | $      | (30,542,058 | )      |   | $ | 6,491,247 |   |
| Restricted stock cancelled in October      2007                                                                               |   |   | (7,500     | )      |   |   | (8      | )      |   |   |       |   |   |   |       |   |   |   | 8          |   |   |   |        |   |   |   |   |   |
| Restricted stock issued toa director at $3.28 per sharein November 2007                                                  |   |   | 5,000      |   |   |   | 5       |   |   |   |       |   |   |   |       |   |   |   | (5         | )      |   |   |        |   |   |   |   |   |
| Common stock issued uponcashless exercise of warrantsat $2.00 per share inDecember 2007                                  |   |   | 688        |   |   |   | 1       |   |   |   |       |   |   |   |       |   |   |   | (1         | )      |   |   |        |   |   |   |   |   |
| Common stock issued uponexercise of warrants at $0.12per share in      December 2007                                     |   |   | 10,000     |   |   |   | 10      |   |   |   |       |   |   |   |       |   |   |   | 1,190      |   |   |   |        |   |   |   | 1,200 |   |
| Restricted stock cancelled in January      2008                                                                               |   |   | (4,000     | )      |   |   | (4      | )      |   |   |       |   |   |   |       |   |   |   | 4          |   |   |   |        |   |   |   |   |   |
| Common stock issued for cashat $0.12 per share uponexercise of employee stockoptions in    February 2008                 |   |   | 100,000    |   |   |   | 100     |   |   |   |       |   |   |   |       |   |   |   | 11,900     |   |   |   |        |   |   |   | 12,000 |   |
| Restricted stock issued todirectors at $1.84 per sharein March 2008                                                           |   |   | 35,000     |   |   |   | 35      |   |   |   |       |   |   |   |       |   |   |   | (35        | )      |   |   |        |   |   |   |   |   |
| Common stock issued in rights offering for      cash at $1.50 per share in April 2008, less offering expense of      $176,414 |   |   | 3,500,043  |   |   |   | 3,500   |   |   |   |       |   |   |   |       |   |   |   | 5,070,086  |   |   |   |        |   |   |   | 5,073,586 |   |
| Common stock issued for cashat $0.12 per share uponexercise of employee stockoptions in May 2008                         |   |   | 100,000    |   |   |   | 100     |   |   |   |       |   |   |   |       |   |   |   | 11,900     |   |   |   |        |   |   |   | 12,000 |   |
| Common stock issued for cashat $0.12 per share uponexercise of employee stockoptions in June 2008                        |   |   | 12,300     |   |   |   | 12      |   |   |   |       |   |   |   |       |   |   |   | 1,465      |   |   |   |        |   |   |   | 1,477 |   |
| Restricted stock issued toemployees at $2.65 per sharein June 2008                                                            |   |   | 382,500    |   |   |   | 383     |   |   |   |       |   |   |   |       |   |   |   | (383       | )      |   |   |        |   |   |   |   |   |
| Stock-based employeecompensation                                                                                              |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | 2,610,921  |   |   |   |        |   |   |   | 2,610,921 |   |
| Net loss                                                                                                                      |   |   | —    |   |   |   | — |   |   |   | —    |   |   |   | —    |   |   |   | —    |   |   |   | (10,286,939 | )      |   |   | (10,286,939 | ) |
| Balance, September 30,      2008                                                                                         |   |   | 38,767,018 |   |   | $      | 38,768  |   |   |   | (3,003,086 | )      |   | $      | (1,511,817 | )      |   | $      | 46,217,538 |   |   | $      | (40,828,997 | )      |   | $ | 3,915,492 |   |

The accompanying notes are an integral part of thesestatements.

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Table of Contents

PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                  |   |                                    |        |   |               |   |        |    |   |   | Period fromJune 9, 2003(date ofinception) to |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|--------|--------------------|--------|-------------|---------|--------|--------|-----------------------------------------------------------------------|--------|
|                                                                                  |   | Year Ended September 30, |        |   | September 30, |   |
|                                                                                  |   | 2008                                    |        |   | 2007               |   |        | 2006    |   |   | 2008                                                                  |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |
| Cash flows from operating      activities:                                            |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |
| Net loss                                                                              |   | $                                       | (10,286,939 | )      |               | $      | (10,754,269 | )       |   | $      | (10,189,587                                                           | )      |   | $ | (40,828,997 | ) |
| Adjustments      to reconcile net loss to net cash used in operating      activities: |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Gain on debtextinguishment                                                            |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | (35,283 | ) |
| Impairment of asset                                                                   |   |                                    | —     |   |               |   | 295,260     |    |   |   | —                                                               |   |   |   | 295,260 |   |
| Gain on sale of assets                                                                |   |                                    | (756,469    | )      |               |   | —     |    |   |   | —                                                               |   |   |   | (756,469 | ) |
| Other                                                                                 |   |                                    | —     |   |               |   | —     |    |   |   | (54,103                                                               |   |   |   | (55,614 | ) |
| Depreciation and amortization      expense                                            |   |                                    | 548,482     |   |               |   | 811,754     |    |   |   | 688,185                                                               |   |   |   | 2,587,298 |   |
| Short-term note issued for      services                                              |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 44,000 |   |
| Common stock issued for      services                                                 |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 931,500 |   |
| Warrants issued for    services                                                       |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 63,829 |   |
| Stock-based employee      compensation                                                |   |                                    | 2,610,921   |   |               |   | 2,520,432   |    |   |   | 2,014,476                                                             |   |   |   | 7,811,543 |   |
| Changes in operating assets and      liabilities:                                     |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Increase in accounts receivable — related      party                            |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | (40,819 | ) |
| Decrease in notereceivable                                                            |   |                                    | —     |   |               |   | 385,839     |    |   |   | —                                                               |   |   |   | 385,839 |   |
| (Increase) Decrease in prepaid      expenses                                          |   |                                    | (27,512     | )      |               |   | 1,314       |    |   |   | 249,460                                                               |   |   |   | 105,289 |   |
| Increase (Decrease) in accounts      payable                                          |   |                                    | (178,055    | )      |               |   | 198,447     |    |   |   | (226,181                                                              | )      |   |   | 511,006 |   |
| Increase (Decrease) in accrued      liabilities                                       |   |                                    | 218,893     |   |               |   | (336,475    | )  |   |   | 325,627                                                               |   |   |   | 450,678 |   |
| Increase in other assets                                                              |   |                                    | 11,418      |   |               |   | (37,912     | )       |   |   | —                                                               |   |   |   | (26,494 | ) |
| Increase in other    liabilities                                                      |   |                                    | 89,992      |   |               |   | 45,539      |    |   |   | —                                                               |   |   |   | 135,531 |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Net cash used in operating      activities                                            |   |                                    | (7,769,269  | )      |               |   | (6,870,071  | )       |   |   | (7,192,123                                                            | )      |   |   | (28,421,903 | ) |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Cash flows from investing      activities:                                            |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Payments to purchase property and      equipment                                      |   |                                    | (39,898     | )      |               |   | (1,496,985  | )       |   |   | (636,930                                                              | )      |   |   | (3,357,502 | ) |
| Proceeds from sale of    assets                                                       |   |                                    | 851,617     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 872,574 |   |
| Payments to purchase      intangibles                                                 |   |                                    | (290,504    | )      |               |   | (132,644    | )       |   |   | (178,170                                                              | )      |   |   | (1,031,762 | ) |
| Payments to purchase other      assets                                                |   |                                    | —     |   |               |   | —     |    |   |   | (28,415                                                               | )      |   |   | (419,504 | ) |
| Payments issued for note      receivable                                              |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | (300,783 | ) |
| Payments issued for note receivable — related      party                        |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | (56,784 | ) |
| Net cash used in investing      activities                                            |   |                                    | 521,215     |   |               |   | (1,629,629  | )       |   |   | (843,515                                                              | )      |   |   | (4,293,761 | ) |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Cash flows from financing      activities:                                            |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Proceeds from issuance of common      stock                                           |   |                                    | 5,100,265   |   |               |   | 10,757,455  |    |   |   | 6,089                                                                 |   |   |   | 36,839,575 |   |
| Repurchase of common stock                                                            |   |                                    | —     |   |               |   | —     |    |   |   | (11,817                                                               | )      |   |   | (1,511,817 | ) |
| Proceeds from issuance of convertible      notes                                      |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 553,500 |   |
| Repayments of notespayable                                                            |   |                                    | (17,997     | )      |               |   | (87,412     | )       |   |   | (171,694                                                              | )      |   |   | (869,451 | ) |
| Proceeds      from borrowings under loan agreements — related      parties      |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 23,195 |   |
| Repayment      of borrowings under loan agreements — related      parties       |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | (23,195 | ) |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Net cash provided (used in) by financing      activities                              |   |                                    | 5,082,268   |   |               |   | 10,670,043  |    |   |   | (177,422                                                              | )      |   |   | 35,011,807 |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Net increase (decrease) in cash and cash      equivalents                             |   |                                    | (2,165,786  | )      |               |   | 2,170,343   |    |   |   | (8,213,060                                                            | )      |   |   | 2,296,143 |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Cash and cash equivalents — beginning of      period                            |   |                                    | 4,461,929   |   |               |   | 2,291,586   |    |   |   | 10,504,646                                                            |   |   |   | — |   |
| Cash and cash equivalents - end of      period                                        |   | $                                       | 2,296,143   |   |               | $      | 4,461,929   |    |   | $      | 2,291,586                                                             |   |   | $ | 2,296,143 |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Supplemental disclosures of cash flow      information:                               |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Cash paid for interest                                                                |   | $                                       | 6,615       |   |               | $      | 6,771       |    |   | $      | 12,339                                                                |   |   | $ | 57,948 |   |
|                                                                                  |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Non-cash investing and financing      activities:                                     |   |                                    |        |   |               |   |        |    |   |   |                                                                  |   |   |   |   |   |
| Prepaid insurance acquired with note      payable                                     |   | $                                       | 107,785     |   |               | $      | 112,869     |    |   | $      | 253,985                                                               |   |   | $ | 586,629 |   |
| Common      stock issued as consideration for account payable                         |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 6,000 |   |
| Common stock issued as consideration for note      payable                            |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 50,000 |   |
| Related party note receivable exchanged for      property and equipment               |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 56,783 |   |
| Note payable converted into common      stock                                         |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 553,500 |   |
| Property and equipment acquired with assumed      liabilities                         |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 479,610 |   |
| Intangibles acquired with assumed      liabilities                                    |   |                                    | —     |   |               |   | —     |    |   |   | —                                                               |   |   |   | 757,792 |   |
| Property and equipment acquired with note      payable                                |   |                                    | —     |   |               |   | —     |    |   |   | 30,487                                                                |   |   |   | 30,487 |   |
| Short-term investment reclassified from other      assets                             |   |                                    | —     |   |               |   | —     |    |   |   | 385,839                                                               |   |   |   | 385,839 |   |
| Property and equipment reclassified from other      assets                            |   |                                    | —     |   |               |   | —     |    |   |   | 19,015                                                                |   |   |   | 19,015 |   |

The accompanying notes are an integral part of thesestatements.

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PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OFBUSINESS

Particle Drilling Technologies, Inc. (“PDTI” orthe “Company”) is a Nevada corporation, formerly named MedXLink, Corp. (“MXLK”).On January 14, 2005, Particle Drilling Technologies, Inc., a Delawarecorporation (“PDTI-DE”), merged with a subsidiary of MXLK in a stock-for-stocktransaction as a result of a merger and plan of reorganization agreement betweenMXLK and PDTI-DE. Pursuant to the above merger, MXLK assumed PDTI-DE’soperations and business plan and changed its name to Particle DrillingTechnologies, Inc.

PDTI is a development stage company engaged in thedevelopment of a proprietary drilling system (“Particle Impact Drilling” or“PID”). The PID technology is designed to increase the rate-of-penetration inthe drilling process, particularly in hard rock drilling environments. PDTIintends to develop and exploit this technology by commercializing the PID systemin the oil and gas industry.

PDTI is devoting substantially all of its efforts toproduct development, commercializing the PID technology and recruitingpersonnel. PDTI has substantially funded its operations with proceeds from theissuance of common stock. In the course of its development activities, PDTI hassustained operating losses and expect such losses to continue into fiscal 2009.PDTI will finance its operations primarily through cash and cash equivalents onhand, through cashflow from operations if PDTI is able to successfully engage incommercial operations that generate revenue, and other potential capital raisingtransactions. However, PDTI has yet to generate any revenues, and have noassurance of future revenues. To management’s knowledge, no company has yetmarketed a salable product using the PID technology. Even if marketing effortsare successful, substantial time may pass before revenues arerealized.

In management’s opinion, based on available cash andcash equivalents on hand as of September 30, 2008, we do not have theability to maintain sufficient liquidity to meet our working capital and capitalexpenditure requirements for the next 12 months.  Management mustraise additional outside capital in order to improve our liquidityposition.  Our continued existence depends on the successful development ofthe PID technology and our ability to successfully commercialize this technologyand to raise additional outside capital.

2.  GOING CONCERN

The financial statements of the Company have beenprepared on the basis of accounting principles applicable to a going concern,which contemplates the realization of assets and the satisfaction of liabilitiesin the normal course of business.  As shown in the condensed consolidatedfinancial statements, for the fiscal year ended September 30, 2008, the Companyreported a net loss of approximately $10.3 million, as compared to a net loss ofapproximately $10.8 million for the fiscal year ended September 30, 2007. The condensed consolidated financial statements also show an accumulated deficitof approximately $40.8 million from inception (June 9, 2003) through thefiscal year ended September 30, 2008.

The Company is currently a development stage companyand its continued existence is dependent upon the Company’s successfuldevelopment of the PID technology and its ability to successfully commercializethis technology.  The Company has yet to generate cashflow from operations,and until revenues commence, the Company is highly dependent upon debt andequity funding.  Based on the Company’s current liquidity position, theCompany will need to raise additional capital through debt or equity fundingwithin the next 12 months.  Management cannot provide any assurance thatany such financing will be available on acceptable terms or at all.  Shouldcontinuing funding requirements not be met, the Company’s operations may ceaseto exist.

These matters raise substantial doubt about theCompany’s ability to continue as a going concern. The financial statements donot include any adjustments relating to the recoverability and classification ofasset carrying amounts or the amount and classification of liabilities thatmight result should the Company be unable to continue as a goingconcern.

3. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

Basis of Presentation

The accompanying consolidated financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States of America. Certain reclassifications have been made toconform prior period

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amounts to the current period presentation. Thesereclassifications had no effect on net loss, net loss per share or stockholders’equity.

Reverse Acquisition

For the purposes of these consolidated financialstatements, the merger of PDTI-DE into MXLK was treated as a reverseacquisition. Pursuant to the guidance in Appendix B of SEC AccountingDisclosure Rules and Practices Official Text, the merger of a privateoperating company into a non-operating public shell corporation with nominal netassets typically results in the owners and management of the private companyhaving actual or effective operating control of the combined company after thetransaction, with the shareholders of the former public shell continuing only aspassive investors. These transactions are considered by the staff of theSecurities and Exchange Commission to be capital transactions in substance,rather than business combinations. That is, the transaction is equivalent to theissuance of stock by the private company for the net monetary assets of theshell corporation, accompanied by a recapitalization. Accordingly, the reverseacquisition has been accounted for as a recapitalization. For accountingpurposes, PDTI is considered the acquirer in the reverse acquisition. Thehistorical consolidated financial statements are those of PDTI. Net loss pershare for periods prior to the merger are restated to reflect the number ofequivalent shares received by the acquiring company.

Principles of Consolidation

The accompanying consolidated financial statementsinclude the accounts of the Company and its subsidiary. All significantintercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting periods. Actualresults could differ from these estimates.

Cash Equivalents

Cash equivalents include highly liquid investmentswith a maturity of three months or less when acquired.

Fair Value of Financial Instruments

We invest cash in excess of operating requirementsin U.S. Money Market Funds. The carrying amounts reported in the consolidatedbalance sheets for current assets and current liabilities approximate fair valuedue to the short maturity of these items.

Concentration of Credit Risk

Financial instruments that potentially subject PDTIto a concentration of credit risk consist of cash and cash equivalents. Cash andcash equivalents are deposited in demand in one financial institution in theUnited States. Deposits held with financial institutions may exceed the amountof insurance provided on such deposits. PDTI has not experienced any materiallosses on its deposits of cash and cash equivalents.

Property and Equipment

Property and equipment are stated at cost.Depreciation is calculated using the straight-line method over the estimateduseful lives of the assets, which ranges from three to six years. Leaseholdimprovements are amortized using the straight-line method over the estimateduseful lives of the assets or the term of the lease, whichever is shorter.Whenever assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts, and any resulting gainor loss is recognized in income for the period. The cost of maintenance andrepairs is expensed as incurred and any significant improvements that extend theuseful life of the assets are capitalized.

Intangible Assets

An intangible asset that is acquired eitherindividually or with a group of other assets (but not those acquired in abusiness combination) is initially recognized and measured based on its fairvalue. The costs of a group of assets acquired in

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a transaction other than a business combination areallocated to the individual assets acquired based on their relative fair valuesand are not considered goodwill. The cost is measured based on the fair value ofthe consideration given or the fair value of the net assets acquired, whicheveris more reliably measurable. Intangible assets are amortized on a straight-linebasis over the best estimate of their useful lives. The amortization period andamortization method are reviewed annually at each fiscal year-end. Additionalpatent and application costs are capitalized, and amortized over their usefullives once the patents are issued.

Impairment of Long-Lived Assets

PDTI evaluates its long-lived assets for indicatorsof possible impairment by comparison of the carrying amounts to future netundiscounted cash flows expected to be generated by such assets when events orchanges in circumstances indicate the carrying amount of an asset may not berecoverable. Should an impairment exist, the impairment loss would be measuredbased on the excess carrying value of the asset over the asset’s fair value ordiscounted estimates of future cash flows. PDTI also evaluates the capitalizedcosts for patents and patent applications filed but not issued for possibleimpairments.

Offering Expense

Offering expenses consist primarily of placementfees and expenses, professional fees and printing costs. These expenses arecharged against the related proceeds from the sale of Company stock in theperiods in which they occur or charged to expense in the event of a terminatedoffering.

Income Taxes

The Company follows Statements of FinancialAccounting Standards (“SFAS”) No. 109 Accounting for Income Taxes.This statement requires an asset and liability approach for financial accountingand reporting for income tax purposes. This statement recognizes the amount oftaxes payable or refundable for the current year and deferred tax liabilitiesand assets for future tax consequences of events that have been recognized inthe consolidated financial statements or tax returns. Provisions (benefits) forincome taxes result from permanent and temporary differences in the recognitionof accounting transactions for tax and financial reporting purposes. Valuationallowances are established when necessary to reduce deferred tax assets to theamount expected to be realized.

Stock-Based Compensation

The Company follows SFAS No. 123(R), Share-Based Payment. Thisstatement establishes standards for the accounting for transactions in which anentity exchanges its equity instruments for goods or services. It also addressestransactions in which an entity incurs liabilities in exchange for goods orservices that are based on the fair value of the entities equity instruments orthat may be settled by the issuance of those equity instruments. This statementfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. This statement does notchange the accounting guidance for share-based payment transactions with partiesother than employees provided in SFAS No. 123 as originallyissued.

Research and Development

The costs of materials and equipment or facilitiesthat are acquired or constructed for research and development activities andthat have alternative future uses are capitalized as tangible assets whenacquired or constructed. The cost of such materials consumed in research anddevelopment activities and the depreciation of such equipment or facilities usedin those activities are research and development costs. However, the costs ofmaterials, equipment, or facilities acquired or constructed for research anddevelopment activities that have no alternative future uses are consideredresearch and development costs and are expensed at the time the costs areincurred.

