UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE QUARTERLY PERIOD ENDED APRIL 30, 2009o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934





Commission
File Number 0-21019









PURE
Bioscience


(Exact
name of registrant as specified in its charter)









California
            
            33-0530289(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)1725
      Gillespie Way
              El
      Cajon, California
            
            92020(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:(619) 596-8600





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes ý No o





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


Yes o No o





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




Large
accelerated filer  o    Accelerated
filer  ý    Non-accelerated
filer  o   Smaller
reporting company  o





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


Yes o No ý





As of June 5, 2009, there were
32,227,766 shares of the registrant’s common stock, no par value,
outstanding.












PURE
Bioscience




FORM
10-Q




For
the Quarterly Period Ended April 30, 2009




TABLE OF CONTENTS









PART 1 —
FINANCIAL INFORMATION




Item
1.          Consolidated
Financial Statements:




Consolidated Balance Sheets as of
April 30, 2009 (unaudited) and July 31, 2008


Consolidated Statements of Operations
for the three and nine months ended April 30, 2009 and 2008
(unaudited)


Consolidated Statements of Cash Flows
for the nine months ended April 30, 2009 and 2008 (unaudited)


Notes to Consolidated Financial
Statements (unaudited)




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




Item
3.          Quantitative and
Qualitative Disclosures about Market Risk




Item
4.          Controls and
Procedures




PART II —
OTHER INFORMATION




Item
1.           Legal
Proceedings




Item
1A.       Risk Factors




Item
5.          Other
Information




Item
6.           Exhibits




SIGNATURES












PURE
Bioscience


CONSOLIDATED
BALANCE SHEETS






April
      30,
                
                
                July
      31,2009
                
                
                2008ASSETSCurrent
      AssetsCash and cash equivalents
                
                $
                2,946,019
                
                
                $
                2,024,400Short-term investments
                
                
                -
                
                
                
                4,607,888Accounts receivable, net of allowance for doubtful
accountsof $781,627 at April 30, 2009 and $0 at July 31, 2008
                
                
                23,908
                
                
                
                834,721Inventories, net
                
                
                442,718
                
                
                
                370,043Prepaid expenses
                
                
                101,856
                
                
                
                52,560Total
      current assets
                
                
                3,514,501
                
                
                
                7,889,612Total
      property, plant and equipment, net
                
                
                906,224
                
                
                
                1,034,835Patents
                
                
                1,940,471
                
                
                
                2,016,391Total assets
                
                $
                6,361,196
                
                
                $
                10,940,838LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable
                
                $
                381,255
                
                
                $
                596,132Accrued liabilities
                
                
                229,214
                
                
                
                126,141Deferred revenue
                
                
                -
                
                
                
                256,793Taxes payable
                
                
                -
                
                
                
                2,400Total
      current liabilities
                
                
                610,469
                
                
                
                981,466Deferred
      rent
                
                
                19,161
                
                
                
                15,798Total
      liabilities
                
                
                629,630
                
                
                
                997,264Stockholders'
      EquityPreferred stock, no par value:5,000,000 shares authorized, no shares issued
                
                
                -
                
                
                
                -Class A common stock, no par value:50,000,000 shares authorized30,809,325 issued and outstanding at April 30, 2009, and29,573,936 issued and outstanding at July 31, 2008
                
                
                36,388,856
                
                
                
                35,436,077Additional paid-in capital
                
                
                4,390,030
                
                
                
                4,155,608Warrants:844,351 issued and outstanding at April 30, 2009, and880,351 issued and outstanding at July 31,2008, and
                
                
                1,756,188
                
                
                
                1,766,159Accumulated other comprehensive income
                
                
                -
                
                
                
                18,588Accumulated deficit
                
                
                (36,803,508
                )
                
                
                (31,432,858
                )Total
      stockholders' equity
                
                
                5,731,566
                
                
                
                9,943,574Total
      liabilities and stockholders' equity
                
                $
                6,361,196
                
                
                $
                10,940,838


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





3











PURE
Bioscience
 CONSOLIDATED
STATEMENTS OF OPERATIONS


For
      the Nine Months Ended
                    
                    
                    For
      the Three Months EndedApril
      30,
                    
                    
                    April
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008REVENUES
      FROM PRODUCT SALESNet
      revenues
                    
                    $
                    275,287
                    
                    
                    $
                    664,188
                    
                    
                    $
                    129,905
                    
                    
                    $
                    416,464Cost
      of sales
                    
                    
                    131,225
                    
                    
                    
                    176,026
                    
                    
                    
                    60,591
                    
                    
                    
                    93,846Gross
      profit
                    
                    
                    144,062
                    
                    
                    
                    488,162
                    
                    
                    
                    69,314
                    
                    
                    
                    322,618OTHER
      REVENUESRevenues
      from license agreements
                    
                    
                    250,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cost
      of other revenues
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Gross
      profit
                    
                    
                    250,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      gross profit
                    
                    
                    394,062
                    
                    
                    
                    488,162
                    
                    
                    
                    69,314
                    
                    
                    
                    322,618Selling
      expenses
                    
                    
                    517,033
                    
                    
                    
                    621,858
                    
                    
                    
                    179,902
                    
                    
                    
                    327,059General
      and administrative expenses
                    
                    
                    4,263,440
                    
                    
                    
                    3,874,246
                    
                    
                    
                    1,142,658
                    
                    
                    
                    1,996,550Research
      and development
                    
                    
                    1,053,214
                    
                    
                    
                    1,162,861
                    
                    
                    
                    312,261
                    
                    
                    
                    571,358Total
      operating expenses
                    
                    
                    5,833,687
                    
                    
                    
                    5,658,965
                    
                    
                    
                    1,634,821
                    
                    
                    
                    2,894,967Loss
      from operations
                    
                    
                    (5,439,625
                    )
                    
                    
                    (5,170,803
                    )
                    
                    
                    (1,565,507
                    )
                    
                    
                    (2,572,349
                    )Other
      income:Interest income
                    
                    
                    10,982
                    
                    
                    
                    32,653
                    
                    
                    
                    719
                    
                    
                    
                    13,892Other
                    
                    
                    57,993
                    
                    
                    
                    109,343
                    
                    
                    
                    19,204
                    
                    
                    
                    92,061Total
      other income
                    
                    
                    68,975
                    
                    
                    
                    141,996
                    
                    
                    
                    19,923
                    
                    
                    
                    105,953Net
      loss before income taxes
                    
                    
                    (5,370,650
                    )
                    
                    
                    (5,028,807
                    )
                    
                    
                    (1,545,584
                    )
                    
                    
                    (2,466,396
                    )Income
      tax provision
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    $
                    (5,370,650
                    )
                    
                    $
                    (5,028,807
                    )
                    
                    $
                    (1,545,584
                    )
                    
                    $
                    (2,466,396
                    )Net
      loss per common share, basic and diluted
                    
                    $
                    (0.18
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.09
                    )Weighted
      average common shares used incomputing
      basic and diluted net loss per common share
                    
                    
                    30,173,261
                    
                    
                    
                    26,962,731
                    
                    
                    
                    30,746,126
                    
                    
                    
                    28,265,412


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
















PURE
Bioscience
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  For
      the Nine MonthsEnded
      April 30,2009
                    
                    
                    2008Cash
      flows from operating activities:Net loss
                    
                    $
                    (5,370,650
                    )
                    
                    $
                    (5,028,807
                    )Adjustments to reconcile net loss to net cashused in operating activities:Amortization and depreciation
                    
                    
                    330,175
                    
                    
                    
                    297,271Stock-based compensation
                    
                    
                    283,050
                    
                    
                    
                    2,029,094Allowance for doubtful accounts
                    
                    
                    781,627
                    
                    
                    
                    -Changes in assets and liabilities:Acounts receivable
                    
                    
                    29,185
                    
                    
                    
                    (154,978
                    )Prepaid expense
                    
                    
                    (49,296
                    )
                    
                    
                    (85,555
                    )Inventories
                    
                    
                    (72,675
                    )
                    
                    
                    (96,516
                    )Deferred rent
                    
                    
                    3,363
                    
                    
                    
                    13,821Deferred revenue
                    
                    
                    (256,793
                    )
                    
                    
                    -Accounts payable and accrued liabilities
                    
                    
                    (111,803
                    )
                    
                    
                    (140,708
                    )Income tax payable
                    
                    
                    (2,400
                    )
                    
                    
                    (2,400
                    )Net
      cash used in operating activities
                    
                    
                    (4,436,217
                    )
                    
                    
                    (3,168,778
                    )Cash
      flows from investing activitiesInvestment in patents
                    
                    
                    (52,634
                    )
                    
                    
                    (79,694
                    )Purchase of property, plant and equipment
                    
                    
                    (73,009
                    )
                    
                    
                    (234,241
                    )Purchases of short-term investments
                    
                    
                    (4,076,992
                    )
                    
                    
                    (10,633,849
                    )Sales of short-term investments
                    
                    
                    8,666,292
                    
                    
                    
                    5,458,030Net
      cash provided by (used in) investing activities
                    
                    
                    4,463,657
                    
                    
                    
                    (5,489,754
                    )Cash
      flows from financing activitiesNet proceeds from the sale of common stock
                    
                    
                    -
                    
                    
                    
                    7,740,967Proceeds from exercise of stock options and warrants
                    
                    
                    894,179
                    
                    
                    
                    1,825,679Net
      cash provided by financing activities
                    
                    
                    894,179
                    
                    
                    
                    9,566,646Net
      increase in cash and cash equivalents
                    
                    
                    921,619
                    
                    
                    
                    908,114Cash
      and cash equivalents at beginning of period
                    
                    
                    2,024,400
                    
                    
                    
                    735,654Cash
      and cash equivalents at end of period
                    
                    $
                    2,946,019
                    
                    
                    $
                    1,643,768
 The
accompanying notes are an
integral part of the consolidated financial statements




5





Notes
to Consolidated Financial Statements (Unaudited)





Note
1.     Basis of Presentation




PURE
Bioscience (sometimes referred to herein as the “Company” or “we”) was
incorporated in the state of California on August 24, 1992.  The
accompanying unaudited financial statements include the consolidated accounts of
PURE Bioscience and its subsidiary, ETIH2O Corporation, a Nevada
corporation.  All inter-company balances and transactions have been
eliminated.




The
financial statements included herein have been prepared by PURE Bioscience
without audit, in accordance with the instructions to Securities and Exchange
Commission (“SEC”) Form 10-Q and Article 10 of Regulation
S-X.  Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by such rules
and regulations, however we believe that the accompanying unaudited financial
statements contain all adjustments (including normal recurring adjustments)
necessary to present fairly the financial condition, results of operations and
cash flows for the periods presented.  These unaudited consolidated
financial statements presented herein should be read in conjunction with our
audited financial statements for the period ended July 31, 2008, and their
accompanying notes, as filed with the Securities and Exchange Commission in our
10-K on October 14, 2008.




The
preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in the statements and
accompanying notes, and actual results could differ materially from those
estimates.  The results of operations for the three and nine months
ended April 30, 2009 are not necessarily indicative of the results of operations
for the full year, or any future periods.




Note
2.    Nature of Business and Summary of Significant
Accounting Policies




Concentration
of Credit Risk




As of
April 30, 2009 and July 31, 2008, all cash deposits and short-term investments
were invested in either U.S. FDIC insured bank accounts; institutional money
market mutual funds investing in A-1 (S&P) or Prime-1 (Moody’s); U.S.
Treasury Securities, or United States Government obligations issued by or backed
by a federal agency of the United States Government.




At April
30, 2009, $593,845 of our cash and cash equivalents were maintained at two
separate major financial institutions in the United States in accounts that are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$100,000.   Effective October 3, 2008, the Emergency Economic
Stabilization Act of 2008 raised the FDIC deposit coverage limits to $250,000
per owner from $100,000 per owner. The enhanced limits are currently available
through December 31, 2009.




Also at
April 30, 2009, $2,351,550  of our cash and cash equivalents were held
in accounts maintained at two separate major financial institutions in the
United States that are provided with up to $500,000 in protection by the
Securities Investor Protection Corporation (“SIPC”) should such a firm close due
to bankruptcy or other financial difficulties and customer assets are
missing.




At April
30, 2009 we had no short-term investments.  During the three month
period ended April 30, 2009, our short-term investments, which were all
converted to cash and cash equivalents during the period, were invested in U.S.
Treasury Bills with maturities of less than 360 days, and were held at a major
financial institution in the United States.  These assets were
provided with up to $500,000 in protection by the SIPC.




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




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




Revenue
Recognition




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




Any
amounts received prior to satisfying our revenue recognition criteria are
recorded as deferred revenue in the accompanying consolidated balance sheets.
See Note 3 for further information regarding our licensing revenues and amounts
previously recorded as deferred revenue in the consolidated balance
sheets.




Cost
of Goods Sold




Cost of
goods sold for product sales includes direct and indirect costs to manufacture
products, including materials consumed, manufacturing overheads, shipping costs,
salaries, benefits and related expenses of operations.  Cost of goods
sold related to licensing revenues recorded in the nine month period ended April
30, 2009 was zero, as we did not incur any costs directly related to our
commitments under the agreement to allow a third party a limited time period to
exclusively evaluate our SDC technology.
