Net Loss Per Share

The Company has presented basic and diluted net lossper share pursuant SFAS No. 128, Earnings Per Share. Inaccordance with SFAS No. 128, basic and diluted net loss per share has beencomputed using the weighted-average number of shares of common stock outstandingduring the period. Dilutive net loss per share would give affect to the dilutiveeffect of common stock equivalents consisting of options and warrants.Potentially dilutive securities have been excluded from the net loss per commonshare calculation as the effects would be antidilutive. Potentially dilutivesecurities for the years ended September 30, 2008, 2007 and 2006 that havebeen excluded are 2,081,796, 1,063,474and 1,276,624,respectively.

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The following is the calculation of basic anddiluted weighted average shares outstanding and net loss per share for each ofthe years and periods ending September 30:

|                                                   |   |                                    |        |   | Period from       |   |
|--------------------------------------------------------|--------|-----------------------------------------|-------------|--------|------------------------|--------|
|                                                   |   |                                    |        |   | June 9, 2003 |   |
|                                                   |   |                                    |        |   | (date of          |   |
|                                                   |   |                                    |        |   | inception) to     |   |
|                                                   |   | Year Ended September 30, |        |   | September 30,     |   |
|                                                   |   | 2008                                    |        |   | 2007                   |   |   | 2006 |   |   | 2008 |   |
|                                                   |   |                                    |        |   |                   |   |   |   |   |   |   |   |
| Net loss (numerator):                                  |   |                                    |        |   |                   |   |   |   |   |   |   |   |
| Net loss — basic and    diluted                  |   | $                                       | (10,286,939 | )      |                   | $      | (10,754,296 | ) |   | $ | (10,189,587 | ) |   | $ | (40,828,997 | ) |
|                                                   |   |                                    |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares      (denominator):            |   |                                    |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares — basic and      diluted |   |                                    | 32,490,392  |   |                   |   | 30,185,030 |   |   |   | 24,520,619 |   |   |   | 27,173,234 |   |
|                                                   |   |                                    |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss per share:                                    |   |                                    |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                      |   | $                                       | (0.32       | )      |                   | $      | (0.36 | ) |   | $ | (0.42 | ) |   | $ | (1.50 | ) |

Recent Accounting Pronouncements

In June 2006, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidancefor the financial statement recognition, measurement and disclosure of uncertaintax positions recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, Accounting for Income Taxes. Tax positionsmust meet a more-likely-than-not recognition threshold at the effective date tobe recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 willbe effective for fiscal years beginning after December 15, 2006 (our fiscalyear 2008) and the provisions of FIN 48 will be applied to all tax positionsunder Statement No. 109 upon initial adoption.  We have adopted FIN 48and there was no effect on our financial statements as a result of itsimplementation.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards, “SFAS” No. 157, Fair Value Measurements(“SFAS No. 157”).  SFAS No. 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions.  Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy.  SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years, with early adoption permitted. The Company believes that the adoption of SFAS No. 157 will not have amaterial impact on its financial position, results of operations or cashflows.

In February 2007, the FASB issued SFASNo. 159, The Fair ValueOption for Financial Assets and Financial Liabilities (“SFASNo. 159”). SFAS No. 159 permits entities to choose to measure manyfinancial assets and financial liabilities at fair value. Unrealized gains andlosses on items for which the fair value option has been elected are reported inearnings. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. We will adopt SFAS No. 159 on October 1,2008 and have not yet determined the impact, if any, on our consolidatedfinancial statements.

In December 2007, the FASB issued SFASNo. 141R, BusinessCombinations (SFAS 141R), which replaces SFAS 141, Business Combinations. SFAS141R establishes principles and requirements for determining how an enterpriserecognizes and measures the fair value of certain assets and liabilitiesacquired in a business combination, including noncontrolling interests,contingent consideration, and certain acquired contingencies. SFAS 141R alsorequires acquisition-related transaction expenses and restructuring costs beexpensed as incurred rather than capitalized as a component of the businesscombination. SFAS 141R will be applicable prospectively to business combinationsbeginning in the Company’s 2010 fiscal year.

In December 2007, the FASB issued SFASNo. 160, NoncontrollingInterests in Consolidated Financial Statements — An Amendment of ARBNo. 51 (SFAS 160). SFAS 160 establishes accounting and reportingstandards for the noncontrolling interest in a subsidiary. SFAS 160 alsorequires that a retained noncontrolling interest upon the deconsolidation of asubsidiary be initially measured at its fair value. SFAS 160 is effective forthe Company’s 2010 fiscal year. Upon adoption of SFAS 160, the Company will berequired to report its noncontrolling interests, if any, as a separate componentof shareholders’ equity. The Company will also be required to present net incomeallocable to the noncontrolling interests, if any, and net income attributableto the shareholders of the Company separately in its consolidated statements ofincome. Currently, noncontrolling interests (minority interests) are reported asa liability in a Company’s statement of financial position and the relatedincome attributable to minority interests is reflected as an expense in arrivingat net income. SFAS

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160 requires retroactive adoption of thepresentation and disclosure requirements for existing minority interests. Allother requirements of SFAS 160 shall be applied prospectively.

In March 2008, the FASB issued SFASNo. 161, “Disclosures about Derivative Instruments and HedgingActivities-an amendment of FASB Statement No. 133” (“SFAS No. 161”).SFAS No. 161 requires enhanced disclosure related to derivatives andhedging activities and thereby seeks to improve the transparency of financialreporting. Under SFAS No. 161, entities are required to provide enhanceddisclosures relating to: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedge items areaccounted for under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS No. 133”), and its related interpretations;and (c) how derivative instruments and related hedged items affect anentity’s financial position, financial performance, and cash flows. SFASNo. 161 must be applied prospectively to all derivative instruments andnon-derivative instruments that are designated and qualify as hedginginstruments and related hedged items accounted for under SFAS No. 133 forall financial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application permitted. The Company doesnot expect the adoption of SFAS No. 161 to significantly impact itsfinancial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles.” This Statementidentifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements. This Statementis effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.” TheCompany is currently evaluating the potential impact the new pronouncement willhave on its consolidated financial statements.

In April 2008, the FASB issued FASB StaffPosition (“FSP”) FAS 142-3, “Determination of the Useful Life of IntangibleAssets.” This FSP amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset underSFAS 142 and the period of expected cash flows used to measure the fairvalue of the asset under SFAS 141R, and other GAAP. This FSP is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. Early adoption isprohibited. The Company is currently evaluating the potential impact the newpronouncement will have on its consolidated financialstatements.

4. PROPERTY AND EQUIPMENT

The following is a summary of property andequipment, at cost less accumulated depreciation, atSeptember 30:

|                                      |   | 2008   |       |   | 2007   |   |
|-------------------------------------------|--------|--------|------------|--------|--------|--------|
|                                      |   |   |       |   |   |   |
| Office furniture and    equipment         |   | $      | 278,350    |   |   | $      | 270,687 |   |
| Machines and equipment                    |   |   | 1,813,816  |   |   |   | 2,073,205 |   |
| Leasehold Improvements                    |   |   | 243,164    |   |   |   | 217,423 |   |
|                                      |   |   |       |   |   |   |   |   |
| Total cost of property and      equipment |   |   | 2,335,330  |   |   |   | 2,561,315 |   |
|                                      |   |   |       |   |   |   |   |   |
| Construction in Progress                  |   |   | —    |   |   |   | — |   |
|                                      |   |   |       |   |   |   |   |   |
| Less: accumulated    depreciation         |   |   | (1,121,412 | )      |   |   | (1,694,147 | ) |
|                                      |   |   |       |   |   |   |   |   |
| Total property and equipment,      net    |   | $      | 1,213,918  |   |   | $      | 867,168 |   |

For the fiscal years ended September 30, 2008,2007 and 2006, depreciation expense totaled $497,998, $761,270 and $637,701,respectively.

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5. INTANGIBLE ASSETS

The following is a summary of intangibles, at costless accumulated amortization, at September 30:

|                              |   | 2008   |      |   | 2007   |   |
|-----------------------------------|--------|--------|-----------|--------|--------|--------|
|                              |   |   |      |   |   |   |
| Intangibles, at cost              |   | $      | 1,789,548 |   |   | $      | 1,499,043 |   |
| Less: accumulated    amortization |   |   | (237,282  | )      |   |   | (186,797 | ) |
|                              |   |   |      |   |   |   |   |   |
| Total intangibles, net            |   | $      | 1,552,266 |   |   | $      | 1,312,246 |   |

During fiscal years 2008 and 2007, the Companyincurred direct cost of $290,504 and $132,640, respectively, for patents filedbut not issued.

The estimated amortization expense for each of thefive succeeding years following September 30, 2008 is$50,000.

For the years ended September 30, 2008, 2007and 2006, amortization expense totaled $50,484, $50,484 and $50,484,respectively.

6. SHORT-TERM NOTES

The following is a table of PDTI’s short-termobligations at September 30:

|                                                                                                          |   | 2008   |    |   | 2007   |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                                                          |   |   |    |   |   |   |
| Short-term note at 6.40% interest, unsecured      with monthly principal and interest payments of$12,298      |   |   | 84,277  |   |   |   | — |   |
|                                                                                                          |   |   |    |   |   |   |   |   |
| Short-term      note at 6.5% interest, unsecured with monthly principal and interest      payments of $12,883 |   |   | — |   |   |   | 88,258 |   |
|                                                                                                          |   |   |    |   |   |   |   |   |
| Total short-term notes    payable                                                                             |   | $      | 84,277  |   |   | $      | 88,258 |   |

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following atSeptember 30:

|                                  |   | 2008   |    |   | 2007   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|
|                                  |   |   |    |   |   |   |
| Payroll and related    expenses       |   | $      | 29,795  |   |   | $      | 31,001 |   |
| Professional fees                     |   |   | 17,163  |   |   |   | 30,196 |   |
| Audit fees                            |   |   | — |   |   |   | 32,342 |   |
| Research and development      expense |   |   | 77,270  |   |   |   | 10,228 |   |
| Property and payroll taxes            |   |   | 103,074 |   |   |   | — |   |
| Other accrued costs                   |   |   | 126,579 |   |   |   | 31,221 |   |
|                                  |   |   |    |   |   |   |   |   |
| Total accrued liabilities             |   | $      | 353,881 |   |   | $      | 134,988 |   |

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8. LONG-TERM DEBT

Long-term debt consists of the following atSeptember 30:

|                                                                                                                                                          |   | 2008   |   |   | 2007   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                          |   |   |   |   |   |   |
| Note      payable to a bank in monthly installments of $954, including interest      at      7.90%, due in February 2009, secured by a vehicle           |   |   | 4,676  |   |   |   | 15,800 |   |
|                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Note      payable to a bank in monthly installments of $515, including interest      at      12.60%, due in September 2012, secured by phone      system |   |   | 19,356 |   |   |   | 22,248 |   |
|                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Less: current portion                                                                                                                                         |   |   | (8,651 | )      |   |   | (13,511 | ) |
|                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Total long-term debt                                                                                                                                          |   | $      | 15,381 |   |   | $      | 24,537 |   |

9. COMMON STOCK

All common stock sold or issued in exchange forservices included an anti-dilution provision with the exception of the founders’shares, the 5,000,000 shares of common stock issued in June 2004 to PDTI’sfinancial advisors, and shares of common stock issued in exchange for warrants.In June 2004, all shareholders whose shares included an anti-dilutionprovision agreed to exchange the anti-dilution provision for registrationrights, thereby eliminating the anti-dilution provision.

At September 30, 2008 and 2007, the Company had35,763,932 and 31,629,901 shares of common stock outstanding, respectively.Common stock reserved for issuance consists of the following atSeptember 30:

|                                                     |   | 2008   |      |   | 2007   |   |
|----------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                                     |   |   |      |   |   |   |
| Exercise of stock options                                |   |   | 3,981,575 |   |   |   | 4,063,375 |   |
| Exercise of warrants                                     |   |   | 1,779,141 |   |   |   | 1,791,141 |   |
| Future grants of stock options and restricted      stock |   |   | 666,500   |   |   |   | 1,215,500 |   |
|                                                     |   |   |      |   |   |   |   |   |
| Total common stock reserved for      issuance            |   |   | 6,427,216 |   |   |   | 7,070,016 |   |

10. STOCK OPTIONS AND WARRANTS

Stock Options

In April 2004, the Board of Directors adoptedthe 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan provides for theissuance of incentive stock options, non-statutory stock options and restrictedstock to directors, employees and consultants of PDTI. Provisions under the 2004Plan allow for the issuance of up to 3,500,000 shares of common stock pursuantto awards under this plan. As of September 30, 2008, the Company had 1,250awards available for grant under the 2004 Plan. Under the 2004 Plan, theexercise price of each option equals the market value of the Company’s commonstock on the date of grant and the maximum term for the options is tenyears.

In March 2005, the Board of Directors adoptedthe 2005 Stock Incentive Plan (the “2005 Plan”).  The 2005 Plan providesfor the issuance of incentive stock options, non-statutory stock options andrestricted stock grants to directors, employees and consultants of PDTI. Provisions under the 2005 Plan allow for the issuance of options and restrictedstock awards to purchase or issue up to 2,000,000 shares of common stock. As of September 30, 2008, the Company had 33,500 shares of common stockavailable for issuance pursuant to awards under the 2005 Plan. Under the 2005Plan, the exercise price of each option equals the market value of the Company’scommon stock on the date of grant and the maximum term for the options is tenyears.

In March 2007, the shareholders adopted the2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan provides for theissuance of incentive stock options, non-statutory stock options and restrictedstock to directors, employees and consultants of PDTI. Provisions under the 2007Plan allow for the issuance of up to 1,500,000 shares of common stock pursuantto awards under this plan. As of September 30, 2008, the Company had631,750 awards available for grant under the 2007 Plan. Under the 2007 Plan, theexercise price of each option equals the market value of the Company’s commonstock on the date of grant and the maximum term for the options is tenyears.

Stock-based employee compensation expense recordedfor awards issued under the 2004 Plan, the 2005 Plan and for the 2007 Plan forthe years ended September 30, 2008 and 2007 was $2,610,921 and $2,520,432,respectively. Stock-based employee compensation expense for awards issued underthe 2004 Plan, the 2005 Plan, and the 2007 Plan since inception (June 9,2003) to September 30, 2008 was $7,811,543.

Warrants

In October 2004, PDTI issued warrants topurchase 33,333 shares of the Company’s common stock at $0.01 per share. The warrants were issued to a financial advisor for services provided.  TheCompany recorded an expense of $58,000 using the Black-Scholes option pricingmodel.

In connection with a private placement thatcommenced in April 2004 and completed in January 2005, PDTI issuedwarrants, in January 2005, to purchase 65,500 shares of the Company’scommon stock to certain persons associated with the Placement Agent of thisprivate placement.  Offering expense recorded for these warrants was$80,565.  The related expense was a direct cost of the associated financingand was therefore charged directly to stockholders’ equity.  Each warranthas an exercise price of $2.00 per share with a maximum term of fiveyears.  The fair value of each warrant granted is estimated as of the grantdate using the Black-Scholes option pricing model.

In connection with a private placement that wascompleted February 9, 2005, PDTI issued warrants, in February 2005, topurchase 1,500,000 shares of the Company’s common stock to certain personsassociated with the Placement Agent of this private placement.  Offeringexpense recorded for these warrants was $2,370,000.  The related expensewas a direct cost of the associated financing and was therefore charged directlyto stockholders’ equity.  Each warrant has an exercise price of $2.00 pershare with a maximum term of ten years.  The fair value of each warrantgranted is estimated as of the grant date using the Black-Scholes option pricingmodel.

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During fiscal year 2004, PDTI issued warrants topurchase 323,909 of the Company’s common stock to consultants. The exerciseprice of each warrant equals the market value of the Company’s common stock onthe date of grant and the maximum term for the warrants is five years. For thefiscal year ended September 30, 2004, compensation expense recorded forthese warrants was $5,830.

In connection with a private placement that wascompleted in October 2006, PDTI issued warrants in October 2006, topurchase 1,500,000 shares of the Company’s common stock.  Offering expenserecorded for these warrants was $2,835,000.  The related expense was adirect cost of the associated financing and was therefore charged directly tostockholders’ equity.  Each warrant has an exercise price of $3.25 pershare with a maximum term of ten years.  The fair value of each warrantgranted is estimated as of the grant date using the Black-Scholes option pricingmodel.

The Company did not have any stock option or stockwarrant activity for the period from June 9, 2003 (date of inception) toSeptember 30, 2003; therefore, no compensation expense was recorded forthis period.

Summarized Information for Stock Options andWarrants

The following is a summary of all stock option andwarrant activity for fiscal years 2008 and 2007:

|                                        |   | Number ofSharesUnderlyingOptions |      |   | WeightedAverageExercisePrice |   |   | Number ofSharesUnderlyingWarrants |   |   | WeightedAverageExercisePrice |   |
|---------------------------------------------|--------|---------------------------------------|-----------|--------|------------------------------|--------|--------|----------------------------------------|--------|--------|------------------------------|--------|
| Outstanding at September 30,      2006 |   |                                  | 4,267,000 |   |                         | $      | 1.66   |                                   |   |   | 1,265,141                    |   |   | $ | 1.91 |   |
|                                        |   |                                  |      |   |                         |   |   |                                   |   |   |                         |   |   |   |   |   |
| Granted                                     |   |                                  | 251,250   |   |                         |   | 3.28   |                                   |   |   | 1,500,000                    |   |   |   | — |   |
| Exercised                                   |   |                                  | (343,500  | )      |                         |   | 0.12   |                                   |   |   | (974,000                     | )      |   |   | 1.92 |   |
| Forfeited                                   |   |                                  | (115,375  | )      |                         |   | 4.20   |                                   |   |   | —                      |   |   |   | — |   |
|                                        |   |                                  |      |   |                         |   |   |                                   |   |   |                         |   |   |   |   |   |
| Outstanding at September 30,      2007 |   |                                  | 4,059,375 |   |                         | $      | 1.82   |                                   |   |   | 1,791,141                    |   |   | $ | 3.02 |   |
|                                        |   |                                  |      |   |                         |   |   |                                   |   |   |                         |   |   |   |   |   |
| Granted                                     |   |                                  | 175,000   |   |                         |   | 2.21   |                                   |   |   | —                      |   |   |   | — |   |
| Exercised                                   |   |                                  | (212,300  | )      |                         |   | 0.12   |                                   |   |   | (12,000                      | )      |   |   | 0.45 |   |
| Forfeited                                   |   |                                  | (40,500   | )      |                         |   | 4.38   |                                   |   |   | —                      |   |   |   | — |   |
|                                        |   |                                  |      |   |                         |   |   |                                   |   |   |                         |   |   |   |   |   |
| Outstanding at September 30,      2008 |   |                                  | 3,981,575 |   |                         | $      | 1.89   |                                   |   |   | 1,779,141                    |   |   | $ | 1.99 |   |
|                                        |   |                                  |      |   |                         |   |   |                                   |   |   |                         |   |   |   |   |   |
| Exercisable at September 30,      2008 |   |                                  | 3,564,493 |   |                         | $      | 1.71   |                                   |   |   | 1,779,141                    |   |   | $ | 1.99 |   |

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The weighted average fair value of an option topurchase one share of common stock granted during fiscal years 2008 and 2007 was$2.21 and $3.28, respectively. The fair value of each stock option and warrantgranted is estimated as of the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions:

|                    |   | Weighted AverageAssumption forOptions Granted |   |   | Weighted AverageAssumption forWarrants Granted |   |
|-------------------------|--------|--------------------------------------------------------------|--------|--------|---------------------------------------------------------------|--------|
|                    |   | 2008                                                         |   |   | 2007                                                          |   |   | 2008 |   |   | 2007 |   |
|                    |   |                                                         |   |   |                                                          |   |   |   |   |   |   |   |
| Risk-free interest rate |   |                                                         | 3.0    | %      |                                                          |   | 4.7 | % |   |   | N/A |   |   |   | N/A |   |
|                    |   |                                                         |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Expected volatility     |   |                                                         | 70.3   | %      |                                                          |   | 74.2 | % |   |   | N/A |   |   |   | N/A |   |
|                    |   |                                                         |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Dividend yield          |   | None                                                         |   |   | None                                                          |   |   |   | N/A |   |   |   | N/A |   |
|                    |   |                                                         |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Expected life           |   | 5.6 years                                                    |   |   | 9.2 years                                                     |   |   |   | N/A |   |   |   | N/A |   |

The following table summarizes information aboutstock options outstanding and exercisable at September 30,2008:

| Options Outstanding               |   | Options Exercisable              |   |
|----------------------------------------|--------|---------------------------------------|--------|
| Range of Exercise Price |   | Number ofSharesUnderlyingOptions |   | WeightedAverageRemainingContractualLife |   | WeightedAverageExercisePrice |   | Number ofSharesUnderlyingOptions |   | WeightedAverageExercisePrice |   |
|                                   |   |                                  |   |   |   |   |   |   |   |   |   |
| $0.12 to $1.75                         |   | 2,547,700                             |   | 5.7 years |   | $ | 0.47 |   | 2,547,700 |   | $ | 0.47 |   |
| $1.76 to $6.73                         |   | 1,433,875                             |   | 7.4 years |   | $ | 4.42 |   | 1,016,793 |   | 4.82 |   |
|                                   |   | 3,981,575                             |   | 6.3 years |   | $ | 1.89 |   | 3,564,493 |   | $ | 1.00 |   |

The following table summarizes information aboutwarrants outstanding and exercisable at September 30,2008:

| Warrants Outstanding              |   | Warrants Exercisable              |   |
|----------------------------------------|--------|----------------------------------------|--------|
| Range of Exercise Price |   | Number ofSharesUnderlyingWarrants |   | WeightedAverageRemainingContractualLife |   | WeightedAverageExercisePrice |   | Number ofSharesUnderlyingWarrants |   | WeightedAverageExercisePrice |   |
|                                   |   |                                   |   |   |   |   |   |   |   |   |   |
| $0.12 to $3.25                         |   | 1,779,141                              |   | 3.3 years |   | $ | 1.99 |   | 1,779,141 |   | $ | 1.99 |   |

The following table presents information about stockoptions and warrants granted during the year indicated where the exercise priceof some stock options and warrants differed from the market price of theCompany’s stock on the grant date:

|                                          | Number ofSharesUnderlyingOptions |   | WeightedAverageExercisePrice |   | Number ofSharesUnderlyingWarrants |    | WeightedAverageExercisePrice |   |
|-----------------------------------------------|---------------------------------------|--------|------------------------------|--------|----------------------------------------|---------|------------------------------|--------|
|                                          |                                  |   |                         |   |                                   |    |                         |   |
| Year ended September 30,      2008       |                                  |   |                         |   |                                   |    |                         |   |
| Exercise price equals market      value       | 175,000                               |   | $                            | 2.21   |                                   | — |                         | $      | — |   |
| Exercise price greater than market      value | —                               |   | —                      |   | —                                |    | —                      |   |
| Exercise price less than market      value    | —                               |   | —                      |   | —                                |    | —                      |   |
|                                          |                                  |   |                         |   |                                   |    |                         |   |
|                                          | 175,000                               |   | $                            | 2.21   |                                   | — |                         | $      | — |   |
|                                          |                                  |   |                         |   |                                   |    |                         |   |
| Year ended September 30,      2007       |                                  |   |                         |   |                                   |    |                         |   |
| Exercise price equals market      value       | 251,250                               |   | $                            | 3.28   |                                   | — |                         | $      | — |   |
| Exercise price greater than market      value | —                               |   | —                      |   | —                                |    | —                      |   |
| Exercise price less than market      value    | —                               |   | —                      |   | —                                |    | —                      |   |
|                                          |                                  |   |                         |   |                                   |    |                         |   |
|                                          | 251,250                               |   | $                            | 3.28   |                                   | — |                         | $      | — |   |

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11. INCOME TAXES

For the year ended September 30, 2008, therewere permanent and temporary differences of approximately $18,000 and$1,546,000, respectively, which decreased the tax loss for the currentyear.

At September 30, 2008, the Company has cumulativefederal net operating loss carryforwards of approximately $33,476,000 whichexpire in years 2009 through 2027. No benefit has been recorded in the financialstatements for the net operating loss carryforwards as the future tax benefitfrom such net operating loss carryforwards is more likely than not ensured atthis time. Accordingly, the deferred tax asset associated with the net operatingloss carryforwards have been fully offset by a valuationallowance.  The valuation allowance increased approximately $4,017,000 from September 30, 2007 to September 30, 2008 due primarily to thebook loss generated during the year the utilization of which is not reasonablyensured.

Deferred tax assets consisted of the following atSeptember 30, 2008 and 2007:

|                                 |   | 2008   |        |   | 2007   |   |
|--------------------------------------|--------|--------|-------------|--------|--------|--------|
|                                 |   |   |        |   |   |   |
| Deferred tax asset:                  |   |   |        |   |   |   |
| Net operating loss      carryforward |   | $      | 12,683,936  |   |   | $      | 9,192,374 |   |
| Intangibles                          |   |   | 31,296      |   |   |   | 31,296 |   |
| Stock warrants exercised             |   |   | 834,807     |   |   |   | 834,807 |   |
| Property and equipment               |   |   | 227,704     |   |   |   | 122,788 |   |
| Stock-based compensation             |   |   | 2,513,832   |   |   |   | 1,626,119 |   |
| Deferred tax liability:              |   |   |        |   |   |   |   |   |
| Stock Warrants                       |   |   | (203,351    | )      |   |   | (203,351 | ) |
| Intangibles                          |   |   | (560,247    | )      |   |   | (338,743 | ) |
| Property and equipment               |   |   | (245,349    | )      |   |   | — | ) |
|                                 |   |   |        |   |   |   |   |   |
| Deferred tax asset                   |   |   | 15,282,628  |   |   |   | 11,265,290 |   |
|                                 |   |   |        |   |   |   |   |   |
| Valuation allowance                  |   |   | (15,282,628 | )      |   |   | (11,265,290 | ) |
|                                 |   |   |        |   |   |   |   |   |
| Net deferred tax asset               |   | $      | —     |   |   | $      | — |   |

Due to the losses that have occurred since theCompany’s inception, no statutory rate reconciliation of the Company’s tax rateis disclosed nor discussed within this footnote.

As discussed in Footnote 3, we adopted FIN 48 and,as a result, there was no effect on our financial statements.  FIN 48prescribes a minimum recognition threshold and measurement methodology that atax position taken or expected to be taken in a tax return is required to meetbefore being recognized in the financial statements. It also provides guidancefor de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition.  The Company recognizesinterest and penalties related to unrecognized tax benefits within the provisionfor income taxes on continuing operations in the consolidated statements ofincome. There are no unrecognized tax benefits as of the date of adoption. There are no unrecognized tax benefits that if recognized would affect the taxrate. There was no interest or penalties recognized as of the date of adoptionor for the fiscal year ended September 30, 2008.

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12. COMMITMENTS AND CONTINGENCIES

Lease Commitments

Rent expense with respect to our lease commitmentsfor the year ended September 30, 2008 was $442,196. The Company isobligated under a non-cancellable operating lease for the Company’s new facilityin Houston, Texas. Future minimum payments required under these leases as ofSeptember 30, 2008 are as follows:

| Year Ending September 30: |   |   |      |
|------------------------------------------|--------|--------|-----------|
| 2009                                     |   | $      | 432,257   |   |
| 2010                                     |   |   | 453,257   |   |
| 2011                                     |   |   | 502,757   |   |
| 2012                                     |   |   | 460,861   |   |
| 2013                                     |   |   | —   |   |
|                                     |   |   |      |   |
| Total minimum lease    payments          |   | $      | 1,849,132 |   |

Royalty Agreements

In January 2004, PDTI entered into a RoyaltyAgreement with PSI whereby PDTI will be required to pay PSI a royalty on aquarterly basis equal to 18% of the earnings before interest, income taxes,depreciation and amortization (“EBITDA”) derived from the use of the PIDtechnology, until an aggregate of $67,500,000 has been paid. PDTI also enteredinto a Royalty Agreement in January 2004 with PSIL whereby PDTI will berequired to pay PSIL a royalty on a quarterly basis equal to 2% of EBITDAderived from the use of the PID technology, until an aggregate of $7,500,000 hasbeen paid. In addition, PDTI will be required to pay CCORE, PSI and PSIL aroyalty equal to 1.6%, 1.2% and 1.2%, respectively, of PDTI’s quarterly grossrevenue derived from the use of the PID technology. PDTI has no revenues orEBITDA; therefore no royalties have been paid or accrued as ofSeptember 30, 2008.

Litigation

The Company may in the future be involved as a partyto various legal proceedings, which are incidental to the ordinary course ofbusiness. The Company regularly analyzes current information and, as necessary,provides accruals for probable liabilities on the eventual disposition of thesematters. In the opinion of management and legal counsel, as ofSeptember 30, 2008, there were no threatened or pending legal matters thatwould have a material impact on the Company’s results of operations, financialposition or cash flows.

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PARTICLE DRILLING TECHNOLOGIES,INC.

(a development stage enterprise)

SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIALSTATEMENTS

SUMMARIZED QUARTERLY FINANCIAL DATA

(Unaudited)

|                                        |   | Fiscal 2008 Quarter Ended |       |
|---------------------------------------------|--------|------------------------------------------|------------|
|                                        |   | December 31                         |       |   | March 31 |   |   | June 30 |   |   | September 30 |   |   | Year |   |
|                                        |   |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Year ended September 30,      2008:    |   |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                    |   | $                                        | —    |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Gross profit                                |   |                                     | —    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Loss from operations                        |   |                                     | (3,259,917 | ) |   |   | (2,339,338 | ) |   |   | (2,539,614 | ) |   |   | (2,229,343 | ) |   |   | (10,368,212 | ) |
| Net loss                                    |   |                                     | (3,226,536 | ) |   |   | (2,329,074 | ) |   |   | (2,518,589 | ) |   |   | (2,212,740 | ) |   |   | (10,286,939 | ) |
| Net loss per share - basic and      diluted |   | $                                        | (0.10      | ) |   | $ | (0.08 | ) |   | $ | (0.07 | ) |   | $ | (0.06 | ) |   | $ | (0.32 | ) |

|                                        |   | Fiscal 2007 Quarter Ended |       |
|---------------------------------------------|--------|------------------------------------------|------------|
|                                        |   | December 31                         |       |   | March 31 |   |   | June 30 |   |   | September 30 |   |   | Year |   |
|                                        |   |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Year ended September 30,      2007:    |   |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                    |   | $                                        | —    |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |
| Gross profit                                |   |                                     | —    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
| Loss from operations                        |   |                                     | (2,963,387 | ) |   |   | (3,521,923 | ) |   |   | (2,470,639 | ) |   |   | (2,176,033 | ) |   |   | (11,131,982 | ) |
| Net loss                                    |   |                                     | (2,838,461 | ) |   |   | (3,409,799 | ) |   |   | (2,390,167 | ) |   |   | (2,115,842 | ) |   |   | (10,754,269 | ) |
| Net loss per share - basic and      diluted |   | $                                        | (0.10      | ) |   | $ | (0.11 | ) |   | $ | (0.08 | ) |   | $ | (0.07 | ) |   | $ | (0.36 | ) |

Item 9. Changes in and Disagreements withAccountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our principal executive and principal financial officers, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934). Based upon that evaluation, our principal executive and principalfinancial officers concluded that our disclosure controls and procedures wereeffective as of September 30, 2008.

Management’s Report on Internal Control overFinancial Reporting and Report of Independent Registered Public AccountingFirm

The information required to be furnished pursuant tothis item is set forth under the captions “Management’s Report on InternalControl over Financial Reporting” and “Report of Independent Registered PublicAccounting Firm” in Item 8 of this report.

Changes in Internal Control over FinancialReporting

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and withthe

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participation of our principal executive andprincipal financial officers, of our internal control over financial reportingto determine whether any changes occurred during the fourth quarter of fiscal2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. Based on that evaluation,there were no changes in our internal control over financial reporting or inother factors that have materially affected or are reasonably likely tomaterially affect our internal control over financialreporting.

Item 9B. Other Information

None Applicable

PART III

Item 10.  Directors, Executive Officers andCorporate Governance

The following table shows information regarding ourdirectors and executive officers. All of the persons named below other thanMessrs Dunn and Flannery became officers and directors of our company inJanuary 2005, following our acquisition of PDTI.

| Name                                                                                                                                                                                                                                                                                        |   | Age (1) |   | Position with PDTI                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|-------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                        |   |    |   |                                                              |
| Ken R.      LeSuer                                                        |   | 73      |   | Chairman of the Board and      Director                           |
| Jim B.      Terry                                                         |   | 55      |   | President, Chief Executive Officer and      Director              |
| J. Chris      Boswell                                                     |   | 47      |   | Senior Vice President, Chief Financial Officer      and Treasurer |
| Thomas E.      Hardisty                                                   |   | 47      |   | Senior Vice President of Corporate Development      and Secretary |
| Gordon      Tibbitts                                                      |   | 61      |   | Vice President of    Technology                                   |
| John D.      Schiller, Jr.                                           |   | 49      |   | Director                                                          |
| Michael S.      Mathews                                                   |   | 68      |   | Director                                                          |
| Hugh A.      Menown                                                       |   | 50      |   | Director                                                          |
| Byron      Dunn                                                           |   | 51      |   | Director (2)                                                      |
| Kevin      Flannery                                                       |   | 64      |   | Director(3)                                                       |

[Missing Graphic Reference]

(1) As of October 31,2008

(2) Was appointed as a director of our companyin November 2007

(3) Was appointed as a director of our companyin March 2008

KenR. LeSuer was elected Chairman of PDTI in December 2004 afterserving as Vice Chairman of PDTI since June 2004. Mr. LeSuer retiredin 1999 as Vice Chairman of Halliburton Company. Since his retirement fromHalliburton in 1999, Mr. LeSuer has been a private investor. Prior tobecoming the Vice Chairman of Halliburton in May 1997, Mr. LeSuerserved as both the President and CEO of Halliburton Energy Services fromMarch 1994 to September 1996 and as President and CEO of HalliburtonEnergy Group from September 1996 to May 1997. He also served asPresident and CEO of three Halliburton units during his tenure. Mr. LeSuerbegan his career with Halliburton as an engineer-in-training in 1959. From 1965through 1982, he served in managerial positions in Asia Pacific andEurope/Africa and was serving as vice president of Europe/Africa beforereturning to Duncan, Oklahoma to assume the position of vice president ofInternational Operations in 1982.

Mr. LeSuer is a member of the Texas A&MUniversity Petroleum Engineering Industry Board, as well as the TAMU Dwight LookCollege of Engineering External Advisory and Development Council. He has servedas Vice President Services Division of the International Association of DrillingContractors, and is or at one time was a member of numerous petroleum andgeological engineering societies, including the Society of Petroleum Engineers,the American Petroleum Institute, the National Ocean Industries Association, andthe Petroleum Equipment Suppliers Association. Mr. LeSuer received hisbachelor’s degree in petroleum engineering from Texas A&M University in1959.

JimB. Terry has served as our President and Chief Executive Officer sinceJanuary 23, 2006. From January 2003 until September 2005,Mr. Terry served as Vice President, Drilling Services for WeatherfordInternational, one of the largest global providers of innovative mechanicalsolutions, technology and services for the drilling and production sectors ofthe oil and gas industry, where he led the effort to consolidate, develop andimprove the performance of well construction products

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and services by strategically aligning synergisticproduct lines in order to improve both their financial and operationalperformance. His duties at Weatherford included responsibility for all phases ofnew product and service development from inception through commercialization,which in some cases included securing project funding from customers. FromSeptember 2005 to January 2006, Mr. Terry served as a consultantto the oil and gas drilling services industry.

From March 1994 until January 2003,Mr. Terry was employed by Halliburton Company, the last three of thoseyears as Director—Advanced Well Construction Systems where he was the leadinventor of a step change advanced well construction system. During this time,he was responsible for all phases of this project which included research anddevelopment, engineering, prototyping, field trials and commercialization.During his first six years at Halliburton, he served in various managementcapacities ranging from new product introduction to regional operationsmanagement. During this time he was responsible for, among other things, much ofHalliburton’s consolidation effort following its acquisition of SmithInternational’s Drilling Services Division.

Prior to joining Halliburton in March 1994,Mr. Terry served as Regional Vice President for Smith International inSingapore. He was responsible for all of Smith’s activities in the Asia Pacific,Middle East and East Africa regions.

Mr. Terry began his career at EastmanWhipstock, which was acquired by Baker Hughes in 1990. Following Baker Hughes’acquisition of Eastman Whipstock in 1990, Mr. Terry joined SmithInternational.

Mr. Terry graduated in 1978 from San FranciscoState University with a BA in Business and is a member of the Society ofPetroleum Engineers, the Independent Petroleum Association of America, theAmerican Association of Drilling Engineers and the International Association ofDrilling Contractors.

J.Chris Boswell has served as Senior Vice President and Chief FinancialOfficer of PDTI since June 2004. Mr. Boswell had previously served asDirector and Senior Vice President and Chief Financial Officer of ParticleDrilling, Inc. from August 2003 until it was merged into PDTI inJune 2004. He also served as a Director of PDTI from June 2004 untilMarch 2006. From October 2002 until August 2003, Mr. Boswellwas a private investor. Mr. Boswell has over 20 years of experience infinancial management focused in the energy industry and began his career as aCertified Public Accountant at Arthur Andersen & Co. and later servedin management positions with Price Waterhouse in Houston, Texas. He served asSenior Vice President and Chief Financial Officer of Petroleum Geo-Services ASA(“PGS”) from December 1995 until October 2002. PGS grew from a smallenterprise in 1994 when Mr. Boswell joined the company to a $1 billionannual revenue enterprise with a peak enterprise value of $6 billion.Subsequent to Mr. Boswell’s departure and following a change of controlwithin PGS, the new management of PGS filed for bankruptcy protection inJuly 2003 in order to restructure PGS’s debt portfolio. The restructuringwas successfully completed and PGS emerged from bankruptcy in October 2003.In all, during his tenure as CFO at PGS, Mr. Boswell directed financingsfor over $3 billion of capital expenditures to facilitate PGS’ growth.Additionally during 1995, Mr. Boswell and other senior executives at PGSdeveloped the concept to create a unique oil and gas company using anon-exclusive license in PGS’ seismic data library as seed capital. This companybecame Spinnaker Exploration company, which was sold to Norsk Hydro ASA(NYSE:NHY) in 2006 for approximately $2.45 billion. Mr. Boswell is a 1984graduate of the University of Texas at Austin.