Intangible
Assets / Long-Lived Assets




Our
intangible assets primarily consist of the worldwide patent portfolio of our
silver ion technologies.  Outside legal costs and filing fees related
to obtaining patents are capitalized as incurred.  The total amounts
capitalized for pending patents were $12,950 and $7,199 in the three month
periods ended April, 2009 and 2008, respectively, and $52,634 and $79,694 in the
nine month periods ended April 30, 2009 and 2008,
respectively.   Patents are stated net of accumulated
amortization of $1,208,821 and $1,080,265 at April 30, 2009 and July 31, 2008,
respectively. The cumulative cost of acquiring patents is amortized on a
straight-line basis over the estimated remaining useful lives of the patents,
generally between 17 and 20 years from the date of issuance.  At April
30, 2009, the weighted average remaining amortization period for all patents was
approximately 11.1 years.  Amortization expense for the three month
periods ended April 30, 2009 and 2008 was $43,064 and $44,437, respectively, and
for the nine month periods ended April 30, 2009 and 2008 was $128,555 and
$131,882, respectively.




Accounting
for Stock-Based Compensation




In
December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
123(R), Share-Based
Payment, which establishes accounting for share-based awards exchanged
for employee and director services and requires us to expense the estimated fair
value of these awards over the applicable service period.  Under SFAS
No. 123(R), share-based compensation cost is measured at the grant date based on
the estimated fair value of the award, and is recognized as expense over the
applicable service period.  We do not have, and have not had during
the nine month periods ended April 30, 2009 or 2008, any stock option awards
with market or performance conditions.




Stock
Options to Non-Employees




Charges
for stock options granted to non-employees have been determined in accordance
with SFAS No. 123(R) and EITF No. 96-18, Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, whereby we use the estimated fair value of
the stock options issued, based on the Black-Scholes Option Pricing
Model.  During the three month period ended April 30, 2009 we recorded
$647 in research and development expense; and during the three month period
ended April 30, 2008 we recorded $70,407 in selling expense.  During
the nine month period ended April 30, 2009 we recorded $6,328 in research and
development expense; and during the nine month period ended April 30, 2008 we
recorded $145,611 in selling expense, and $13,011 in research and development
expense.




Cash,
Cash Equivalents and Short-term Investments




We
consider all liquid investments with maturities of ninety days or less when
purchased to be cash equivalents.  Our short-term investments have
maturities of greater than ninety days from the date of purchase.  We
classify securities as “available-for-sale” in accordance with SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, and carry these investments at fair value
with any unrealized gains and losses reported as a component of shareholders’
equity on the consolidated balance sheets and in the statements of shareholders’
equity.  At April 30, 2009 we had no short-term
investments.  All of our short-term investments as of July 31, 2008
were carried at fair value, based upon market prices quoted on the last day of
the fiscal period, and were considered available for sale.  We use the
specific identification method to determine the cost of debt securities sold,
and include gross realized gains and losses in investment
income.  Realized gains recorded for the three month periods ended
April 30, 2009 and 2008 were $19,204 and $92,027, respectively, and for the nine
month periods ended April 30, 2009 and 2008 were $57,992 and $109,215,
respectively.  All interest and dividends received from short-term
investments are included in interest income.




Liquidity




On May
28, 2009 we closed a registered direct offering whereby we sold $3 million of
our common stock and warrants to institutional investors.  After fees
and expenses, the net proceeds of the offering to us are expected to be
approximately $2.79 million.  However, our existing cash resources
will not be sufficient to fund our planned activities, and in future periods we
expect to seek additional capital through the issuance of common stock,
preferred stock, convertible securities or through other means.  We
believe that our cash resources are sufficient to meet our anticipated needs
during the next twelve months based on our assessment of historical working
capital needs, operating loss trends, and our current business
outlook.  However, we expect that we will need additional financing
and there can be no assurance that when additional financing is necessary it
will be available, or if available, that such financing can be obtained on
satisfactory terms.   If adequate funds are not available when
needed, we may be required to significantly modify our business model to reduce
spending to a sustainable level. Such modification of the business model could
also result in an impairment of assets which cannot be determined at this
time.




Comprehensive
Income




SFAS 130,
Reporting Comprehensive
Income, requires us to display comprehensive income or loss and its
components as part of our consolidated financial statements.  Our
comprehensive loss includes our net loss and certain changes in equity that are
excluded from our net loss, including unrealized holding gains and losses on
available-for-sale securities.  SFAS 130 requires such changes in
shareholders’ equity to be included in accumulated other comprehensive income or
loss.  For the three month periods ended April 30, 2009 and 2008, our
comprehensive loss was $1,563,517 and $2,531,897,
respectively.  During the three month periods ended April 30, 2009 and
2008, we recorded unrealized gains on available for sale securities of $1,271
and $26,526, respectively.  Realized gains on the sale of available
for sale securities, which are included in our net loss for the three month
periods ended April 30, 2009 and 2008, were $19,204 and $92,027,
respectively.  For the nine month periods ended April 30, 2009 and
2008, our comprehensive loss was $5,389,239 and $5,022,120,
respectively.  During the nine month period ended April 30, 2009,
unrealized gains on available for sale securities declined by $18,588, and in
the nine month period ended April 30, 2008, unrealized gains on available for
sale securities increased by $6,688.  Realized gains on the sale of
available for sale securities, which are included in our net loss for the nine
month periods ended April 30, 2009 and 2008, were $57,992 and $109,215,
respectively.











Net
Loss Per Common Share




In
accordance with FASB Statement No. 128, Earnings Per Share (“SFAS
128”), we compute basic loss per share by dividing the applicable net loss by
the weighted average number of common shares outstanding during the respective
period.  Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock equivalents, including stock options and
warrants, unless the effect is to reduce a loss or increase the income per
common share from continuing operations.  As we incurred losses in
three and nine month periods ended April 30, 2009 and 2008, we did not include
common stock equivalent shares in the computation of net loss per share as the
effect would have been anti-dilutive.  Therefore, both the basic and
diluted loss per common share for the three and nine month periods ended April
30, 2009 and 2008 are based on the weighted average number of shares of our
common stock outstanding during the periods.