Thomas E. Hardisty has servedas Senior Vice President, Corporate Development of PDTI since June 2004.Mr. Hardisty had previously served as Director and Senior Vice President,Corporate Development of Particle Drilling, Inc. from June 2003 untilit was merged into PDTI in June 2004. He also served as a Director of PDTIfrom June 2004 until March 2006. Mr. Hardisty has over21 years of experience in the oil and gas industry, primarily in the areaof land management, contracts and corporate development, and is co-founder ofthe company. From January 2001 until June 2003, Mr. Hardisty wasVice President, Land of Shoreline Partners LLC, an independent explorationcompany and from January 2000 until January 2001, Vice President, Landof Benz Resources LLC, a consulting firm charged with managing certainexploration properties acquired by Harken Energy Corporation. From May 1999until January 2000, Mr. Hardisty was a Land Manager for TexstarEnergy Inc. responsible for divesting certain of the company’s explorationprojects in the Texas Gulf Coast and Mississippi areas. From 1994 untilMay 1999, Mr. Hardisty was Division Landman for PetroCorp Inc.responsible for company land positions, contract negotiations and partnerrelations in exploration and development projects in PetroCorp’s Gulf Coast,Rockies and Canada Division. From 1984 until 1994, Mr. Hardisty was a landconsultant and later Senior Project Manager for Roger A. Soape Inc. inHouston, Texas. Mr. Hardisty graduated from the University of Texas atAustin in 1984 with a BBA in Petroleum Land Management. He is a member of theAmerican Association of Drilling Engineers (AADE), International Association ofDrilling Contractors (IADC), the American Association of Professional Landmen(AAPL) and the Houston Association of Professional Landmen (HAPL).Mr. Hardisty formerly served as a Director of HAPL and is past Chairman ofthe HAPL Ethics Committee and past Chairman of HAPL MembershipCommittee.

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Gordon Tibbitts hasserved as Vice President of Technology of PDTI since June 2004, and servedas Vice President of Technology of Particle Drilling, Inc. fromJune 2003 until it was merged into PDTI in June 2004. Prior to joiningParticle Drilling, Inc., Mr. Tibbitts was Vice President of Technologyfor ProDril Services Inc. from October 2002 until June 2003. FromApril 2000 until October 2002, Mr. Tibbitts was an in-houseengineering consultant on drilling and coring activities for TerraTekDrilling & Completions Research Laboratory. Mr. Tibbitts wasemployed from May 1999 until April 2000 by Pro Steel Inc as ChiefOperating Officer. Prior to that time and for the majority of his career,Mr. Tibbitts worked for Hughes Christensen, one of the world’s largestmakers of oil and gas drilling bits. While at Hughes Christensen,Mr. Tibbitts held the title of Director of Research and Development from1987 until October 1998 and was responsible for managing and directingworld-wide research, development, and technical support through research groupsin Houston, Salt Lake City and Tulsa. He directed and managed the building of aworld-class drilling research laboratory in Houston and a drilling operation inOklahoma dedicated to field-testing and development of downhole tools.Mr. Tibbitts has over 30 years of experience in the upstream oil andgas industry, including 17 years in engineering, research, and developmentmanagement. Mr. Tibbitts holds over 70 patents related to drilling, coring,and diamond cutting tools. His work has been published by the Society ofPetroleum Engineers, International Association of Drilling Contractors, Societyof Core Analysts, and the Journal of Petroleum Technology. Mr. Tibbittsgraduated from the University of Utah with a Bachelors degree in MechanicalEngineering.

John D. Schiller, Jr. hasserved as a Director of PDTI since May 2004.  BetweenDecember 2004 and November 2005, Mr. Schiller acted as interimchief executive officer of our Company.  Since July 2005,Mr. Schiller has been Chairman and CEO of Energy XXI.  BetweenDecember 2003 and December 2004, Mr. Schiller pursued personalinterests and private investment opportunities. From April 2003 toDecember 2003, Mr. Schiller served as Vice President,Exploration & Production, for Devon Energy with responsibility fordomestic & international activities. Before joining Devon Energy,Mr. Schiller was Executive Vice President, Exploration &Production, for Ocean Energy, Inc. from 1999 to April 2003, withresponsibility for Ocean’s worldwide exploration, production and drillingactivities. Mr. Schiller joined Ocean Energy from Seagull Energy inSeptember 1998, where he served as Senior Vice President of Operations,prior to the merger of the two companies in March of 1999. From 1985 to1998, Mr. Schiller served in various positions with Burlington Resources,including as Corporate Acquisition Manager. From 1981 to 1985, Mr. Schillerwas a staff engineer at Superior Oil.  Currently, Mr. Schiller servesas the Chairman and Chief Executive Officer of Energy XXI and serves on theBoard of Directors of the Escape Family Resource Center, a charitableorganization.

Mr. Schiller is currently a member and PastChairman of the Texas A&M Petroleum Engineering Industry Board, as well asthe TAMU Dwight Look College of Engineering External Advisory and DevelopmentCouncil. Mr. Schiller graduated with honors from Texas A&M Universitywith a Bachelor of Science in Petroleum Engineering in 1981. Mr. Schilleris a member of the Company’s nominating and governancecommittee.

Michael Mathews has served asa Director of PDTI since June 2004. Mr. Mathews is managing directorof Westgate Capital Co., a firm he founded in 1993 to identify and structureinvestment opportunities on behalf of private investors. Mr. Mathews servedon the Board of Petroleum Geo-Services (PGS) from 1993 untilSeptember 2002. From 1998 to 2002, he served as Vice Chairman of PGS andheld the position as Chairman of the Compensation Committee and was a member ofthe Audit Committee. From 1989 to 1992, Mr. Mathews served as managingdirector of Bradford Ventures Ltd., a private investment firm involved inequity investments, including acquisitions. Prior to 1989, he was president ofDNC Capital Corporation and senior vice president and director of its parent,DNC America Banking Corp., the US subsidiary of Den Norske Credit Bank Group,where he directed merchant banking and investment activity in North America andfounded and acted as senior advisor to Nordic Investors Limited, N.V., a privateventure capital fund. Previously, Mr. Mathews was a Vice President inCorporate Finance at Smith Barney and prior to that he was an associate with theNew York law firm of White & Case. Mr. Mathews received an A.B.from Princeton University in 1962 and received a J.D. from the University ofMichigan Law School in 1965.

Hugh A. Menown has servedas a Director of PDTI since June 2004. Mr. Menown has over28 years of experience in mergers & acquisitions, auditing andmanagerial finance. In May 2007, Mr. Menown joined Energy XXI(Bermuda) Limited as the Chief Accounting Officer and was appointed ChiefInformation Officer in July 2008. From January 2006 to May 2007,Mr. Menown worked as an independent consultant. From June 1999 throughDecember 2005, Mr. Menown worked with Quanta Services, Inc.(“Quanta”) (NYSE: PWR) as a financial consultant. Mr. Menown performed duediligence on a number of Quanta’s acquisitions and has served as Chief FinancialOfficer for two of their operating companies, most recently North Houston PoleLine, L.P. located in Houston, Texas. Prior to serving as a financial consultantto Quanta, Mr. Menown was a Partner in the Houston office ofPricewaterhouseCoopers, LLP where he led the Transaction Services Practiceproviding due diligence, mergers & acquisition advisory and strategicconsulting to numerous clients in various industries. Mr. Menown alsoworked in the Business Assurance Practice providing audit and related servicesto clients.

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Mr. Menown is a Certified PublicAccountant.

Kevin Flannery has served as aDirector since March 2008.  Mr. Flannery has been the President andChief Executive Officer of Whelan Financial Corp. since 1992.  At WhelanFinancial Corp., Mr. Flannery is engaged in corporate advisory work,including serving as Chairman of the Stockholder’s Committee of Tesoro PetroleumCorp.  In addition to his role at Whelan, Mr. Flannery served as theChairman and Chief Executive Officer of RoweCom, Inc. fromJanuary 2003 until October 2004 and as Chairman and Chief ExecutiveOfficer of Telespectrum Worldwide Inc. from April 2002 untilOctober 2004.  Mr. Flannery is currently Chairman and ChiefExecutive Officer of Rehrig United, Inc. and has served as Vice Chairman ofTexas Petrochemical LP since May 2004 Mr. Flannery was formerly amember of the New York Stock Exchange Allocation Committee.

Byron Dunnhas served as a Director sinceNovember 2007.  Mr. Dunn has served as the President and ChiefExecutive Officer of IDM Group since December 2007.  FromSeptember 2005 to December 2007, Mr. Dunn has served as SeniorVice President, Corporate Development of Harvest Natural Resources, Inc.,an independent energy company engaged in the acquisition, development,production and disposition of oil and natural gas properties. Mr. Dunnpreviously served on Harvest’s Board of Directors and was a member of the Auditand Compensation committees.   From 2003 through 2005, Mr. Dunnwas with National Oilwell, Inc., as Vice President, Corporate BusinessDevelopment. In that capacity he chaired the National Oilwell/Varco integrationteam, served as President of Eastern Hemisphere Rig Solutions, and Chairman ofthe Board of TTS Marine ASA, a Bergen Norway ship’s equipment manufacturer. From1997 to 2003, Mr. Dunn held increasingly responsible roles in UBS globalenergy and power investment banking group. Earlier in his career, Mr. Dunnwas Manager of Upstream Business Development and Acquisitions for Phibro Energyand production and reservoir engineer for Chevron USA.   Mr. Dunnholds a Bachelor of Science degree in Chemical Engineering from the IllinoisInstitute of Technology, a Master of Business Administration degree with aspecialization in finance from the University of Chicago, and is a CharteredFinancial Analyst. Mr. Dunn is a member of the Board of Directors ofCitizens National Bank.

Audit Committee

Our Board of Directors has a separately-designatedstanding Audit Committee, which committee consists of Messrs. Menown,Mathews and Dunn. Mr. Menown serves as Chairman of the Audit Committee. TheBoard of Directors has made the following determinations related to the AuditCommittee:

|   | · | Messrs. Menown, Mathews and Dunn satisfy      the independence requirements as defined by the NASDAQ rules and as      set forth in Rule 10A-3 under the Securities Exchange Act of      1934. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Each member of the Audit Committee is      “financially literate” as the Board of Directors, in its business      judgment, interprets suchqualification. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Mr. Menown qualifies as an “audit      committee financial expert” based on the definition and additional      expertise factors outlined by the Securities and Exchange Commission.      Mr. Menown acquired the attributes to qualify as an “audit committee      financial expert” through his experience as a Partner with      PricewaterhouseCoopers LLP where he had extensive exposure to and obtained      a working knowledge of generally accepted accounting principles and      financial statements. Mr. Menown is also a Certified Public      Accountant. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Our Audit Committee reviews, acts on and reports tothe Board of Directors with respect to various auditing and accounting matters,including the selection of our independent auditors, the scope of the annualaudits, fees to be paid to the auditors, the performance of our independentauditors and our accounting practices. The Audit Committee operates pursuant toa written charter, which was adopted on February 3, 2005 and amended onMay 31, 2005.

|   | Section 16(a) Beneficial Ownership      Reporting Compliance |
|--------|------------------------------------------------------------------------|

Section 16(a) of the Securities ExchangeAct of 1934 requires our officers, directors and persons who own more than 10%of our common stock to file reports of ownership and changes in ownershipconcerning the common stock with the SEC and to furnish us with copies of allSection 16(a) forms they file.

Based solely upon a review of Forms 3 and 4 andamendments thereto furnished to us pursuant to Rule 16a-3(e) under theSecurities Exchange Act of 1934 during the fiscal year ended September 30,2008 and Forms 5 and amendments thereto furnished to us with respect to thefiscal year ended September 30, 2008, and any representations furnished tous that no Form 5 is required, we believe that all such forms required tobe filed were timely filed, as necessary, by the officers, directors andsecurity holders required to file the same during the fiscal year endedSeptember 30, 2008, except a late Form 4

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filed by Ken LeSuer on May 7, 2008, two late Form4’s filed by Hugh Menown on May 7, 2008, two late Form 4’s filed by MichaelMathews on March 20, 2008 and May 7, 2008, one late Form 4 filed by Jim Terryand Gordon Tibbitts each on December 10, 2008.

Code of Ethics

Our Board of Directors has adopted a code of ethics(we call it our “Code of Business Conduct and Ethics”) that governs the businessconduct and ethics of our directors, all of our employees and our executiveofficers, including our chief executive officer, our chief financial officer andour chief accounting officer. Our code of ethics has been posted on ourcompany’s internet website at www.particledrilling.com. In addition, we willprovide a printed copy of our code of ethics without charge to any stockholdermaking a written request to Corporate Secretary, Particle DrillingTechnologies, Inc., 5611 Baird Court, Texas 77041. It is our intention todisclose on our internet website within four business days of any amendment orwaiver:

|   | · | the date and nature of any amendment we make      to any provision of our code of conduct that applies to our chief      executive officer, our chief financial officer and our chief accounting      officer and that relates to any element of the code of ethics definition      enumerated in Item 406(b) of Regulation S-K;  and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | information related to any waiver, including      any implicit waiver, we grant to our chief executive officer, our chief      financial officer and our chief accounting officer that relates to any      element of the code of ethics definition enumerated in Item 406(b) of      Regulation S-K. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Item 11.   ExecutiveCompensation

EXECUTIVE COMPENSATION

Compensation Discussion andAnalysis

Overview

This Compensation Discussion and Analysis sectiondiscusses the compensation programs and policies for our executive officers andthe Compensation Committee’s role in the design and administration of theseprograms and policies and in making specific compensation decisions for ourexecutive officers and key employees, including our “named executive officers,”which consist of Jim B. Terry, our President and Chief Executive Officer, J.Chris Boswell, our Senior Vice President, Chief Financial Officer and Treasurer,Thomas E. Hardisty, our Senior Vice President of Corporate Development andSecretary and Gordon E. Tibbitts, our Vice President ofTechnology.

Philosophy

Our executive compensation program is designed tomotivate, reward, attract and retain the management deemed essential to oursuccess.  The program seeks to align executive compensation with ourcorporate objectives, business strategy and financial performance.  Inapplying these principles, we seek to:

|   | · | reward executives for long-term strategic      management and the enhancement of stockholder  value; |
|--------|--------|------------------------------------------------------------------------------------------------------|

|   | · | support an environment that rewards      performance with respect to our goals, as well as our performance relative      to industry peers; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | integrate compensation programs with our short      and long-term strategic plans; |
|--------|--------|------------------------------------------------------------------------------------|

|   | · | attract and retain key executives critical to      our long-term success; and |
|--------|--------|-------------------------------------------------------------------------------|

|   | · | align the interests of executives with the      long-term interests of stockholders through equity    awards. |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

We use each element of compensation to satisfy oneor more of these compensation objectives, and each element is an integral partof and supports our overall compensation objectives.  We strive tooffer our executive officers compensation and benefits that are attractive andcompetitive in the marketplace for executive talent.

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    Administration

Our executive compensation program is administeredby the Compensation Committee, which is comprised of Messrs. LeSuer,Flannery and Menown.  Mr. Schiller served on our CompensationCommittee until his resignation on May 7, 2008.  Mr. LeSuer isthe Chairman of the Compensation Committee.  The Board of Directorshas determined that Messrs. LeSuer, Flannery and Menown satisfy theindependence requirements as defined by the listing standards of the NASDAQ andRule 16b-3 under the Securities Exchange Act of 1934.

Our Compensation Committee is authorized to makerecommendations concerning salaries and incentive compensation for our employeesand consultants, establish and approve salaries and incentive compensation forour executive officers and administer our employee benefit and stock optionplans.   The Compensation Committee reviews and approves thespecific base salary and bonus compensation of our named executiveofficers.  Typically, the President and Chief Executive Officer andthe Chief Financial Officer are requested to present to the CompensationCommittee industry compensation data based on public filings as well as thecalculations required to support achievement of goals established by theCompensation Committee.  These executive officers do not participatein the deliberation process of the Compensation Committee.  Ourexecutive officers participate in the review and award process for other keyemployees who are not executive officers.

Compensation Program Benchmarking

The Compensation Committeeselected  twelve companies that operate in the oilfield servicesindustry against which to compare our executive compensationprogram.  These companies consist of Dawson Geophysical Company, OyoGeospace Corporation, Horizon Offshore, Inc., NATCO Group, Inc., AllisChalmers Energy, Inc., AZZ, Inc., Core Laboratories NV,Electromagnetic GeoServices ASA, Superior Energy Services, Inc., W-H EnergyServices, Inc., Weatherford International, Inc., and HalliburtonCompany.  We refer to these twelve companies collectively as our “PeerGroup.”  Although many of these companies are larger and moreestablished than our company, we require personnel with comparable levels ofexperience.  As a result, we must offer compensation that is generallycompetitive with larger and more established companies listed in our Peer Groupin order to compete for personnel with the high level of experience andexpertise we require.  The Compensation Committee reviews this PeerGroup composition on an annual basis.  The Compensation Committee mayelect to modify the Peer Group for future periods to reflect best practices inexecutive compensation or changes in our business or the business of othercompanies, in and outside the Peer Group.

CompensationProgramComponents

An executive’s compensation typically consistsof:

|   | · | base salary paid in  cash; |
|--------|--------|----------------------------|

|   | · | annual incentive compensation paid in      cash; |
|--------|--------|--------------------------------------------------|

|   | · | long-term incentive awards comprised of      restricted stock and stockoptions; |
|--------|--------|---------------------------------------------------------------------------------|

|   | · | severance and change in control arrangements;      and |
|--------|--------|--------------------------------------------------------|

|   | · | other employee  benefits. |
|--------|--------|---------------------------|

The balance among these components is establishedannually by the Compensation Committee and is designed to recognize pastperformance, retain key employees and encourage futureperformance.  The particular elements of the compensation programs forour executive officers are set forth in more detail below.

BaseSalary.   Base salaries are primarily determined by theCompensation Committee at levels the Compensation Committee deems necessary orappropriate to attract the level of competence required for theposition.   The Compensation Committee reviews base salariesannually and considers the base salaries paid by the Peer Group in itsdecision-making process.  The Compensation Committee also takes intoaccount industry and market conditions, the executive’s salary history, level ofresponsibility, breadth of knowledge, past performance, credentials andexperience, as well as his or her perceived future importance tous.   The Compensation Committee believes that base salaries forour executive officers are competitive and within a low to median range of ourPeer Group and considers them reasonable and necessary to achievethe

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objectives of our executive compensationprogram.  It is the intent of the Compensation Committee to continueto review and assess base salary levels in order to maintain our competitiveposition relative to the Peer Group.

Annual IncentiveCompensation.   We provide incentive compensation to ourexecutive officers and key employees in the form of annual cash bonuses that arepaid on a discretionary basis and are based upon financial and operationalachievements during the preceding fiscal year.   Our annualincentive compensation program is primarily intended to motivate our executiveofficers to achieve certain short-term strategic objectives established by theCompensation Committee on an annual basis.  We also believe our annualincentive compensation program is an important part of our overall compensationprogram to attract and retain executive talent as discussed above.  In2007, the Bonus Plan, as approved by the Compensation Committee, set forthcertain objectives for management revolving around the commercialization of thePID technology and the development of a new particle injection system.  The2008 Bonus Plan, which has been approved by the Compensation Committee, alsosets forth objectives for management that revolve around the commercializationof the PID technology, achieving first revenue and generating positive cash flowfrom the business.  For fiscal 2008, the Compensation Committeeexercised its discretion and determined that the Company was not in a financialposition to pay cash bonuses even though some performance evaluation criteriahad been met. As such, no bonuses were paid for 2008 to our executiveofficers.

Our cash bonus awards are linked to the achievementof the performance goals described above and are designed to put a significantportion of total compensation at risk. The Compensation Committee hasestablished a bonus target for each executive officer based upon a review of thecompetitive data for that position, level of responsibility and ability toimpact our success. Individual executive officer bonus targets range from 40% to80% of base salary, except the President and Chief Executive Officer’s bonus,whose target ranges from 50% to 100% of base salary.