Recent
Accounting Pronouncements




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




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




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




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











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




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




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




In April
2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP
157-4”). Based on the guidance, if an entity determines that the level of
activity for an asset or liability has significantly decreased and that a
transaction is not orderly, further analysis of transactions or quoted prices is
needed, and a significant adjustment to the transaction or quoted prices may be
necessary to estimate fair value in accordance with FASB Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”). FSP 157-4 is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009 (our fiscal year ending
July 31, 2009.  We do not expect that FSP 157-4 will have a material
impact on our consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-2 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-2 and FSP APB 28-1”). FSP FAS
107-2 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value and the
related carrying amount of financial instruments in interim and annual periods.
FSP APB 28-1 amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements.  FSP
FAS 107-2 and FSP APB 28-1 also require disclosure about the method and
significant assumptions used to estimate the fair value of financial
instruments. FAS FSP 107-2 and FSP APB 28-1 are effective for interim and annual
periods ending after June 15, 2009 (our fiscal year ending July 31,
2009).




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP 115-2 and 124-2”), which amend the
other-than-temporary guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  FSP 115-2 and 124-2 are effective for interim periods
ending after June 15, 2009 (our fiscal year ending July 31, 2009.  We
do not expect that the adoption of the FSP’s will have a material impact on our
consolidated financial statements.




Note
3.    Licensing Revenue




During
the three month period ended July 31, 2008 we recorded deferred revenue on
receipt of a non-refundable fee of $250,000 which we received subject to an
agreement whereby we allowed a third party a limited time period to exclusively
evaluate our SDC technology for use within specified indications and for certain
products.  Upon the termination of the agreement on January 31, 2009,
we recognized the $250,000 as licensing revenue in the consolidated statements
of operations for the three month period ended January 31, 2009.




Note
4.    Accounts Receivable




Trade
accounts receivable are recorded net of allowances for doubtful
accounts.  Estimates for allowances for doubtful accounts are
determined based on payment history and individual customer
circumstances.  The allowance for doubtful accounts was $781,600 and
zero at April 30, 2009 and July 31, 2008, respectively.  The allowance
for doubtful accounts at April 30, 2009 is made up of amounts billed during
prior periods to two international distributors.  During the year
ended July 31, 2008 we granted non-exclusive distribution and blending rights to
a new distributor for the sale of SDC-based products in Colombia.  In
addition, we granted non-exclusive distribution and blending rights to a second
distributor, which is affiliated with the first distributor, for the sale of
SDC-based products in Argentina, Venezuela, Panama and Costa Rica. The $781,600
receivable includes $57,000 for amounts billed at cost to the distributors in
August 2008 for parts shipped directly to them by one of our U.S. packaging
suppliers.  Subsequent to this transaction, we have not sold any
products to either of the two referenced distributors.











During
the three month period ended January 31, 2009 we determined these accounts to be
delinquent.  We therefore established a full reserve and recorded
$781,600 as bad debt expense, within general and administrative expense, in the
consolidated statements of operations for the three month period ended January
31, 2009.  At April 30, 2009 the referenced amounts remained
uncollected, and we have therefore maintained the allowance for doubtful
accounts of $781,600.




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




Note
5.    Fair Value




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




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




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




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




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




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




The
following table represents our fair value hierarchy for our financial assets
(cash, cash equivalents and short-term investments) measured at fair value on a
recurring basis as of April 30, 2009:




Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalMoney
      market funds
                
                $
                1,377
                
                
                
                —
                
                
                
                —
                
                
                $
                1,377Total
                
                $
                1,377
                
                
                $
                —
                
                
                $
                —
                
                
                $
                1,377





Note
6.  Other Equity and Common Stock Transactions




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




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




In
September 2008, we entered into a one year consulting agreement with an
independent third party for intellectual property legal services, the
compensation being a fee of $11,000 per month and an option to purchase 25,000
shares of our common stock which vests in equal increments bi-annually over a
two year period.  The options, which have an exercise price of $4.41,
were valued at $59,745 using the Black-Scholes Option Pricing Model, assuming no
dividend yield, volatility of 103.18% and a risk free interest rate of
2.00%.  During the three month period ended October 31, 2008 we
expensed $4,979 of the options fair value to research and
development.  The options will be revalued quarterly until fully
vested with any change to fair value expensed.











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




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




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




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




At April
30, 2009, we had outstanding warrants to purchase 844,351 shares of our common
stock with exercise prices ranging from $2.56 to $8.60. These warrants expire at
various times between March 2011 and October 2012.




Note
7.    Stock-Based Compensation




We have,
or have had during the fiscal years presented herein, the following equity
incentive plans (the “Plans”) pursuant to which we have granted options to
acquire our common stock:  the 1998 Directors and Officers Stock
Option Plan; the 2001 Directors and Officers Stock Option Plan:  the
2001 ETIH2O Stock Option Plan; the 2001 Consultants and Advisors Stock Option
Plan; the 2002 Non-Qualified Stock Option Plan; the 2002 Employee Incentive
Stock Option Plan; the 2004 Consultants and Advisors Stock Option Plan; and the
2007 Equity Incentive Plan.  The Plans are administered by the
Compensation Committee of the Board of Directors (the “Compensation
Committee”).  The exercise price for stock options, or the value of
other incentive grants granted under the Plans, are set by the Compensation
Committee but may not be for less than the fair market value of the shares on
the date the award is granted. The period in which options can be exercised is
set by the Compensation Committee but is not to exceed five years from the date
of grant.




On August
1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (“SFAS123(R)”), requiring us to recognize expense related to the fair
value of share-based compensation awards to employees and
directors.  We elected to use the modified-prospective-transition
method as permitted by SFAS 123R and therefore have not restated our financial
results for prior fiscal years.  We recognize compensation expense for
stock option awards on a straight-line basis over the applicable service period
of the award.  The service period is generally the vesting period,
with the exception of options granted subject to a consulting agreement, whereby
the option vesting period and the service period defined pursuant to the terms
of the consulting agreement may be different.  Share-based
compensation expense for awards granted subsequent to July 31, 2006 is based on
the grant date fair value estimated in accordance with the provisions of SFAS
123R, using the Black-Scholes Option Pricing Model.  The following
methodology and assumptions were used to calculate share based compensation for
the nine month periods ended April 30, 2009 and 2008:




For
      the nine month periods endedApril
      30,2009
                  
                  
                  2008Expected
      price volatility
                  
                  
                  97.70%-142.02
                  %
                  
                  
                  66.10%
      - 117.58
                  %Risk-free
      interest rate
                  
                  
                  0.25%-2.00
                  %
                  
                  
                  2.25%
      - 5.25
                  %Expected
      rate of forfeiture
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Weighted
      average expected term
                  
                  2.8
      years
                  
                  
                  2.0
      years




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




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











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




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




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




The
following table sets forth the share-based compensation expense recorded in our
consolidated statements of operations for the three and nine month periods ended
April 30, 2009 and 2008 resulting from share-based compensation awarded to our
employees, directors and third party service providers:




Three
      Months Ended
                April
      30, 2009
              
              
              Three
      Months Ended
                April
      30, 2008Share-based
      compensation for employees and directors:Selling
      expense
              
              $
              -
              
              
              $
              98,784General
      and administrative expenses
              
              
              96,677
              
              
              
              1,179,108Research
      and development
              
              
              -
              
              
              
              148,176Total
      share-based compensation for employees and directors
              
              
              96,677
              
              
              
              1,426,068





Share-based
      compensation for third party service providers:Selling
      expense
              
              $
              -
              
              
              $
              -General
      and administrative expenses
              
              
              -
              
              
              
              -Research
      and development
              
              
              647
              
              
              
              -Total
      share-based compensation for third party service providers
              
              
              647
              
              
              
              -Total
      share-based compensation expense
              
              $
              97,324
              
              
              $
              1,426,068







Nine
      Months Ended
                April
      30, 2009
              
              
              Nine
      Months Ended
                April
      30, 2008Share-based
      compensation for employees and directors:Selling
      expense
              
              $
              -
              
              
              $
              98,784General
      and administrative expenses
              
              
              218,123
              
              
              
              1,579,762Research
      and development
              
              
              -
              
              
              
              148,176Total
      share-based compensation for employees and directors
              
              
              218,123
              
              
              
              1,826,722





Share-based
      compensation for third party service providers:Selling
      expense
              
              $
              -
              
              
              $
              51,736General
      and administrative expenses
              
              
              58,600
              
              
              
              43,750Research
      and development
              
              
              6,328
              
              
              
              -Total
      share-based compensation for third party service providers
              
              
              64,928
              
              
              
              95,486Total
      share-based compensation expense
              
              $
              283,051
              
              
              $
              1,922,208















A summary
of stock option activity is as follows:





Number
      of Shares
                      
                      
                      Weighted-Average
      Exercise Price
                      
                      
                      Aggregate
      Intrinsic Value ($000’s)Balance
      at July 31, 2008
                      
                      
                      7,442,447
                      
                      
                      $
                      1.62Granted
                      
                      
                      35,000
                      
                      
                      $
                      4.41Exercised
                      
                      
                      (211,880
                      )
                      
                      $
                      1.11Forfeited
      / Cancelled
                      
                      
                      (131,570
                      )
                      
                      $
                      0.74Balance
      at October 31, 2008
                      
                      
                      7,133,997
                      
                      
                      $
                      1.67
                      
                      
                      $
                      14,152Granted
                      
                      
                      75,000
                      
                      
                      $
                      3.08Exercised
                      
                      
                      (861,383
                      )
                      
                      $
                      1.05Forfeited
      / Cancelled
                      
                      
                      (445,148
                      )
                      
                      $
                      2.63Balance
      at January 31, 2009
                      
                      
                      5,902,466
                      
                      
                      $
                      1.73
                      
                      
                      $
                      7,190Granted
                      
                      
                      60,000
                      
                      
                      $
                      2.27Exercised
                      
                      
                      (106,126
                      )
                      
                      $
                      0.53Forfeited
      / Cancelled
                      
                      
                      (43,874
                      )
                      
                      $
                      0.53Balance
      at April 30, 2009
                      
                      
                      5,812,466
                      
                      
                      $
                      1.77
                      
                      
                      $
                      4,390






Outstanding
                                                                                                                              
                                                                                                                              
                                                                                                                              ExercisableRange
      of Exercise Prices
                                                                                                                              
                                                                                                                              Number
      of Shares Outstanding
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
      Average Remaining Contractual Life
                                                                                                                                (in
      years)
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
      Average Exercise Price
                                                                                                                              
                                                                                                                              
                                                                                                                              Number
      of Shares Exercisable
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
      Average Remaining Contractual Life
                                                                                                                                (in
      years)
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
      Average Exercise Price$
                                                                                                                              0.50
      to $0.75
                                                                                                                              
                                                                                                                              
                                                                                                                              1,620,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.01
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.53
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,620,000
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.01
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.53$
                                                                                                                              0.80
      to $1.20
                                                                                                                              
                                                                                                                              
                                                                                                                              729,166
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.57
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.81
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              729,166
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.57
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.81$
                                                                                                                              1.50
      to $7.50
                                                                                                                              
                                                                                                                              
                                                                                                                              3,463,300
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              2.08
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              2.55
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,233,725
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              2.07
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              2.425,812,466
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.72
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              1.77
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              5,582,891
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1.70
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              1.66




Cash
received from options and warrants exercised for the three month periods ended
April 30, 2009 and 2008 was zero and $1,033,619, respectively. The intrinsic
value of all options exercised during the three month periods ended April 30,
2009 and 2008 was $163,434 and $5,219,189, respectively, and the
weighted-average grant date fair value of equity options granted during the
three month periods ended April 30, 2009 and 2008 was $1.74 and $3.22,
respectively.




Cash
received from options and warrants exercised during the nine month periods ended
April 30, 2009 and 2008 was $894,179 and $1,800,119, respectively. The intrinsic
value of all options exercised during the nine month periods ended April 30,
2009 and 2008 was $2,000,774 and $11,841,865, respectively, and the
weighted-average grant date fair value of equity options granted during the nine
month periods ended April 30, 2009 and 2008 was $1.80 and $3.05,
respectively.




As of
April 30, 2009, there was $366,651 of unrecognized non-cash compensation cost
related to unvested options, which will be recognized over a weighted average
period of 1.2 years.




Note
8.   Inventory




Inventories
are stated at the lower of cost or net realizable value using the average cost
method.  Inventories at April 30, 2009 and July 31, 2008 consisted
of:




April
      30, 2009
                      
                      
                      July
      31, 2008Raw
      Materials
                      
                      $
                      221,444
                      
                      
                      $
                      252,491Work
      in Progress
                      
                      
                      -
                      
                      
                      
                      -Finished
      Goods
                      
                      
                      221,274
                      
                      
                      
                      117,552$
                      442,718
                      
                      
                      $
                      370,043












Note
9.  Business Segment and Sales Concentrations




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




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




Our
customers are strategic partners who are developing markets for, and
distributors who sell, products containing our SDC technology.  During
the three month period ended April 30, 2009, 92% of product sales were made to
three strategic partners that are also developing markets for our
products.  During the nine month period ended April 30, 2009, 85% of
product sales were made to five such strategic partners.  100% of
revenue from product sales for the nine month period ended April 30, 2009 was
derived from sales made to U.S. domestic customers.




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




During
the three month period ended April 30, 2009, 63% of our product sales were of
bulk SDC concentrate, and 37% of our product sales were of bulk Axen30 or
finished packaged products containing Axen 30, our ready to use
product.  During the same period of the prior year, 92% of our product
sales were of bulk SDC concentrate and 8% of our product sales were of bulk
Axen30 or finished packaged products containing Axen 30.