Long-termIncentive Awards.   From time to time, we also providelong-term incentive compensation to our executive officers and key employeesthrough equity awards pursuant to one of the 2004, 2005 and 2007 Stock IncentivePlans. The use of equity awards is intended to provide incentives to ourexecutive officers and key employees to work toward our long-term goals. Equityawards are not granted by the Compensation Committee as a matter of course aspart of the regular compensation of any executive or key employee. The decisionby the Compensation Committee to grant an equity award is based on the perceivedincentive that any such grant will provide and the benefits that the grant mayhave on long-term stockholder value. The determination by the CompensationCommittee of the number of shares granted is based on the level and contributionof the intended recipient as well as an analysis of the intended recipient’sstock ownership position relative to other executive officers within ourcompany. Consideration is also given by the Compensation Committee to theanticipated contribution of the business operations for which the intendedrecipient has responsibility to overall stockholder value.

During fiscal 2008, the Compensation Committeeawarded restricted shares as reflected in the table below. A total of 827,000restricted shares and 295,000 options have been awarded to named executiveofficers during the last three fiscal years.

|               |   | 2008                      |   |
|--------------------|--------|---------------------------|--------|
| Name               |   | RestrictedShares (1) |   |   |   |
| Jim B. Terry       |   | 150,000                   |   |   |   |
| J. Chris Boswell   |   | —                   |   |   |   |
| Thomas E. Hardisty |   | —                   |   |   |   |
| Gordon Tibbitts    |   | 20,000                    |   |   |   |

(1)                Restrictionslapse in one-third increments on each of the first, second and thirdanniversaries of the date of grant, June 23, 2008.

Severance andChange in Control Arrangements.   We have entered intoEmployment Agreements with each of our executive officers that contain severanceand change of control arrangements.  The purpose of these EmploymentAgreements is to (i) ensure the continued dedication of the executive,notwithstanding the possibility, threat or occurrence of a change of control;(ii) diminish any distraction of the executive resulting from theuncertainties and risks created by a pending or threatened change of control;and (iii) provide the executive with compensation and benefits arrangementsupon a change of control that are competitive with those of our PeerGroup.  As discussed above, it is important that the terms of theseEmployment Agreements are competitive with the terms of similar agreements thatare found in the market place based on compensation packages of our Peer Groupto retain quality key employees. The benefits that each of our named executiveofficers will receive in the event of termination or upon a change of controlare described below under “-Potential Payments upon Termination or Change inControl.”

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The Employment Agreements for the President andChief Executive Officer, Senior Vice President and Chief Financial Officer andSenior Vice President of Corporate Development and Secretary are effective for athree-year term and are automatically renewed for a one year term on theanniversary date, such that these agreements are always for a three-year termupon each annual renewal.  The agreement for the Vice President ofTechnology is effective for a one-year term and is automatically renewed for aone-year term on the anniversary date.  Please see “- EmploymentAgreements.”

Benefits.   Ourexecutive officers may also participate in our 401(k) plan on the sameterms as other employees for which we automatically contribute 3% of theemployee’s base salary.  We also offer medical, dental and term lifeinsurance.  In addition, Messrs. Terry, Boswell, Hardisty, andTibbitts each have life insurance policies for which we pay the annual premiumsof $9,920, $2,870, $2,975, and $1,903, respectively.

Determination of fiscal 2009 Annual Base Salary andIncentive Bonus Potential

During fiscal 2008, the Compensation Committee alsoconsidered whether adjustments should be made to the base salaries and incentivebonus potential for the named executive officers for fiscal 2009. TheCompensation Committee adjusted each named executive officer’s base salary andincentive bonus potential based on individual performance, market conditions andthe other factors discussed above. The following table sets forth the 2009 basesalaries and incentive bonus potential (as a percentage of base salary) for thenamed executive officers.

| Name               |   | Title                                                                          |   | Fiscal 2009 BaseSalary |    | Maximum Fiscal2009 IncentiveBonus Potential(as a % of BaseSalary) |   |
|--------------------|--------|--------------------------------------------------------------------------------|--------|----------------------------------|---------|------------------------------------------------------------------------------------------------------|--------|
| Jim B. Terry       |   | President and Chief Executive      OfficerSenior Vice President and      Chief |   | $                                | 277,200 |                                                                                                 | 100    | % |
| J. Chris Boswell   |   | Financial OfficerSenior Vice President of      Business                        |   | 254,100                          |    | 80                                                                                                   | %      |
| Thomas E. Hardisty |   | Development                                                                    |   | 207,900                          |    | 80                                                                                                   | %      |
| Gordon Tibbitts    |   | Vice President of    Technology                                                |   | 165,000                          |    | 80                                                                                                   | %      |

Allocation of Compensation between Short andLong-Term Benefits and between Restricted Stock and Options

The Compensation Committee generally allocates thecompensation program for our executive officers and key employees betweenequity-based and non-equity-based compensation in order to balance the policiesof supporting long-term performance measures while rewarding yearly performancegoals. In evaluating whether or not to make awards of equity-based long-termcompensation during fiscal 2008, the Compensation Committee considered theamount of equity already held by our executive officers.  Because each ofMessrs. Boswell and Hardisty were founders or executive officers of ourcompany near the time it was founded, each of them already had significantequity ownership positions in our company as of September 30, 2008. Mr. Terry, on the other hand, became an executive officer of our company inJanuary 2006.  Therefore, the Compensation Committee exercised itsdiscretion to make awards of equity-based long-term compensation toMr. Terry.  The Compensation Committee also exercised itsdiscretion to make awards of equity-based long-term compensation to Mr. Tibbittsas Mr. Tibbitts had no such previous awards granted to him.

    Set forth below isthe percentage of short-term to long-term benefits given to Messrs. Terry,Boswell, Hardisty and Tibbitts based on the fiscal 2008 Summary CompensationTable reflecting the determinations of the Compensation Committee described inthe preceding paragraph.

| Name               |   | Short-TermBenefits(1) |   | Long-TermBenefits(2) |   | Total |   |
|--------------------|--------|-----------------------|--------|----------------------|--------|-------|--------|
| Jim B. Terry       |   | 39                    | %      | 61                   | %      | 100.0 | %      |
| J. Chris Boswell   |   | 97                    | %      | 3                    | %      | 100.0 | %      |
| Thomas E. Hardisty |   | 97                    | %      | 3                    | %      | 100.0 | %      |
| Gordon Tibbitts    |   | 72                    | %      | 28                   | %      | 100.0 | %      |

 (1)                 Short-TermBenefits include salary and insurance premiums paid.

    (2)                Long-TermBenefits include stock awards and safe-harbor amounts under the401(k) Plan.

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Tax Considerations

During 1993, Congress enacted legislation that couldhave the effect of limiting the deductibility of executive compensation paid toeach of a company’s five highest paid executive officers.  Thislegislation provides that compensation paid to any one executive in excess of$1,000,000 will not be deductible unless it is performance-based and paid undera plan that has been approved by stockholders.  The CompensationCommittee considers the application of this legislation when reviewing executivecompensation; however, the limitation on deductibility of executive compensationhas not had any impact on us to date.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed anddiscussed the disclosure set forth above under the heading “CompensationDiscussion and Analysis” with management and, based on this review anddiscussion, the Compensation Committee has recommended to the Board of Directorsthat the “Compensation Discussion and Analysis” be included in this AnnualReport on Form 10-K.

|                    | The Compensation Committee |          |
|-------------------------|----------------------------|---------------|
|                    |                       |          |
| Ken R. LeSuer, Chairman | Hugh A. Menown             | KevinFlannery |

Summary Compensation Table

The following Summary Compensation Table sets forththe compensation of our named executive officers for fiscal years 2007 and2008.   Additional details regarding the applicable elements ofcompensation in the Summary Compensation Table are provided in the footnotesfollowing the table.

| Name and Principal Position                 |   | FiscalYear |   | Salary($) |   | RestrictedStock Awards($) |   | OptionAwards($) (1) |   | All OtherCompensation($) |   | Total($)  |   |
|------------------------------------------------------------|--------|------------|--------|-----------|--------|--------------------------------|--------|--------------------------|--------|-------------------------------|--------|-----------|--------|
| Jim B. Terry                                               |   | 2008       |   | 248,511   |   | 397,500                        | (2)    | —                  |   | 17,376                        | (3)    | 663,387   |   |
| President and ChiefExecutive Officer                       |   | 2007       |   | 238,707   |   | 1,161,250                      |   | 138,000                  |   | 19,332                        | (3)    | 1,557,289 |   |
|                                                       |   |       |   |      |   |                           |   |                     |   |                          |   |      |   |
| J. Chris Boswell                                           |   | 2008       |   | 227,803   |   | —                        |   | —                  |   | 18,102                        | (3)    | 245,905   |   |
| Senior Vice President,Chief Financial Officerand Treasurer |   | 2007       |   | 218,816   |   | —                        |   | —                  |   | 19,393                        | (3)    | 238,209   |   |
|                                                       |   |       |   |      |   |                           |   |                     |   |                          |   |      |   |
| Thomas E. Hardisty                                         |   | 2008       |   | 186,383   |   | —                        |   | —                  |   | 8,566                         | (3)    | 194,949   |   |
| Senior Vice President ofCorporate Developmentand Secretary |   | 2007       |   | 179,032   |   | —                        |   | —                  |   | 9,517                         | (3)    | 188,549   |   |
|                                                       |   |       |   |      |   |                           |   |                     |   |                          |   |      |   |
| Gordon Tibbitts                                            |   | 2008       |   | 147,923   |   | 53,000                         | (4)    | —                  |   | 6,340                         | (3)    | 207,263   |   |
| Vice President ofTechnology                                |   | 2007       |   | 143,462   |   | —                        |   | —                  |   | 7,323                         | (3)    | 150,785   |   |

| (1) | Please see the discussion of the assumptions      made in the valuation of this award in the financial statements and      footnotes to the financial statements of the Annual Report on      Form 10-K filed with the SEC on December 13, 2007.  We      adopted the fair value recognition provisions of SFAS      No. 123(R) effective June 15, 2005.  Under the      SFAS No. 123(R), we recorded compensation expense in our Audited      Consolidated Financial Statements for the year ended September 30,      2007 and 2008 with respect to the award included in this      table.  See “Note 3 Summary of Significant Accounting Policies”      in the financial statements of this Annual Report on Form 10-K for      further discussion of the accounting treatment for these      options. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents 150,000 shares of restricted stock      valued at $2.65 per share, the average of the high and low prices of our      common stock on the NASDAQ Capital Market on June 23, 2008, the day of the      grant.  On September 30, 2008, the restricted stock granted      to Mr. Terry in fiscal 2008 had a value of $30,000 based on the      closing price of our |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | common stock of $0.20 per share on the NASDAQ      Capital Market.   The restricted stock granted to      Mr. Terry vests 33% on each anniversary of the date of grant for the      shares granted on June 23, 2008.  We do not currently pay      dividends on our common stock; however, we would pay dividends on the      restricted stock should our dividend policy change and we declared a      dividend on our common stock. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Represents company matching contributions      pursuant to our 401(k) plan and the dollar value of insurance      premiums paid by our company with respect to term life insurance for the      benefit of the named executiveofficer. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Represents 20,000 shares of restricted stock      valued at $2.65 per share, the average of the high and low prices of our      common stock on the NASDAQ Capital Market on June 23, 2008, the day of the      grant.  On September 30, 2008, the restricted stock granted      to Mr. Tibbitts in fiscal 2008 had a value of $4,000 based on the      closing price of our common stock of $0.20 per share on the NASDAQ Capital      Market.   The restricted stock granted to Mr. Tibbitts      vests 33% on each anniversary of the date of grant for the shares granted      on June 23, 2008.  We do not currently pay dividends on our      common stock; however, we would pay dividends on the restricted stock      should our dividend policy change and we declared a dividend on our common      stock. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Grants of Plan Based Awards

|               |   |       |   | Estimated Future Payouts    Under |   | All OtherStock Awards:Number of |   | All OtherOptionAwards:Number ofSecurities |   | Exercise orBase Price |      | ClosingMarketPriceof Common |   | Grant DateFair Valueof Stockand |   |
|--------------------|--------|------------|--------|-----------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------|-----------|----------------------------------|--------|------------------------------------------------|--------|
|               |   |       |   | Equity Incentive Plan    Awards   |   | Shares of Stock                      |   | Underlying                                          |   | of Option                  |      | Stock                            |   | Option                                         |   |
| Name               |   | Grant Date |   | Threshold(#)                      |   | Target(#)                                      |   | Maximum (#)                                         |   | or Units(#)                |      | Options(#)                       |   | Awards($ / Sh)                       |   | Awards($ / Sh) |   | Awards(1)($) |   |
| Jim B. Terry       |   | 6/23/08    |   | —                           |   | —                                        |   | —                                             |   | 150,000                         |  (2) | —                          |   | —                                        |   | 2.65 |   | 394,500 |   |
| J. Chris Boswell   |   | —    |   | —                           |   | —                                        |   | —                                             |   | —                         |      | —                          |   | —                                        |   | — |   | — |   |
| Thomas E. Hardisty |   | —    |   | —                           |   | —                                        |   | —                                             |   | —                         |      | —                          |   | —                                        |   | — |   | — |   |
| Gordon Tibbitts    |   | 6/23/08    |   | —                           |   | —                                        |   | —                                             |   | 20,000                          |  (3) | —                          |   | —                                        |   | 2.65 |   | 53,000 |   |

| (1) | We adopted the fair value recognition      provisions of SFAS No. 123(R) effective June 15,      2005.  Accordingly, the grant date fair value for the award made      in fiscal 2008 is calculated in accordance with SFAS      123(R). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Effective June 23, 2008, Mr. Terry      received 150,000 shares of restricted stock, pursuant to the 2007 Stock      Incentive Plan, vesting over three years, 33% on each anniversary of the      grant date in each of 2009, 2010, and2011. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Effective June 23, 2008, Mr. Tibbitts      received 20,000 shares of restricted stock, pursuant to the 2007 Stock      Incentive Plan, vesting over three years, 33% on each anniversary of the      grant date in each of 2009, 2010, and2011. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Narrative Disclosure to Summary Compensation      Table and Grants of Plan-Based AwardsTable |
|----------------------------------------------------------------------------------------------|

The following is a discussion of material factorsnecessary to gain an understanding of the information disclosed in the SummaryCompensation Table and the Grants of Plan-Based Awards Table.

Employment Agreements

Employment Agreement of Jim B.Terry.    Mr. Terry entered into an employmentagreement effective as of January 23, 2006.  This agreement has athree-year term that is automatically extended for successive one-year periodsfollowing the end of the initial three-year term unless otherwise terminated bydelivery of written notice by either party no less than 90 days prior to thefirst day of any one-year extension period.  No such notice oftermination of Mr. Terry’s employment agreement has been delivered and,therefore, the agreement will be extended for a one year term effective January23, 2009.  The agreement provides that Mr. Terry will serve asour Chief Executive Officer and President.  Under the terms of theagreement, Mr. Terry will receive an annual base salary of $240,000, whichmay be further increased at the sole discretion of the CompensationCommittee.  We may decrease Mr. Terry’s base salary only with theprior written consent of Mr. Terry.  Mr. Terry is alsoeligible to participate in our annual bonus incentive plan as approved by theCompensation Committee or the Board of Directors in amounts approved by andbased on criteria established by the CompensationCommittee.  Mr. Terry will also be eligible to participate, inthe sole discretion of the Compensation Committee, in any long-term incentivearrangements we make available to our executive officers from time totime.  Finally, Mr. Terry will receive certain perquisites,including reimbursement in accordance with our standard policies and proceduresof business and business-related business expenses and dues and fees to industryand professional organizations, four weeks of paid vacationeach

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calendar year, and participation by Mr. Terryand his spouse and dependents in all benefits, plans and programs available toour executive employees.  We have also agreed to use reasonableefforts to obtain life insurance for Mr. Terry in the amount of$500,000.

During the term of the agreement, we may terminateMr. Terry’s employment at any time upon his (1) death,(2) disability, (3) for cause, or (4) for any other reasonwhatsoever in the sole discretion of the Board of Directors. If we desire toterminate Mr. Terry’s employment at any time prior to expiration of theterm of his employment, we must provide written notice to Mr. Terryindicating that we have elected to terminate his employment and stating theeffective date of termination and the reason for such termination.Mr. Terry may terminate his employment (1) as a result of a change induties (as such term is defined in the employment agreement) after first givingus written notice of the specific occurrence that resulted in the change induties and if such occurrence remains uncorrected for 10 days following deliveryof such notice, or (2) at any time for any reason whatsoever. IfMr. Terry desires to terminate his employment at any time prior toexpiration of the term of his employment, he must provide 30-days written noticeto us indicating that he has elected to terminate his employment and stating theeffective date of termination and the reason for suchtermination.

In the event Mr. Terry’s employment terminatesupon expiration of the term of the employment agreement or if Mr. Terry’semployment is terminated by either Mr. Terry or our Company for any reasonother than an Involuntary Termination (as defined below), all compensation andbenefits to Mr. Terry under the agreement will terminate contemporaneouslywith the termination of his employment. For purposes of the agreement, an“Involuntary Termination” means any termination of Mr. Terry’s employmentwith our Company which:

|   | · | does not result from an expiration of the term      of the employment agreement; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | does not result from a resignation by      Mr. Terry (except as otherwise provided  below); |
|--------|--------|--------------------------------------------------------------------------------------------------|

|   | · | does not result from a termination for cause      of Mr. Terry; |
|--------|--------|----------------------------------------------------------------------|

|   | · | does not result from Mr. Terry’s death or      disability; or |
|--------|--------|--------------------------------------------------------------------------|

|   | · | results from a resignation by Mr. Terry      on or before the date which is 60 days after the date upon which      Mr. Terry receives notice of a change of duties (as defined in the      agreement). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Mr. Terry’s employment agreement also includesprovisions governing the payment of severance benefits if his employment isterminated in connection with a Change in Control.  For a descriptionof these payments, please read “—Potential Payments Upon Termination or Changein Control” below.

Additionally, if any of the payments or benefitsdescribed above are subject to the excise tax imposed by Section 4999 ofthe Internal Revenue Code of 1986, as amended, then Mr. Terry is entitledto receive a gross-up payment equal to the amount of excise tax imposed plus alltaxes imposed on the gross-up payment.

The agreement also contains customaryconfidentiality, nondisclosure and proprietary rights provisions. In addition,during his employment and for a period of two years following the termination ofMr. Terry’s employment for any reason, Mr. Terry is prohibited fromparticipating in the ownership, management, operation or control in any businessthat conducts a business similar to that conducted by us or provides or sells aservice or product that is the same, substantially similar to or otherwisecompetitive with the products and services provided or sold by our Company inany of the business territories that we conduct business from time to time,subject to certain limited exceptions. During that same period, Mr. Terrymay not solicit, among others, customers, suppliers and employees of ourCompany.

Employment Agreement of J. ChrisBoswell.    Mr. Boswell entered into anemployment agreement that was effective as of February 1,2006.  This agreement, which replaced his previous employmentagreement, has a three-year term that is automatically extended for successiveone-year periods following the end of the initial three-year term unlessotherwise terminated by delivery of written notice by either party no less than90 days prior to the first day of any one-year extension period.  Nosuch notice of termination of Mr. Boswell’s employment agreement has beendelivered and, therefore, the agreement will be extended for a one year termeffective February 1, 2009.  The agreement provides thatMr. Boswell will serve as Chief Financial Officer and Senior VicePresident.  Under the terms of the agreement, Mr. Boswell willreceive an annual base salary of $220,000, which may be further increased at thesole discretion of the Compensation Committee.  We may decreaseMr. Boswell’s base salary only with the prior written consent ofMr. Boswell.  Mr. Boswell is also eligible to participate inour annual bonus incentive plan as approved by the Compensation Committee or theBoard of Directors in amounts approved by and based on criteria established bythe Compensation Committee.  Mr. Boswell will also be eligibleto

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participate, in the sole discretion of theCompensation Committee, in any long-term incentive arrangements we makeavailable to our executive officers from time to time.  Finally,Mr. Boswell will receive certain perquisites, including reimbursement inaccordance with our standard policies and procedures of business andbusiness-related business expenses and dues and fees to industry andprofessional organizations, four weeks of paid vacation each calendar year, andparticipation by Mr. Boswell and his spouse and dependents in all benefits,plans and programs available to our executive employees.  We have alsoagreed to use reasonable efforts to obtain life insurance for Mr. Boswellin the amount of $500,000.

During the term of the agreement, we may terminateMr. Boswell’s employment at any time upon his (1) death,(2) disability, (3) for cause, or (4) for any other reasonwhatsoever in the sole discretion of the Board of Directors. If we desire toterminate Mr. Boswell’s employment at any time prior to expiration of theterm of his employment, we must provide written notice to Mr. Boswellindicating that we have elected to terminate his employment and stating theeffective date of termination and the reason for such termination.Mr. Boswell may terminate his employment (1) as a result of a changein duties (as such term is defined in the employment agreement) after firstgiving us written notice of the specific occurrence that resulted in the changein duties and if such occurrence remains uncorrected for 10 days followingdelivery of such notice, or (2) at any time for any reason whatsoever. IfMr. Boswell desires to terminate his employment at any time prior toexpiration of the term of his employment, he must provide 30-days written noticeto us indicating that he has elected to terminate his employment and stating theeffective date of termination and the reason for suchtermination.

In the event Mr. Boswell’s employmentterminates upon expiration of the term of the employment agreement or ifMr. Boswell’s employment is terminated by either Mr. Boswell or ourCompany for any reason other than an Involuntary Termination (as defined below),all compensation and benefits to Mr. Boswell under the agreement willterminate contemporaneously with the termination of his employment. For purposesof the agreement, an “Involuntary Termination” means any termination ofMr. Boswell’s employment with our Company which:

|   | · | does not result from an expiration of the term      of the employment agreement; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | does not result from a resignation by      Mr. Boswell (except as otherwise provided  below); |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | · | does not result from a termination for cause      of Mr. Boswell; |
|--------|--------|------------------------------------------------------------------------|

|   | · | does not result from Mr. Boswell’s death      or disability; or |
|--------|--------|----------------------------------------------------------------------------|

|   | · | results from a resignation by Mr. Boswell      on or before the date which is 60 days after the date upon which      Mr. Boswell receives notice of a change of duties (as defined in the      agreement). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Mr. Boswell’s employment agreement alsoincludes provisions governing the payment of severance benefits if hisemployment is terminated in connection with a Change in Control.  Fora description of these payments, please read “—Potential Payments UponTermination or Change in Control” below.

Additionally, if any of the payments or benefitsdescribed above are subject to the excise tax imposed by Section 4999 ofthe Internal Revenue Code of 1986, as amended, then Mr. Boswell is entitledto receive a gross-up payment equal to the amount of excise tax imposed plus alltaxes imposed on the gross-up payment.

The agreement also contains customaryconfidentiality, nondisclosure and proprietary rights provisions. In addition,during his employment and for a period of two years following the termination ofMr. Boswell’s employment for any reason, Mr. Boswell is prohibitedfrom participating in the ownership, management, operation or control in anybusiness that either (1) conducts a business similar to the particle impactdrilling system business conducted by us (or any other line of businessinvolving technological processes that we have either developed or acquired) or(2) provides or sells a service or product that is the same, substantiallysimilar to or otherwise competitive with the products and services related tothe particle impact drilling system business conducted by us (or any other lineof business involving technological processes that we have either developed oracquired) in any of the business territories that we conduct business from timeto time, subject to certain limited exceptions. During that same period,Mr. Boswell may not solicit, among others, customers, suppliers andemployees of our Company.

Employment Agreement of Thomas E.Hardisty.    Mr. Hardisty entered into anemployment agreement that was effective as of February 1,2006.  This agreement, which replaced his previous employmentagreement, has a three-year term that is automatically extended for successiveone-year periods following the end of the initial three-year term unlessotherwise terminated by delivery of written notice by either party no less than90 days prior to the first day of any one-year

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extension period.  No such notice oftermination of Mr. Hardisty’s employment agreement has been delivered and,therefore, the agreement will be extended for a one year term effective February1, 2009.  The agreement provides that Mr. Hardisty will serve asa Senior Vice President.  Under the terms of the agreement,Mr. Hardisty will receive an annual base salary of $180,000, which may befurther increased at the sole discretion of the CompensationCommittee.  We may decrease Mr. Hardisty’s base salary only withthe prior written consent of Mr. Hardisty.  Mr. Hardisty isalso eligible to participate in our annual bonus incentive plan as approved bythe Compensation Committee or the Board of Directors in amounts approved by andbased on criteria established by the CompensationCommittee.  Mr. Hardisty will also be eligible to participate, inthe sole discretion of the Compensation Committee, in any long-term incentivearrangements we make available to our executive officers from time totime.  Finally, Mr. Hardisty will receive certain perquisites,including reimbursement in accordance with our standard policies and proceduresof business and business-related business expenses and dues and fees to industryand professional organizations, four weeks of paid vacation each calendar year,and participation by Mr. Hardisty and his spouse and dependents in allbenefits, plans and programs available to our executive employees.  Wehave also agreed to use reasonable efforts to obtain life insurance forMr. Hardisty in the amount of $500,000.

During the term of the agreement, we may terminateMr. Hardisty’s employment at any time upon his (1) death,(2) disability, (3) for cause, or (4) for any other reasonwhatsoever in the sole discretion of the Board of Directors. If we desire toterminate Mr. Hardisty’s employment at any time prior to expiration of theterm of his employment, we must provide written notice to Mr. Hardistyindicating that we have elected to terminate his employment and stating theeffective date of termination and the reason for such termination.Mr. Hardisty may terminate his employment (1) as a result of a changein duties (as such term is defined in the employment agreement) after firstgiving us written notice of the specific occurrence that resulted in the changein duties and if such occurrence remains uncorrected for 10 days followingdelivery of such notice, or (2) at any time for any reason whatsoever. IfMr. Hardisty desires to terminate his employment at any time prior toexpiration of the term of his employment, he must provide 30-days written noticeto us indicating that he has elected to terminate his employment and stating theeffective date of termination and the reason for suchtermination.

In the event Mr. Hardisty’s employmentterminates upon expiration of the term of the employment agreement or ifMr. Hardisty’s employment is terminated by either Mr. Hardisty or ourCompany for any reason other than an Involuntary Termination (as defined below),all compensation and benefits to Mr. Hardisty under the agreement willterminate contemporaneously with the termination of his employment. For purposesof the agreement, an “Involuntary Termination” means any termination ofMr. Hardisty’s employment with our Company which:

|   | · | does not result from an expiration of the term      of the employment agreement; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | does not result from a resignation by      Mr. Hardisty (except as otherwise provided  below); |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | does not result from a termination for cause      of Mr. Hardisty; |
|--------|--------|-------------------------------------------------------------------------|

|   | · | does not result from Mr. Hardisty’s death      or disability; or |
|--------|--------|-----------------------------------------------------------------------------|

|   | · | results from a resignation by      Mr. Hardisty on or before the date which is 60 days after the date      upon which Mr. Hardisty receives notice of a change of duties (as      defined in the agreement). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Mr. Hardisty’s employment agreement alsoincludes provisions governing the payment of severance benefits if hisemployment is terminated in connection with a Change in Control.  Fora description of these payments, please read “—Potential Payments UponTermination or Change in Control” below.

Additionally, if any of the payments or benefitsdescribed above are subject to the excise tax imposed by Section 4999 ofthe Internal Revenue Code of 1986, as amended, then Mr. Hardisty isentitled to receive a gross-up payment equal to the amount of excise tax imposedplus all taxes imposed on the gross-up payment.

The agreement also contains customaryconfidentiality, nondisclosure and proprietary rights provisions. In addition,during his employment and for a period of two years following the termination ofMr. Hardisty’s employment for any reason, Mr. Hardisty is prohibitedfrom participating in the ownership, management, operation or control in anybusiness that conducts a business similar to that conducted by us or provides orsells a service or product that is the same, substantially similar to orotherwise competitive with the products and services provided or sold by ourCompany in any of the business territories that we conduct business from time totime, subject to certain limited exceptions. During that same period,Mr. Hardisty may not solicit, among others, customers, suppliers andemployees of our Company.

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    Employment Agreementof Gordon Tibbitts.    Mr. Tibbitts entered intoan employment agreement effective as of August 1, 2003.  Theagreement has an initial term of one year and automatically renews eachAugust 1st for an addition twelve month period.  The agreementprovides that Mr. Tibbitts will serve as VicePresident—Technology.  Mr. Tibbitts receives an annual basesalary of $130,000 and is eligible to participate in benefits and insurancepackages of the Company.  We also agreed to provide Mr. Tibbittswith the use of office and communication equipment normal for the operation of asatellite office in Salt Lake City, Utah.  Mr. Tibbitts will alsobe eligible to receive a bonus at such time and in such amount as determined bythe Board of Directors of the Company.

During the term of the agreement, we may terminateMr. Tibbitts’ employment at any time for cause, and Mr. Tibbitts mayterminate the agreement for any reason upon written notice delivered no lessthan 15 days and no more than 60 days prior to the date of termination. Theemployment agreement with Mr. Tibbitts also contains customarynondisclosure and proprietary rights provisions.

Outstanding Equity Awards as of September 30,2008

The following table provides information concerningunexercised options and restricted stock that have not vested for each namedexecutive officer as of September 30, 2008:

|              |   | Options Awards                                                          |   | Stock Awards                                                 |   |
|-------------------|--------|-------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
| Name              |   | Number ofSecuritiesUnderlyingUnexercisedUnearnedOptionsExercisable |   | Number ofSecuritiesUnderlyingUnexercisedOptionsUnexercisable |   | Equity IncentivePlan Awards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions |   | OptionExercisePrice |   | OptionExpiration Date |   | Number ofShares or Unitsof Stock ThatHave NotVested |   | MarketValue ofShares orUnits ofStock ThatHave NotVested(1) |   | Equity IncentivePlan Awards:Number ofUnearned Shares,Units or OtherRights That HaveNot Vested |   | Equity IncentivePlan Awards:Market or Payout Value ofUnearned Shares,Units or OtherRights That HaveNot Vested |   |   |
| Jim B. Terry      |   | 100,000                                                                 |   | 50,000                                                       | (5)    | — |   | $ | 6.73 |   | 1/23/2016 |   | — |   | $ | — |   | — |   | $ | — |   |   |   |
|              |   | 25,000                                                                  |   | 50,000                                                       | (6)    | — |   | 2.85 |   | 10/24/2016 |   | — |   | — |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | 50,000 | (2) | 10,000 |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | 16,667 | (3) | 3,333 |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | 150,000 | (8) | 30,000 |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | — |   | — |   | 129,250 | (4) | 25,850 |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | — |   | — |   | 200,000 | (4) | 40,000 |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | — |   | — |   | 170,750 | (4) | 34,150 |   |   |
| J. ChrisBoswell   |   | 760,000                                                                 |   | —                                                      |   | — |   | 0.12 |   | 4/8/2014 |   | — |   | — |   | — |   | — |   |   |
|              |   | 160,000                                                                 |   | —                                                      |   | — |   | 4.90 |   | 5/20/2015 |   | — |   | — |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |   |
| Thomas E.Hardisty |   | 600,000                                                                 |   | —                                                      |   | — |   | 0.12 |   | 4/8/2014 |   | — |   | — |   | — |   | — |   |   |
|              |   | 160,000                                                                 |   | —                                                      |   | — |   | 4.90 |   | 5/20/2015 |   | — |   | — |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |   |
| GordonTibbitts    |   | 350,000                                                                 |   | —                                                      |   | — |   | 0.12 |   | 4/8/2014 |   | — |   | — |   | — |   | — |   |   |
|              |   | 46,667                                                                  |   | 23,333                                                       | (7)    | — |   | 4.50 |   | 10/3/2015 |   | — |   | — |   | — |   | — |   |   |
|              |   | —                                                                 |   | —                                                      |   | — |   | — |   | — |   | 20,000 |  (8) | 4,000 |   | — |   | — |   |   |

| (1) | Value based on the closing price of our common      stock on September 30, 2008($0.20). |
|-----|----------------------------------------------------------------------------------------------|

| (2) | Restricted stock award restrictions lapse on      January 23, 2009. |
|-----|--------------------------------------------------------------------------|

| (3) | Restricted stock award restrictions lapse 1/2      on each of October 24, 2008 and2009. |
|-----|----------------------------------------------------------------------------------------------|

| (4) | With respect to 129,250 shares, the      restrictions lapse on the date we file our first quarterly or annual      report with the Securities and Exchange Commission in which we report      Adjusted EBITDA (as defined in the award agreement) for a fiscal quarter      that is greater than $0; with respect to 200,000 shares, the restrictions      lapse on the date we consummate a strategic transaction with a third party      that the Compensation Committee, in its sole discretion, determines      satisfies certain criteria described in the award agreement; and with      respect to 170,750 shares, the restrictions lapse on the date we file our      first quarterly or annual report with the Securities and Exchange      Commission in which we report, for two consecutive fiscal quarters,      cumulative revenues in an amount equal to or greater than $1.0 million, in      the aggregate.  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  (5) | Option award vests on January 23,      2009. |
|-----------|---------------------------------------------------|

| (6)  | Option award vests in 1/2 increments on      October 24, 2008, and 2009. |
|-----------|-------------------------------------------------------------------------------|

| (7) | Option award vests on October 3,      2008. |
|-----|--------------------------------------------------|

| (8)  |  Restricted stock award lapses in 1/3      increments on June 23, 2009, 2010 and2011. |
|-----------|--------------------------------------------------------------------------------------------|

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|   | Option Exercises and Stock      Vested |
|--------|----------------------------------------|

|               |   | Option Awards                                       |   | Stock Awards                   |    |
|--------------------|--------|----------------------------------------------------------|--------|-------------------------------------|---------|
| Name               |   | Number of SharesAcquired on Exercise |   | Value Realized onExercise |    | Number of SharesAcquired on Vesting |   | Value Realized onVesting(1) |   |
| Jim B. Terry       |   | —                                                  |   | $                                   | — |   | 58,333 |   | $ | 121,249 |   |
| J. Chris Boswell   |   | —                                                  |   | —                             |    | 10,000 |   | 26,500 |   |
| Thomas E. Hardisty |   | —                                                  |   | —                             |    | 10,000 |   | 26,500 |   |
| Gordon Tibbitts    |   | —                                                  |   | —                             |    | — |   | — |   |

| (1) | Value realized represents the fair market      value of the shares at the vestdate. |
|-----|-------------------------------------------------------------------------------------|

Potential Payments upon Termination or Change inControl

Severance Under Employment Agreementof Jim B. Terry.   Except as provided in the followingsentence, in the event Mr. Terry’s employment is subject to an InvoluntaryTermination (as defined above), we shall pay to Mr. Terry a lump sum cashpayment within 30 days of termination equal to two times his annual base salaryin effect at the time of termination. If Mr. Terry’s employment is subjectto an Involuntary Termination that occurs at any time during the periodbeginning 60 days prior to the date a definitive agreement concerning a Changeof Control (as defined below) is executed and ending on the one-year anniversaryof the consummation of such Change of Control (such period being a “Change ofControl Period”), Mr. Terry will be entitled to receive a lump sum cashpayment within 30 days of termination equal to two times the sum of his annualbase salary in effect at the time of termination and the average of the bonuseshe received in the two preceding fiscal years (as calculated in accordance withthe agreement). If Mr. Terry’s employment is subject to an InvoluntaryTermination during a Change of Control Period or as a result of his death ordisability, we have also agreed to accelerate the vesting of all options topurchase common stock granted to Mr. Terry and to remove the restrictionson vesting or forfeiture of all restricted stock and all other accrued benefitsunder any non-qualified deferred compensation plans granted to Mr. Terry.Finally, Mr. Terry and his dependents will be eligible to receive COBRAcontinuation coverage under our group health plans for a period of up to twoyears following any Involuntary Termination of his employment, in accordancewith and to the extent provided by COBRA.

For purposes of the agreement, a “Change of Control”means:

|   | · | a merger of our Company with another entity, a      consolidation involving our Company or the sale of all or substantially      all of our assets to another entity if, in any such case, (A) the      holders of our equity securities immediately prior to such transaction do      not beneficially own after such transaction 50% or more of the votes to      elect directors generally in substantially the same proportions that they      owned securities of our Company prior to such transaction, or (B) the      persons who were members of our Board of Directors immediately prior to      such transaction do not constitute at least a majority of the Board of      Directors of the resulting entity after such    transaction; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a dissolution or liquidation of our      Company; |
|--------|--------|---------------------------------------------------|

|   | · | when any person or entity acquires or gains      ownership or control of more than 50% of the combined voting power of the      outstanding securities of our Company;or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | as a result of or in connection with a      contested election of directors, the persons who were members of our Board      of Directors immediately before such election cease to constitute a      majority of our Board ofDirectors. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In the event Mr. Terry is a “disqualifiedindividual” (as defined in Section 280G(c) of the Internal RevenueCode) and the payments and benefits that Mr. Terry has the right to receivewould constitute a “parachute payment” (as defined inSection 280G(b)(2) of the Internal Revenue Code), then the benefitsprovided under the agreement will be either (1) reduced to an amount sothat no portion of such amounts and benefits received by Mr. Terry will besubject to the excise tax imposed by Section 4999 of the Internal RevenueCode or (2) paid in full, whichever produces the better net after-taxposition to Mr. Terry.

In the event that any payment or distribution toMr. Terry is subject to the excise tax imposed by Section 4999 of theInternal Revenue Code or any interest or penalties with respect to such excisetax, we have agreed to make an additional payment to Mr. Terry in an amountsuch that after payment by Mr. Terry of all taxes (including such excisetax imposed on

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such additional payment), Mr. Terry will retainan amount of such payment equal to the amount of the excise tax imposed uponsuch payment (the “Gross Up” payment).

The following table describes the potential paymentsupon termination or a change in control of the Company for Mr. Terry, ourPresident and Chief Executive Officer.

| Executive Benefits and Payments      Upon Termination |   | Involuntarytermination |    |   | Involuntary termination on change of      control |   |
|---------------------------------------------------------------------------|--------|------------------------|---------|--------|---------------------------------------------------|--------|
| Compensation:                                                             |   |                   |    |   |                                              |   |
| Cash payment                                                              |   | $                      | 554,400 |   |                                              | $      | 591,900 |   |
| Gross Up (1)                                                              |   |                   | — |   |                                              |   | — |   |
| Vacation                                                                  |   |                   | 21,323  |   |                                              |   | 21,323 |   |
| Medical Benefits                                                          |   |                   | 31,414  |   |                                              |   | 31,414 |   |
| Long-term incentives:                                                     |   |                   |    |   |                                              |   |   |   |
| Stock Options: Unvested                                                   |   |                   | 25,000  |   |                                              |   | 25,000 |   |
| Restricted Stock: Unvested                                                |   |                   | 143,333 |   |                                              |   | 143,333 |   |
| Total                                                                     |   | $                      | 775,470 |   |                                              | $      | 812,970 |   |

    (1) Asof  September 30, 2008, the amount of the termination benefit dueunder Mr. Terry’s employment contract would not trigger the excise taximposed by Section 4999.