During
the nine month period ended April 30, 2009, 35% of our product sales were of
bulk SDC concentrate and 65% of our product sales were of bulk Axen30 or
finished packaged products containing Axen 30. During the same period of the
prior year, 79% of our product sales were of bulk SDC concentrate and 21% of our
product sales were of bulk Axen30 or finished packaged products containing Axen
30.




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




Note
10.  Subsequent Events




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




Under the
terms of the offering, we issued to the investors 1,418,441 shares of common
stock, and warrants to purchase 496,452 shares of our common
stock.  The common stock was sold at a price of $2.115 per share, and
the investors received warrants to purchase 0.35 shares of common stock at an
exercise price of $2.37 per share for each share of common stock they purchased
in the offering.  The warrants were exercisable as of May 27, 2009 and
will expire five years from that date.




In
addition we paid a fee of $180,000 to Axiom Capital Management, Inc. (“Axiom”)
in consideration for its services as the placement agent in the
offering.  We also issued to Axiom and its principals, warrants to
purchase 70,922 shares of our common stock at an exercise price of $2.64 per
share.  These warrants were exercisable as of May 27, 2009 and will
expire five years from that date.




After
fees and expenses, the net proceeds of the offering to us are expected to be
approximately $2.79 million.  The net proceeds from the offering will
be used for working capital.




In May
2009, we issued an aggregate of 86,800 shares of restricted stock to four of our
independent directors, and a five year option to purchase 30,000 shares at an
exercise price of $2.34 per share, to one of our independent
directors.  The options and the restricted shares vest after one
year.  In addition, we issued options to purchase an aggregate of
360,000 shares at an exercise price of $2.34 per share, to our three executive
officers.  These options have a five year term and vest annually in
equal increments over four years.













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






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




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




The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes and other financial information appearing elsewhere in this
Quarterly Report. Readers are also urged to carefully review and consider the
various disclosures made by us which attempt to advise interested parties of the
factors which affect our business, including without limitation the disclosures
made in Item 1A of Part II of this Quarterly Report under the Caption “Risk
Factors” and in our audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the fiscal year ended July 31,
2008, previously filed with the Securities and Exchange Commission
(“SEC”).




Risk
factors that could cause actual results to differ from those contained in the
forward-looking statements include but are not limited to: our limited operating
history; our history of losses; our future capital needs; the rapidly changing
technologies and market demands; the failure of our products to achieve broad
acceptance; our failure to successfully compete; our dependence on a single
product; our failure to comply with government regulation; the loss of a key
member of our management team; our failure to protect our intellectual property;
our exposure to intellectual property and product liability claims; changes in
government policies and other risks identified in Part II, Item 1A of this
Quarterly Report on Form 10-Q.







Overview




PURE
Bioscience (sometimes referred to herein as the “Company” or “we”) was
incorporated in the state of California on August 24, 1992. We began as a
provider of pharmaceutical water purification products.  We now focus
on markets that we believe have broader potential by developing new, proprietary
bioscience products based upon our patented silver ion antimicrobial
technologies. We are developing technology-based bioscience products, including
our silver dihydrogen citrate-based antimicrobials, which we believe have the
potential to provide best in class, non-toxic solutions to numerous global
health challenges and represent innovative advances in diverse markets. We
believe that our technologies are in a position to contribute significantly to
today’s global trend toward industrial and consumer use of “green” products,
while providing competitive advantages in efficacy and safety.




Bioscience
Technologies




Our
flagship bioscience technology is an aqueous disinfectant, silver dihydrogen
citrate (“SDC”). A patented new molecular entity, SDC is an electrolytically
generated source of stabilized ionic silver that can serve as the basis for a
broad range of products in diverse markets. SDC liquid is colorless, odorless,
tasteless, non-caustic and formulates well with other compounds. As a platform
technology, our SDC-based antimicrobial is distinguished from competitors in the
marketplace because of its superior efficacy combined with reduced toxicity. We
are producing and plan to expand the production of pre-formulated, ready-to-use
products for private label distribution, as well as varying strengths of SDC
concentrate as an additive or raw material for inclusion in other companies’
products, including as an active pharmaceutical ingredient. In addition to SDC,
we have obtained patent protection for ionic silver-based molecular entities
utilizing 14 organic acids other than citric acid.




We also
own certain rights to a patent-pending pesticide technology, TriglycylborideTM
which, like SDC, provides effective results without human toxicity and is an
alternative to traditional poisons. Triglycylboride has been formulated into our
Environmental Protection Agency (“EPA”) registered RoachX® and AntXTM products,
though these products are not currently being actively marketed or
developed.




Sources
of Revenue




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




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









For
example, for the nine month period ended April 30, 2009 we reported revenues
from product sales of $275,300, compared with revenue from product sales in the
three month period ended July 31, 2008 of $823,300.  The majority of
sales for the three month period ended July 31, 2008 were made to two
international distributors.  We have not recognized any revenue
related to these distributors in the nine month period ended April 30,
2009.




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




Cost
of Revenues and Operating Expenses




Costs of Revenue.
  Costs of product revenue include materials consumed, manufacturing
overheads, shipping costs, salaries, benefits and related expenses of
operations. Gross profit on product sales represents net revenue less the costs
of revenue. Gross profit percentage is highly dependent on pricing, contractual
agreements, and overhead allocations. We do not believe that historical gross
profit margins on product sales are a reliable indicator of future gross profit
margins.




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




Selling and Marketing.  Selling and marketing expenses consist primarily of salaries,
commissions and related expenses for personnel engaged in marketing, sales,
public relations and advertising, along with promotional and trade show costs
and travel expenses. Sales and marketing expenses also include share-based
compensation allocable to personnel performing services related to sales and
marketing.




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




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




Critical
Accounting Policies




Accounting
for Long-Lived Assets / Intangible Assets


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




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




·
            Loss
      of legal ownership or title to an
asset;




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




·
            The
      impact of significant negative industry or economic
  trends.




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




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









Accounting
for Stock-Based Compensation


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




Results
of Operations for the Three Months Ended April 30, 2009 vs. Three Months Ended
April 30, 2008




Revenue and Gross
Margin




For the
three month period ended April 30, 2009 (the “Third Quarter”), product revenues
of $129,900 declined by $286,600, or 69%, compared with the three months ended
April 30, 2008.  The decrease is primarily due to new customers who
made initial purchases in the prior year period but did not order product in the
current period.  Product revenues for each of the quarters presented
were derived from sales of finished products to our partners and distributors,
and product provided to our partners for product development and
testing.  92% of product sales for the Third Quarter were made to
three strategic partners and distributors that are pursuing regulatory approvals
and developing markets for our products.  100% of product sales for
the Third Quarter were made to U.S. domestic customers, compared with 42% in the
same period of the prior year.