Severance Under Employment Agreementof J. Chris Boswell.   Except as provided in the followingsentence, in the event Mr. Boswell’s employment is subject to anInvoluntary Termination (as defined above), we shall pay to Mr. Boswell alump sum cash payment within 30 days of termination equal to the greater of(1) two times his annual base salary in effect at the time of termination,or (2) $600,000. If Mr. Boswell’s employment is subject to anInvoluntary Termination that occurs at any time during the period beginning 60days prior to the date a definitive agreement concerning a Change of Control (asdefined below) is executed and ending on the one-year anniversary of theconsummation of such Change of Control (such period being a “Change of ControlPeriod”), Mr. Boswell will be entitled to receive a lump sum cash paymentwithin 30 days of termination equal to the greater of (1) two times the sumof his annual base salary in effect at the time of termination and the averageof the bonuses he received in the two preceding fiscal years (as calculated inaccordance with the agreement), or (2) $600,000, which amount will beincreased to $950,000 if Mr. Boswell is not provided with an opportunity tosell the shares of our common stock then held by Mr. Boswell at a purchaseprice of $4.00 or more per share in connection with a Change of Controltransaction. If Mr. Boswell’s employment is subject to an InvoluntaryTermination during a Change of Control Period or as a result of his death ordisability, we have also agreed to accelerate the vesting of all options topurchase common stock granted to Mr. Boswell and to remove the restrictionson vesting or forfeiture of all restricted stock and all other accrued benefitsunder any non-qualified deferred compensation plans granted to Mr. Boswell.Finally, Mr. Boswell and his dependents will be eligible to receive COBRAcontinuation coverage under our group health plans for a period of up to twoyears following any Involuntary Termination of his employment, in accordancewith and to the extent provided by COBRA.

For purposes of the agreement, a “Change of Control”has the same meaning as set forth in Mr. Terry’s employmentagreement.

In the event that any payment or distribution toMr. Boswell is subject to the excise tax imposed by Section 4999 ofthe Internal Revenue Code or any interest or penalties with respect to suchexcise tax, we have agreed to make an additional payment to Mr. Boswell inan amount such that after payment by Mr. Boswell of all taxes (includingsuch excise tax imposed on such additional payment), Mr. Boswell willretain an amount of such payment equal to the amount of the excise tax imposedupon such payment.

The following table describes the potential paymentsupon termination or a change in control of the Company for Mr. Boswell, ourSenior Vice President - Chief Financial Officer.

|                                                                |   |                   |    |   | Involuntary termination onchange of control |   |
|---------------------------------------------------------------------|--------|------------------------|---------|--------|-----------------------------------------------------------------|--------|
| Executive Benefits and Payments UponTermination |   | Involuntarytermination |    |   | Purchase price of$4 or more                 |   |   | Purchaseprice of lessthan $4 |   |
| Compensation:                                                       |   |                   |    |   |                                                            |   |   |   |   |
| Cash payment                                                        |   | $                      | 600,000 |   |                                                            | $      | 600,000 |   |   | $ | 950,000 |   |
| Gross Up (1)                                                        |   |                   | — |   |                                                            |   | — |   |   |   | 358,711 |   |
| Vacation                                                            |   |                   | 19,546  |   |                                                            |   | 19,546 |   |   |   | 19,546 |   |
| Long-term incentives:                                               |   |                   |    |   |                                                            |   |   |   |   |   |   |   |
| Stock Options: Unvested                                             |   |                   | — |   |                                                            |   | — |   |   |   | — |   |
| Restricted Stock: Unvested                                          |   |                   | — |   |                                                            |   | — |   |   |   | — |   |
| Total                                                               |   | $                      | 619,546 |   |                                                            | $      | 619,546 |   |   | $ | 1,328,257 |   |

    (1) Asof  September 30, 2008, the amount of the termination benefit dueunder Mr. Boswell’s employment contract would only trigger the excise taximposed by Section 4999 if the company were to be sold for less than $4 pershare.

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Severance Under Employment Agreementof Thomas E. Hardisty.   Except as provided in thefollowing sentence, in the event Mr. Hardisty’s employment is subject to anInvoluntary Termination (as defined above), we shall pay to Mr. Hardisty alump sum cash payment within 30 days of termination equal to the greater of(1) two times his annual base salary in effect at the time of termination,or (2) $450,000. If Mr. Hardisty’s employment is subject to anInvoluntary Termination that occurs at any time during the period beginning 60days prior to the date a definitive agreement concerning a Change of Control (asdefined below) is executed and ending on the one-year anniversary of theconsummation of such Change of Control (such period being a “Change of ControlPeriod”), Mr. Hardisty will be entitled to receive a lump sum cash paymentwithin 30 days of termination equal to the greater of (1) two times the sumof his annual base salary in effect at the time of termination and the averageof the bonuses he received in the two preceding fiscal years (as calculated inaccordance with the agreement), or (2) $450,000, which amount will beincreased to $650,000 if Mr. Hardisty is not provided with an opportunityto sell the shares of our common stock then held by Mr. Hardisty at apurchase price of $4.00 or more per share in connection with a Change of Controltransaction. If Mr. Hardisty’s employment is subject to an InvoluntaryTermination during a Change of Control Period or as a result of his death ordisability, we have also agreed to accelerate the vesting of all options topurchase common stock granted to Mr. Hardisty and to remove therestrictions on vesting or forfeiture of all restricted stock and all otheraccrued benefits under any non-qualified deferred compensation plans granted toMr. Hardisty. Finally, Mr. Hardisty and his dependents will beeligible to receive COBRA continuation coverage under our group health plans fora period of up to two years following any Involuntary Termination of hisemployment, in accordance with and to the extent provided byCOBRA.

For purposes of the agreement, a “Change of Control”has the same meaning as set forth in Mr. Terry’s employmentagreement.

In the event that any payment or distribution toMr. Hardisty is subject to the excise tax imposed by Section 4999 ofthe Internal Revenue Code or any interest or penalties with respect to suchexcise tax, we have agreed to make an additional payment to Mr. Hardisty inan amount such that after payment by Mr. Hardisty of all taxes (includingsuch excise tax imposed on such additional payment), Mr. Hardisty willretain an amount of such payment equal to the amount of the excise tax imposedupon such payment.

The following table describes the potential paymentsupon termination or a change in control of the Company for Mr. Hardisty,our Senior Vice President of Business Development andSecretary.

|                                                                |   |                   |    |   | Involuntary termination onchange of control |   |
|---------------------------------------------------------------------|--------|------------------------|---------|--------|-----------------------------------------------------------------|--------|
| Executive Benefits and Payments UponTermination |   | Involuntarytermination |    |   | Purchase price of$4 or more                 |   |   | Purchase price ofless than $4 |   |
| Compensation:                                                       |   |                   |    |   |                                                            |   |   |   |   |
| Cash payment                                                        |   | $                      | 450,000 |   |                                                            | $      | 450,000 |   |   | $ | 650,000 |   |
| Gross Up (1)                                                        |   |                   | — |   |                                                            |   | — |   |   |   | 227,887 |   |
| Vacation                                                            |   |                   | 15,992  |   |                                                            |   | 15,992 |   |   |   | 15,992 |   |
| Long-term incentives:                                               |   |                   |    |   |                                                            |   |   |   |   |   |   |   |
| Stock Options: Unvested                                             |   |                   | — |   |                                                            |   | — |   |   |   | — |   |
| Restricted Stock: Unvested                                          |   |                   | — |   |                                                            |   | — |   |   |   | — |   |
| Total                                                               |   | $                      | 465,992 |   |                                                            | $      | 465,992 |   |   | $ | 893,879 |   |

    (1) Asof  September 30, 2008, the amount of the termination benefit dueunder Mr. Hardisty’s employment contract would only trigger the excise taximposed by Section 4999 if the company were to be sold for less than $4 pershare.

Severance Under Employment Agreementof GordonTibbitts.     If  Mr. Tibbits isinvoluntarily terminated, he will be entitled to receive a payment equal to onemonth of his base salary as well as any vacation unused at that time and allstock options and restricted stock not then vested or exercisable, as the casemay be, shall immediately vest and become fully exercisable.

The following table describes the potential paymentsupon termination or a change in control of the Company for Mr. Tibbitts,our Vice President of Technology.

| Executive Benefits and Payments UponTermination |   | Involuntarytermination |    |   | Involuntary termination on change of      control |   |
|---------------------------------------------------------------------|--------|------------------------|---------|--------|---------------------------------------------------|--------|
| Compensation:                                                       |   |                   |    |   |                                              |   |
| Cash payment                                                        |   | $                      | 13,750  |   |                                              | $      | 13,750 |   |
| Gross      Up                                                       |   |                   | — |   |                                              |   | — |   |
| Vacation                                                            |   |                   | 12,692  |   |                                              |   | 12,692 |   |
| Long-term incentives:                                               |   |                   |    |   |                                              |   |   |   |
| Stock Options: Unvested                                             |   |                   | 4,667   |   |                                              |   | 4,667 |   |
| Restricted Stock: Unvested                                          |   |                   | 4,000   |   |                                              |   | 4,000 |   |
| Total                                                               |   | $                      | 35,109  |   |                                              | $      | 35,109 |   |

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DIRECTOR COMPENSATION

The following table sets forth the compensationearned by our non-employee directors for the year ended September 30,2008:

| Name                       |   | Fees Earnedor Paid inCash |   | Stock Awards(1) |   | OptionAwards(2) |   | Non-EquityIncentive PlanCompensation |   | All OtherCompensation |    | Total   |    |
|----------------------------|--------|------------------------------------------|--------|----------------------|--------|-----------------|--------|-------------------------------------------|--------|----------------------------|---------|---------|---------|
| Len R. LeSuer              |   | $                                        | 47,000 |                 | $      | 18,400          |   | $                                         | 31,500 |                       | — |    | — |   | $ | 96,900 |   |
| John D. Schiller, Jr. |   | 31,250                                   |   | 9,200                |   | 15,750          |   | —                                   |   | —                    |    | 56,200  |    |
| Michael Mathews            |   | 40,750                                   |   | 9,200                |   | 15,750          |   | —                                   |   | —                    |    | 65,700  |    |
| Hugh A. Menown             |   | 41,000                                   |   | 9,200                |   | 15,750          |   | —                                   |   | —                    |    | 65,950  |    |
| Byron Dunn                 |   | 32,000                                   |   | 19,250               |   | 98,000          |   | —                                   |   | —                    |    | 149,250 |    |
| Kevin Flannery             |   | 15,000                                   |   | 9,200                |   | 26,250          |   | —                                   |   | —                    |    | 50,450  |    |

| (1) | Based on the the average of the high and low      market prices of our common stock on the NASDAQ Capital Market on the date      of the grant. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  |  Based on the fair value computed in      accordance with FAS 123(R) |
|-----------|---------------------------------------------------------------------------|

Jim Terry does not receive any compensation for hisservices as a member of our Board of Directors because he is also anofficer.  We reimburse our directors for travel and lodging expensesin connection with their attendance at board and committeemeetings.

Our Board of Directors adopted our current BoardCompensation Package effective as of June 1, 2005.  Under theBoard Compensation Package, our non-employee directors will receive an annualretainer of $20,000 and $1,500 for each formal Board meetingattended.  In addition, each non-employee director who is also acommittee member will receive an annual committee retainer fee of $2,500 and$750 for each formal committee meeting attended.  Each non-employeedirector who is also a committee chair will receive an additional annualretainer of $2,500.  The Board Compensation Package also provides forannual equity compensation for each non-employee director consisting of 5,000shares of our restricted common stock and an option for 15,000 shares of ourcommon stock.  In addition, any new non-employee directors will begranted an option for 25,000 shares of our common stock as a one time award uponjoining the Board of Directors.  In addition to receiving thecompensation described above as a director, the Chairman of the Board willreceive an annual retainer of $2,500, as well as an annual award of 5,000 sharesof our restricted common stock and an option for 15,000 shares of our commonstock.  All option awards will be non-qualified stock options and,together with all awards of restricted stock, will be issued pursuant to ourequity compensation plans in effect at the time of the award and will beexercisable for a ten-year period from the date of grant of theaward.  The restricted stock and option awards will vest in 50%installments on each anniversary of the date of grant of theaward.  On September 16, 2008, the Board of Directors formed a specialcommittee consisting of Messrs Mathews, Dunn and LeSuer to evaluate strategicalternatives for the Company.  The Board agreed to pay each member$1,000 for each meeting held by the special committee until an acceptablealternative has been identified.

Compensation Committee Interlocks and InsiderParticipation

During the fiscal year ended September 30,2008, Messrs. LeSuer, Schiller, Flannery and Menown served on theCompensation Committee of our Board of Directors. None of Messrs. Flannery,LeSuer nor Menown has ever been an officer or employee of Particle DrillingTechnologies, Inc.  Mr. Schiller served as our interim Presidentand Chief Executive Officer from January 2005 until November2005.  None of our executive officers serve as a member of the Boardof Directors or compensation committee of any entity that has any executiveofficer serving as a member of our Board of Directors or CompensationCommittee.

Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters

The following table sets forth the number of sharesof common stock of the company beneficially owned as of October 30, 2008 by(1) those persons or any group (as that term is used inSection 13(d)(3) of the Securities Exchange Act of 1934) known by ourcompany to beneficially own more than 5% of our common stock, (2) eachnamed executive officer and director of our company, and (3) all directorsand executive officers of our company as a group. For purposes of this table,beneficial ownership is determined in accordance with Rule 13d-3promulgated under the Securities Exchange Act of

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1934. The following table includes shares ofrestricted stock of our company held by our executive officers and directorsover which they have voting power but no investment power. The followingpercentage information is calculated based on 35,763,932 shares of common stockthat were outstanding as of October 30, 2008. Except as indicated below,the stockholders listed possess sole voting and investment power with respect tothe shares beneficially owned by that person.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Shares      of Common Stock Beneficially Owned  |     | Percentage      of Common Stock Beneficially Owned  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|----------|---------------------------------------------------------------|--------|
| LC Capital Master Fund,      Ltd.(1)                                                                                         | 6,250,847                                            |     | 17.5                                                          | %      |
| Greywolf Capital Management      LP(2)                                                                                       | 3,706,964                                            |     | 10.4                                                          | %      |
| John D. Schiller, Jr.      (3)                                                                                          | 1,947,500                                            | (4)      | 5.3                                                           | %      |
| Jim B.      Terry                                                                                                            | 985,500                                              | (5)      | 2.7                                                           | %      |
| Thomas E.      Hardisty                                                                                                      | 1,606,000                                            | (6)      | 4.4                                                           | %      |
| J. Chris      Boswell                                                                                                        | 1,991,140                                            | (7)      | 5.4                                                           | %      |
| Gordon      Tibbitts                                                                                                         | 440,000                                              | (8)      | 1.2                                                           | %      |
| Ken R.      LeSuer                                                                                                           | 219,225                                              | (9)      | *                                                             |   |
| Michael S.      Mathews                                                                                                      | 109,586                                              | (10)     | *                                                             |   |
| Hugh A.      Menown                                                                                                          | 109,801                                              | (10)     | *                                                             |   |
| Kevin      Flannery                                                                                                          | 29,172                                               | (11)     | *                                                             |   |
| Byron      Dunn                                                                                                              | 23,980                                               | (12)     | *                                                             |   |
| Directors and executive officers as a group (9      persons)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 7,461,904                                            | (3)-(12) | 19.0                                                          | %      |

| * | Less than1% |
|---|-------------|

| (1) | Address: c/o Lampe Conway, 680 Fifth Avenue,      Suite 1202, New York, New York 10019. Richard F. Conway has sole      voting and investment power with respect to the shares of common stock      held by LC Capital MasterFund, Ltd. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Address: c/o Joe McInnis, 4 Manhattanville      Road, Suite 201, Purchase, NY 10577-2119.  We have been      advised that the shares are owned directly by Greywolf Capital Partners II      LP (“Greywolf Capital II”) and by Greywolf Capital Overseas Fund      (“Greywolf Overseas”). Greywolf Advisors LLC (the “General Partner”), as      general partner to Greywolf Capital II, may be deemed to be the beneficial      owner of all such shares owned by Greywolf Capital II. Greywolf Management      LP (“Investment Manager”), as investment manager of Greywolf Overseas and      Greywolf Capital II, may be deemed to be the beneficial owner of all such      shares owned by Greywolf Overseas and Greywolf Capital II. Greywolf GP LLC      (the “Investment Manager General Partner”), as general partner of the      Investment Manager, may be deemed to be the beneficial owner of all such      shares owned by Greywolf Capital II and Greywolf Overseas. Jonathan Savitz      (“Savitz”), as the senior managing member of the General Partner and as      the sole managing member of the Investment Manager General Partner, may be      deemed to be the beneficial owner of all such shares owned by Greywolf      Capital II and Greywolf Overseas. Each of the General Partner, the      Investment Manager, the Investment Manager General Partner and Savitz      hereby disclaims any beneficial ownership of any such shares. The address      of the principal business office of (i) Greywolf Capital II, General      Partner, Investment Manager and Investment Manager General Partner is 4      Manhattanville Road, Suite 201, Purchase, NY 10577 and      (ii) Greywolf Overseas is 6 Front Street, Hamilton, HM11      Bermuda. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Address: 1021 Main Street Suite 2626      Houston, Texas 77002. |
|-----|----------------------------------------------------------------------|

| (4) | Includes 75,000 shares of restricted stock and      822,500 shares of common stock that Mr. Schiller may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of the date of this  Form 10-K. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Includes 825,000 shares of restricted stock      and 200,000 shares of common stock that Mr. Terry may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of the date of this  Form 10-K. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Includes 30,000 shares of restricted stock and      760,000 shares of common stock that Mr. Hardisty may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of the date of this  Form 10-K. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Includes 30,000 shares of restricted stock and      920,000 shares of common stock that Mr. Boswell may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of the date of this  Form 10-K. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Includes 20,000 shares of restricted stock and      420,000 shares of common stock that Mr. Tibbitts may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of thisForm 10-K. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| (9) | Includes 40,000 shares of restricted stock and      175,000 shares of common stock that Mr. LeSuer may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of thisForm 10-K. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | Includes 20,000 shares of restricted stock and      87,500 shares of common stock that each of Messrs. Mathews and Menown      may purchase upon exercise of stock options that are currently vested or      will become vested within 60 days of this      Form 10-K. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | Includes 5,000 shares of restricted      stock. |
|------|-------------------------------------------------|

| (12) | Includes 10,000 shares of restricted stock and      12,500 shares of common stock that Mr. Dunn may purchase upon      exercise of stock options that are currently vested or will become vested      within 60 days of thisForm 10-K. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Securities Authorized for Issuance Under EquityCompensation Plans.

Incorporated by reference from “Item5.  Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities” in this Annual Report onForm 10-K.

Item 13. Certain Relationships and RelatedTransactions and Director Independence

Transactions with Related Persons

    As part of the Codeof Business Conduct and Ethics, we have adopted procedures related to theidentification of conflicts of interest including related party transactions.Any potential conflicts of interest including related party transactions are tobe brought to the attention of the appropriate personnel. Senior managementevaluates instances of potential conflicts, including related party transactionsand in cases where the matter is deemed significant, consults with the Board ofDirectors.