Gross
profit on product sales for the Third Quarter was $69,300, compared with
$322,600 in the same period of the prior fiscal year.  The gross
margin percentage declined from 77% in the prior fiscal year to 53% in the
current period.  The decline is primarily due to an increased
proportion of lower margin products sold in the most recent
period.  During the three month period ended April 30, 2009, 63% of
our product sales were of bulk SDC concentrate, and 37% of our product sales
were of bulk Axen30 or finished packaged products containing Axen 30, our ready
to use product.  During the same period of the prior year, 92% of our
product sales were of bulk SDC concentrate and 8% of our product sales were of
bulk Axen30 or finished packaged products containing Axen 30. We generally sell
our SDC bulk concentrate at higher margins than our ready to use
products.




Operating
Costs




Operating
costs declined by $1,260,200, from $2,895,000 in the three months ended April
30, 2008, to $1,634,800 in the Third Quarter.  Within these aggregate
operating costs, selling expenses declined by $147,200 to $179,900 in the Third
Quarter compared with the same period in the prior fiscal year.  The
decrease in selling expenses is primarily due to $169,900 of employee and
consultant stock option expense recorded in the prior year period, which was
partially offset by additional salary expense in the Third Quarter of the
current year.




General
and administrative expense declined by $853,900 to $1,142,700 in the Third
Quarter, compared with the three months ended April 30, 2008.  The
decrease in general and administrative expense is primarily due to $1.1 million
of stock and stock option expense recorded in the prior year
period.   In April 2008, we granted options, which vested on the
date of grant, to purchase 275,000 shares of common stock to directors and
officers of the Company, valued at approximately $906,000.  We also
granted 30,000 shares of common stock to each of three independent directors of
the Company, the aggregate of 90,000 shares being valued at
$463,500.  $1,123,000 of the expense for these option and stock grants
was booked to general and administrative expense in the three month period ended
April 30, 2008.  The decline in stock and stock option expense in the
Third Quarter was partially offset by an increase in legal fees of $165,300,
primarily related to the protection of our intellectual property and in
compliance costs, including legal advice related to the filing of our shelf
registration statement.




Research
and development costs, including in-house costs, patent amortization, outside
legal costs for maintaining approved patents, and product registration
expenditures, declined by $259,100, from $571,400 in the three months ended
April 30, 2008 to $312,300 in the Third Quarter.  The decline in
expense is primarily related to reduced stock option expense and reduced patent
related legal fees. We do not currently expect our research and development
expense to grow significantly in future periods; however, if opportunities
arise, particularly in the development and testing of new formulations, we will
evaluate the need for additional research expenditures based on potential market
sizes and our estimation of the likelihood of our technology achieving
successful results.




Our loss
from operations before taxes declined by $1,006,800 from a loss of $2,572,300
for the three months ended April 30, 2008 to a loss of $1,565,500 for the Third
Quarter.




Other
Income




Other
income declined by $86,000 in the Third Quarter compared to the same period of
the prior fiscal year, due primarily to gains on the sale of T-bills recorded in
the prior year, and decreased interest income from lower average cash balances
and lower interest rates.




Net Income
(Loss)




Our net
loss after taxes declined by $920,800 from a net loss of $2,466,400 for the
three months ended April 30, 2008 to a net loss of $1,545,600 for the Third
Quarter.














Results
of Operations for the Nine Months Ended April 30, 2009 vs. Nine Months Ended
April 30, 2008




Revenue and Gross
Margin




For the
nine months ended April 30, 2009, product revenues of $275,300 declined by
$388,900 or 59%, compared with the nine months ended April 30,
2008.  The decrease is primarily due to new customers who made initial
purchases in the nine month period ended April 30, 2008 but did not order
product in the current period.  Product revenues for each of the nine
month periods presented was derived from sales of finished products to our
partners and distributors, and product provided to our partners for product
development and testing.  85% of product sales for the nine months
ended April 30, 2009 were made to three strategic partners and distributors that
are pursuing regulatory approvals and developing markets for our
products.  100% of product sales for the nine months ended April 30,
2009 were made to U.S. domestic customers, compared with 64% in the same period
of the prior year.




Gross
profit on product sales for the nine months ended April 30, 2009 was 144,100,
compared with $488,200 in the same period of the prior fiscal
year.  The gross margin percentage declined from 73% in the prior year
to 52% in the current period, primarily due to an increased proportion of lower
margin products sold in the most recent period.  During the nine month
period ended April 30, 2009, 35% of our product sales were of bulk SDC
concentrate and 65% of our product sales were of bulk Axen30 or finished
packaged products containing Axen 30. During the same period of the prior year,
79% of our product sales were of bulk SDC concentrate and 21% of our product
sales were of bulk Axen30 or finished packaged products containing Axen
30.  We generally sell our SDC bulk concentrate at higher margins than
our ready to use products.  The decline in overall gross margin caused
by the increased proportion of lower margin products in the most recent period
was partially offset by efficiencies gained in our in-house manufacturing and
bottling operations.




During
the three month period ended July 31, 2008 we recorded deferred revenue on
receipt of a non-refundable fee of $250,000 which we received subject to an
agreement whereby we allowed a third party a limited time period to exclusively
evaluate our SDC technology for use within specified indications and for certain
products.  Upon the termination of the agreement on January 31, 2009,
we recognized the $250,000 as licensing revenue in the consolidated statements
of operations for the three month period ended January 31, 2009.  This
amount is included in other revenues for the nine month period ended April 30,
2009.  Cost of goods sold related to this revenue was zero, as we did
not incur any costs directly related to our commitments under the
agreement.




Operating
Costs




Operating
costs increased by 3%, from $5,659,000 in the nine months ended April 30, 2008,
to $5,833,700 in the nine months ended April 30, 2009.  Within these
aggregate operating costs, selling expenses declined by $104,800 in the current
period compared with the same period in the prior fiscal year.  The
decrease in selling expenses is primarily due to $338,200 of employee and
consultant stock option expense recorded in the prior year period, which was
partially offset by additional salary expense in the nine months ended July 31,
2009.