Director Independence

Our Board of Directors has determined thatMessrs. LeSuer, Schiller, Mathews, Menown, Flannery and Dunn are“independent,” as that term is defined by the rules of the NASDAQ. Prior toDecember 12, 2006, our Board of Directors had determined thatMr. Schiller was not independent. This was because Mr. Schiller servedas interim President and Chief Executive Officer of our company and PDTI fromDecember 2004 until November 14, 2005. During that time,Mr. Schiller received compensation in the form of additional grants ofrestricted stock for serving as an interim executive officer. Because ofmodifications to the NASDAQ rules in 2006 related to the definition of anindependent director, our Board of Directors re-evaluated this determinationwith respect to Mr. Schiller in December 2006. As a result of thisevaluation, our Board of Directors determined that Mr. Schiller is now anindependent director under the rules and regulations of the NASDAQ. Inmaking the independence determinations with respect to our directors, our Boardof Directors considered transactions and relationships between each director orhis immediate family and our company. The purpose of this review was todetermine whether any such relationships or transactions were material and,therefore, inconsistent with a determination that the director is independent.The Board of Directors concluded that any such relationships and transactionsduring the past three years were not material and that any such transactionswere at arm’s-length. As a result of this review, the Board of Directorsaffirmatively determined based on its understanding of such transactions andrelationships that the directors named above, other than Mr. Terry, areindependent of the Company under the standards set forth byNASDAQ.

During the fiscal year ended September 30, 2008,each of the directors who served on the Audit Committee, Nominating andCorporate Governance Committee and Compensation Committee were determined tohave been independent by our Board of Directors.

Item 14. Principal Accountant Fees andServices

Audit Fees

The aggregate fees billed for professional servicesrendered for the audit of our consolidated financial statements, audit ofinternal control over financial reporting, issuance of consents and the reviewsof financial statements included in our annual reports on Form 10-K for thefiscal years ended September 30, 2008 and 2007 were $124,713 and $98,897,respectively. Our Audit Committee pre-approved all fees for professionalservices for the audit of our consolidated financial statements for the fiscalyear ended September 30, 2008.

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|   | Audit-Related  Fees |
|--------|---------------------|

There were no audit-related services provided by ourindependent registered public accounting firm for the fiscal years endedSeptember 30, 2008 and 2007.

|   | TaxFees |
|--------|---------|

There were no tax services provided by ourindependent registered public accounting firm for the fiscal years endedSeptember 30, 2008 and 2007.

|   | All OtherFees |
|--------|---------------|

There were no other services provided by ourindependent registered public accounting firm for the fiscal years endedSeptember 30, 2008 and 2007.

The Audit Committee is responsible for approving inadvance any audit services and all permitted audit-related services, taxservices, and other non-audit services to be performed by the independentregistered public accounting firm. The Audit Committee may delegate itspre-approval authority for these services to one or more members, whosedecisions shall be presented to the full Audit Committee at its scheduledmeetings. Each of these services must receive specific pre-approval by the AuditCommittee unless the Audit Committee has provided general pre-approval for suchcategory of services in accordance with policies and procedures that comply withapplicable laws and regulations.

PART IV

|   | Item 15. Exhibits and Financial Statement      Schedules |
|--------|----------------------------------------------------------|

(a) List of documents filed as part of thisAnnual Report:

(1) Consolidated FinancialStatements

All of our consolidated financial statements are setforth under Item 8 of this Annual Report onForm 10-K.

(2) Financial StatementSchedules:

Financial statement schedules listed under SECrules but not included in this report are omitted because they are notapplicable or the required information is provided in the notes to ourconsolidated financial statements.

(3) Exhibits

See Exhibit Index

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SIGNATURES

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized, on the fifteenth day of December, 2008.

|   | PARTICLE DRILLING TECHNOLOGIES,      INC |
|--------|------------------------------------------|
|   |                                     |
|   | By                                       | /s/ J. CHRIS BOSWELL |   |
|   |                                     | J. Chris Boswell |
|   |                                     | Chief Financial  Officer |

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities indicated and on the fifteenthday of December, 2008.

| Signature                 |                                                                | Title                                                   |
|---------------------------|---------------------------------------------------------------------|---------------------------------------------------------|
|                      |                                                                |
| /s/ KENNETH R. LESUER     |                                                                | Chairman of the Board and      Director                 |
| Kenneth R. LeSuer         |                                                                |
|                      |                                                                |
| /s/ JIM TERRY             |                                                                | President and Chief Executive      Officer              |
| Jim Terry                 | (principal executive    officer)                                    |
|                      |                                                                |
| /s/ J. CHRIS BOSWELL      |                                                                | Senior Vice President, and Chief Financial      Officer |
| J. Chris Boswell          | (principal financial officer and principal      accounting officer) |
|                      |                                                                |
| /s/ JOHN D. SCHILLER      |                                                                | Director                                                |
| John. D. Schiller         |                                                                |
|                      |                                                                |
| /s/ MICHAEL S. MATHEWS    |                                                                | Director                                                |
| Michael S. Mathews        |                                                                |
|                      |                                                                |
| /s/ HUGH A. MENOWN        |                                                                | Director                                                |
| Hugh A. Menown            |                                                                |
|                      |                                                                |
| /s/ KEVIN FLANNERY        |                                                                | Director                                                |
| Kevin  Flannery |                                                                |
| /s/ BYRON DUNN            |                                                                | Director                                                |
| Byron Dunn                |                                                                |

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EXHIBIT INDEX

| ExhibitNo.   |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1          |   | Acquisition Agreement dated as of      January 20, 2004 among Particle Drilling, Inc., ProDril      Partners L.L.C., ProDril Services Incorporated,      Mr. Harry B. Curlett, CCORE Technology and Licensing,  Ltd.      and Curlett Family Limited Partnership, Ltd. (Incorporated herein by      reference to Exhibit 10.3 to our current report filed on      Form 8-K dated January 20, 2005.)                                                                                                              |
| 2.2          |   | Acquisition Agreement dated as of      January 20, 2004 among Particle Drilling, Inc., ProDril Partners      L.L.C., ProDril Services International Limited, Mr. Harry B.      Curlett, CCORE Technology and Licensing, Ltd. and Curlett Family Limited      Partnership, Ltd. (Incorporated herein by reference to Exhibit 10.4      to our current report on Form 8-K dated January 20,      2005).                                                                                                                           |
| 2.3          |   | Agreement and Plan of Reorganization dated      July 14, 2004 by and among MedXLink Corp., a Nevada corporation,      PDTI Acquisition Corp., a Delaware corporation, Dean Becker, Particle      Drilling Technologies,  Inc., a Delaware corporation, ProDril      Partners L.L.C., a Texas limited liability company, and      Thomas E. Hardisty. (Incorporated herein by reference to      Exhibit 2.1 to our current report filed on Form 8-K dated      July 14, 2004.)                                         |
| 2.4          |   | Amendment No. 1 to the Agreement and Plan      of Reorganization dated January 10, 2005 by and among      MedXLink Corp., a Nevada corporation, PDTI Acquisition Corp., a      Delaware corporation, Dean Becker, Particle Drilling      Technologies, Inc., a Delaware corporation, ProDril      Partners L.L.C., a Texas limited liability company, and      Thomas E. Hardisty. (Incorporated herein by reference to      Exhibit 99.1 to our current report filed on Form 8-K dated      January 12, 2005.)  |
| 2.5          |   | Plan of Merger and Merger Agreement, dated      January 19, 2005, between Particle Drilling Technologies, Inc.      and MedXLink Corp. (Incorporated herein by reference to Exhibit 2.3      to our current report filed on Form 8-K dated January 31,      2005.)                                                                                                                                                                                                                                                                        |
| 3.1          |   | Articles of Incorporation of      MedePort, Inc. (Incorporated herein by reference to Exhibit 3.1      to our current report filed on Form 8-K dated January 20,      2005.)                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2          |   | Articles of Amendment to the Articles of      Incorporation of MedePort, Inc. (Incorporated herein by reference to      Exhibit 3.2 to our current report filed on Form 8-K dated      January 20, 2005.)                                                                                                                                                                                                                                                                                                                                      |
| 3.3          |   | Articles of Merger dated January 25, 2005      changing the name of the Company to Particle Drilling      Technologies, Inc. (Incorporated herein by reference to      Exhibit 3.3 to our Registration Statement on Form S-1      (Registration No. 333-123925 filed on April 7,      2005.)                                                                                                                                                                                                                                         |
| 3.4          |   | Bylaws of the Company (Incorporated herein by      reference to Exhibit 3.3 to our current report filed on Form 8-K      dated January 20, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.5          |   | Amendment to the Articles of Incorporation      (Incorporated herein by reference to Exhibit 3.1 to our      Form 10-Q for the quarterly period ended March 31,      2008)                                                                                                                                                                                                                                                                                                                                                                          |
| 3.6          |   | Certificate of Designation of Series A      Junior Participating Preferred Stock (Incorporated herein by reference to      Exhibit 3.1 to our current report on Form 8-K dated May 23,      2008).                                                                                                                                                                                                                                                                                                                                                            |
| 4.1          |   | Form of Rights Certificate (Incorporated      herein by reference to Exhibit 4.1 to our current report on Form 8-K dated      March 18, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2          |   | Subscription Agent Agreement, dated      March 7, 2008 by and among Particle Drilling Technologies, Inc.,      Computershare, Inc. and Computershare Trust Company, N.A.      (Incorporated herein by reference to Exhibit 4.2 to our current report on      Form 8-K dated March 18, 2008).                                                                                                                                                                                                                                                        |
| 4.3          |   | Rights Agreement, dated as of May 23,      2008, between Particle Drilling Technologies, Inc. and Computershare      Trust Company, N.A., as Rights Agent, including the form of Certificate of      Designation of Series A Junior Participating Preferred Stock, the      forms of Right Certificate, Assignment and Election to Purchase, and the      Summary of Rights attached thereto as Exhibits A, B and C, respectively      (Incorporated herein by reference to Exhibit 4.1 to our current report on      Form 8-K dated May 23, 2008). |
| 10.1†  |   | Particle Drilling, Inc. 2004 Stock      Incentive Plan. (Incorporated herein by reference to Exhibit 10.5 to      our current report filed on Form 8-K dated January 20,      2005.)                                                                                                                                                                                                                                                                                                                                                           |
| 10.2†  |   | Particle Drilling Technologies, Inc. 2005      Stock Incentive Plan. (Incorporated herein by reference to      Exhibit 99.1 to our current report filed on Form 8-K dated      April 4, 2005.)                                                                                                                                                                                                                                                                                                                                                 |
| 10.3†  |   | Form of Incentive Stock Option Agreement.      (Incorporated herein by reference to Exhibit 10.6 to our current      report filed on Form 8-K dated January 20,      2005.)                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4†  |   | Form of Non-Statutory Stock Option      Agreement. (Incorporated herein by reference to Exhibit 10.7 to our      current report filed on Form 8-K dated January 20,      2005.)                                                                                                                                                                                                                                                                                                                                                                |
| 10.5†  |   | Employment Agreement by and between Particle      Drilling Technologies, Inc. and Jim B. Terry (Incorporated by      reference to Exhibit 10.1 to our current report on Form 8-K      filed with the Securities and Exchange Commission on January 25,      2006)                                                                                                                                                                                                                                                                              |
| 10.6†  |   | Form of Non-Statutory Stock Option      Agreement (employees) (Incorporated by reference to Exhibit 10.2 to      our current report on Form 8-K filed with the Securities and Exchange      Commission on January 25, 2006)                                                                                                                                                                                                                                                                                                                    |
| 10.7†  |   | Form of Restricted Stock Agreement      (employees) (Incorporated by reference to Exhibit 10.3 to our current      report on Form 8-K filed with the Securities and Exchange Commission      on January 25, 2006)                                                                                                                                                                                                                                                                                                                              |
| 10.8†  |   | Employment Agreement by and between Particle      Drilling Technologies, Inc. and Jon Christopher Boswell (Incorporated      by reference to Exhibit 10.4 to our current report on Form 8-K      filed with the Securities and Exchange Commission on January 25,      2006)                                                                                                                                                                                                                                                                   |
| 10.9†  |   | Employment Agreement by and between Particle      Drilling Technologies, Inc. and Thomas E. Hardisty (Incorporated by      reference to Exhibit 10.5 to our current report on Form 8-K      filed with the Securities and Exchange Commission on January 25,      2006)                                                                                                                                                                                                                                                                        |
| 10.10† |   | Employment Agreement dated August 1, 2003      between ProDril Acquisition Company and Gordon Tibbitts. (Incorporated      herein by reference to Exhibit 10.10 to our current report filed on      Form 8-K dated January 20, 2005.)                                                                                                                                                                                                                                                                                                          |
| 10.11† |   | Letter agreement dated December 2, 2004      between Particle Drilling Technologies, Inc. and Prentis      Tomlinson, Jr. (Incorporated herein by reference to      Exhibit 10.11 to our current report filed on Form 8-K dated      January 20, 2005.)                                                                                                                                                                                                                                                                              |
| 10.12        |   | Securities Purchase Agreement, dated as of      February 9, 2005, by and among Particle Drilling      Technologies, Inc. and the Purchasers listed on Schedule I      thereto. (Incorporated herein by reference to Exhibit 10.1 to our      current report filed on Form 8-K dated February 10,      2005.)                                                                                                                                                                                                                         |
| 10.13        |   | Registration Rights Agreement, dated as of      February 9, 2005, by and among Particle Drilling      Technologies, Inc. and each of the Purchasers. (Incorporated herein      by reference to Exhibit 10.2 to our current report filed on      Form 8-K dated February 10, 2005.)                                                                                                                                                                                                                                                        |
| 10.14        |   | Common Stock Purchase Warrant issued by      Particle Drilling Technologies, Inc. to Rita Barr (with attached      schedule of substantially identical Common Stock Purchase Warrants not      filed with the Securities and Exchange Commission). (Incorporated herein      by reference to Exhibit 10.3 to our current report filed on      Form 8-K dated February 10, 2005.)                                                                                                                                                               |
| 10.15        |   | Stock Purchase Agreement, dated as of      February 8, 2005, by and between Particle Drilling      Technologies, Inc. and Prentis B. Tomlinson, Jr.      (Incorporated herein by reference to Exhibit 10.4 to our current      report filed on Form 8-K dated February 10,      2005.)                                                                                                                                                                                                                                          |
| 10.16        |   | Form of Common Stock Purchase Warrant      issued by Particle Drilling Technologies, Inc. to Tejas Securities      Group, Inc. (Incorporated herein by reference to Exhibit 10.5 to      our current report filed on Form 8-K dated February 10,      2005.)                                                                                                                                                                                                                                                                         |
| 10.17        |   | Assignment and Assumption Agreement dated      January 20, 2004 among Curlett Family Limited Partnership, Ltd.,      ProDril Services Incorporated, Harry B. Curlett, CCORE Technology and      Licensing, Ltd. ProDril Services International Limited and Particle      Drilling, Inc. (Incorporated by reference to Exhibit 10.14 to      Amendment No. 1 to our Registration Statement on Form S-1      (Registration No. 333-123925) filed on May 20,      2005.)                                                      |
| 10.18        |   | Royalty Agreement dated January 20, 2004      between Particle Drilling, Inc. and ProDril Services Incorporated.      (Incorporated by reference to Exhibit 10.15 to Amendment No. 1      to our Registration Statement on Form S-1 (Registration      No. 333-123925) filed on May 20, 2005.)                                                                                                                                                                                                                                  |
| 10.19        |   | Royalty Agreement dated January 20, 2004      between Particle Drilling, Inc. and ProDril Services International      Limited. (Incorporated by reference to Exhibit 10.16 to Amendment      No. 1 to our Registration Statement on Form S-1 (Registration      No. 333-123925) filed on May 20, 2005.)                                                                                                                                                                                                                         |
| 10.21        |   | Registration Rights Agreement, dated as of      October 19, 2006, by and among Particle Drilling      Technologies, Inc. and each of the purchasers. (Incorporated herein      by reference to Exhibit 10.2 to our current report filed on      Form 8-K dated October 19, 2006.)                                                                                                                                                                                                                                                         |
| 10.22        |   | Common Stock Purchase Warrant issued by      Particle Drilling Technologies, Inc. to Milfam I, LP (with attached      schedule of substantially identical Common Stock Purchase Warrants not      filed with the Securities and Exchange Commission). (Incorporated herein      by reference to Exhibit 10.3 to our current report filed on      Form 8-K dated October 19, 2006.)                                                                                                                                                             |
| 10.23† |   | 2007 Bonus Plan. (Incorporated herein by      reference to Exhibit 10.1 to our Form 10-Q for the quarterly      period ended December 31, 2006.)                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.24† |   | Particle Drilling Technologies, Inc. 2007      Stock Incentive Plan. (Incorporated herein by reference to      Exhibit 10.2 to our Form 10-Q for the quarterly period ended      December 31, 2006.)                                                                                                                                                                                                                                                                                                                                           |
| 10.25† |   | Restricted Stock Agreement, dated      August 7, 2007, between Particle Drilling Technologies, Inc. and      Jim B. Terry. (Incorporated herein by reference to Exhibit 10.1 to      our Form 10-Q for the quarterly period ended June 30,      2007.)                                                                                                                                                                                                                                                                                    |
| 10.26† |   | Restricted Stock Agreement, dated      August 7, 2007, between Particle Drilling Technologies, Inc. and      Jim B. Terry. (Incorporated herein by reference to Exhibit 10.2 to      our Form 10-Q for the quarterly period ended June 30,      2007.)                                                                                                                                                                                                                                                                                    |
| 10.27† |   | First Amendment to Employment Agreement, dated      August 7, 2007, by and between Particle Drilling      Technologies, Inc. and Jim B. Terry. (Incorporated herein by      reference to Exhibit 10.3 to our Form 10-Q for the quarterly      period ended June 30, 2007.)                                                                                                                                                                                                                                                                |
| 10.29        |   |  Bonus      Plan for fiscal 2008 (Incorporated herein by reference by      reference to Exhibit 10.29 to our Annual Report on Form 10-K for the      fiscal year ended September 30, 2007.)                                                                                                                                                                                                                                                                                                                                                              |
| 10.30        |   | Standby Purchase Agreement dated March 7,      2008 by and among Particle Drilling Technologies, Inc., LC Capital      Master Fund, Ltd. and Millennium Partners, L.P. (Incorporated herein by      reference to Exhibit 10.1 to our current report on Form 8-K dated March      13, 2008).                                                                                                                                                                                                                                                              |
| 14.1         |   | Particle Drilling Technologies, Inc. Code      of Business Conduct and Ethics. (Incorporated herein by reference to      Exhibit 14.1 to our current report filed on Form 8-K dated      February 9, 2005.)                                                                                                                                                                                                                                                                                                                                    |
| 16.1         |   | Letter of Chisholm, Bierwolf &      Nilson, LLC. (Incorporated herein by reference to Exhibit 16.1      to our current report filed on Form 8-K dated April 4,      2005.)                                                                                                                                                                                                                                                                                                                                                            |
| 16.2         |   | Letter of UHY Mann Frankfort Stein &      Lipp CPAs, LLP (Incorporated herein by reference to Exhibit 16.1 to      our current report filed on Form 8-K dated August 7,      2006.)                                                                                                                                                                                                                                                                                                                                                        |
| 21.1*        |   | Subsidiaries of Particle Drilling      Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1*        |   | Consent of  UHY, LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1*        |   | Certification pursuant to Section 302 of      the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2*        |   | Certification pursuant to Section 302 of the      Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1*        |   | Certification pursuant to Section 906 of      the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.2*        |   | Certification pursuant to Section 906 of      the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|   | *Filedherewith |
|--------|----------------|

|   | †Management contract or compensatory plan or      arrangement |
|--------|---------------------------------------------------------------------|

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