General
and administrative expenses increased by $389,200 or 10%, to $4,263,441 in the
nine months ended April 30, 2009, compared with the nine months ended April 30,
2008.  Included in general and administrative expense for the nine
months ended April 30, 2009 is $781,600 of expense related to an allowance for
doubtful accounts.  This amount is made up of amounts billed during
prior periods to two international distributors.  During the year
ended July 31, 2008 we granted non-exclusive distribution and blending rights to
a new distributor for the sale of SDC-based products in Colombia.  In
addition, we granted non-exclusive distribution and blending rights to a second
distributor, which is affiliated with the first distributor, for the sale of
SDC-based products in Argentina, Venezuela, Panama and Costa Rica. The $781,600
receivable includes $57,000 for amounts billed at cost to the distributors in
August 2008 for parts shipped directly to them by one of our U.S. packaging
suppliers.  Subsequent to this transaction, we have not sold any
products to either of the two referenced distributors.




During
the three month period ended January 31, 2009 we determined these accounts to be
delinquent.  We therefore established a full reserve and recorded
$781,600 as bad debt expense, which is recorded within general and
administrative expense in the consolidated statements of operations for the nine
months ended April 30, 2009.  Management currently considers all other
accounts receivable to be fully collectible.




This
increase in expense was offset by a decline of $1.4 million in stock and stock
option expense within general and administrative expense, the most significant
factor being $1.1 million of stock and stock option expense recorded in the
three months ended April 30, 2009.  In April 2008, we granted options,
which vested on the date of grant, to purchase 275,000 shares of common stock to
directors and officers of the Company, valued at approximately
$906,000.  We also granted 30,000 shares of common stock to each of
three independent directors of the Company, the aggregate of 90,000 shares being
valued at $463,500.  $1,123,000 of the expense for these option and
stock grants was booked to general and administrative expense in the three month
period ended April 30, 2008.  No corresponding grants were made to
officers and directors during the nine months ended April 30,
2009.  We recognized employee and director stock option non-cash
expense in general and administrative expenses for the nine months ended April
30, 2009 of $218,100 and for the nine months ended April 30, 2008 of
$1,579,800.











General
and administrative payroll expense increased by $250,700 year over year due to
new hires and salary increases, and accounting and legal fees increased by
$420,000.  Additionally, insurance, depreciation, rent, and board of
director fees accounted for $263,300 of the increase in general and
administrative expense for the nine months ended April 30, 2009 compared with
the nine months ended April 30, 2008.




Research
and development costs, including in-house costs, patent amortization, outside
legal costs for maintaining approved patents, and product registration
expenditures, decreased in the nine month period ended April 30, 2009 by 9% to
$1,053,200, compared with the same period in the prior fiscal
year.  The decline in expense is primarily related to a decline of
$128,000 in patent related legal fees and a decline of $141,800 in employee and
director stock option expense.  These decreases were partially offset
by increases in payroll and in third-party testing costs.  We do not
currently expect our research and development expense to grow significantly in
future periods, however if opportunities arise, particularly in the development
and testing of new formulations, we will evaluate the need for additional
research expenditures based on potential market sizes and our estimation of the
likelihood of our technology achieving successful results.




Our loss
from operations before taxes increased by $268,800, from a loss of $5,171,000
for the nine months ended April 30, 2008 to a loss of $5,439,600 for the nine
months ended April 30, 2009.




Other
Income




Other
income declined by $73,000 in the current nine month period compared to the same
period of the prior fiscal year, due primarily to gains on the sale of T-bills
recorded in the prior year, and decreased interest income from lower average
cash balances and lower interest rates.




Net Income
(Loss)




Our net
loss after taxes increased by $341,900, from a net loss of $5,028,800 for the
nine months ended April 30, 2008 to a net loss of $5,370,700 for the nine months
ended April 30, 2009.




Liquidity
and Capital Resources




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




At April
30, 2009, we had cash and cash equivalents of $2,946,000, and no short-term
investments.  We have no long-term debt.  On May 27, 2009 we
closed a registered direct offering whereby we sold $3 million of our common
stock and warrants to institutional investors.  After fees and
expenses, the net proceeds of the offering to us are expected to be
approximately $2.79 million.




Our cash
and equivalents at April 30, 2009 represented a decline in cash, cash
equivalents and short-term investments of $3,686,300 from July 31,
2008.  Our cash outflows could be greater in future
periods.  We had a loss of $5,370,700 after taxes for the nine month
period ended January 31, 2009, a loss of $6,540,300 after taxes for the fiscal
year ended July 31, 2008, and a loss of $4,654,900 after taxes for the fiscal
year ended July 31, 2007.  As of April 30, 2009, we had an accumulated
deficit of approximately $ 36.8 million.




Our
future capital needs and our future profits, if any, are uncertain, and will
depend on many factors including, among others, the acceptance of, and demand
for, our products; the success of strategic partners in selling our products;
our success and the success of strategic partners in obtaining regulatory
approvals to sell our products; the costs of further developing our existing,
and developing new, products or technologies; the extent to which we invest in
new technology and product development; and the costs associated with the
continued operation, and any future growth, of our business.




Many of
the factors determining our future profitability and capital needs are outside
our control.  We rely on third parties to market and distribute our
products.  Our partners and distributors are marketing our novel
antimicrobial silver ion technology to industrial and consumer markets, however
these products have not yet been widely accepted into the
marketplace.  In most cases, regulatory approvals are required, in the
United States and overseas, before products can be sold.




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




We have a
strategic agreement with Ciba, whereby we have granted Ciba the right to resell
our SDC concentrate within the global personal care, household and institutional
markets.  In February 2009, the first name brand personal care
products containing SDC as the active ingredient were launched in Europe by a
customer of Ciba.  We expect other such product launches in future
periods through our relationship with Ciba.  Additionally, we have a
strategic agreement with Rockline Industries that we expect will lead to the
sale of wet wipes containing our SDC technology, subsequent to U.S. EPA
approval.




We also
have other pending EPA applications, for additional uses and for new
formulations, the approval of which we believe are likely to lead to enhanced
sales of SDC.  SDC is currently in various trials by third parties in
the transportation and agriculture industries, both of which we consider to be
significant market opportunities.  While we cannot predict the timing
or scale of any of these opportunities, and we are competing in highly
competitive markets, we believe that our SDC technology has significant
advantages over existing technologies.











To date,
with the exception of Ciba and Rockline, our partners have been, and are, small
distributors to whom we have granted primarily non-exclusive rights to market
our EPA approved hard surface disinfectant known generically as Axen 30, and
sold under multiple brand names owned by the distributors.




With our
relationships with Ciba and Rockline, we expect our technology to be used in
multiple products being marketed by our partners’ customers.  Ciba’s
customers include many global, well established corporations with powerful
existing brands.  Rockline’s customers include many large retail
chains that look to Rockline to produce store brand products, among other
products.




We
continue to develop new products and formulations utilizing our SDC
technology.  If we are successful, potential products may include
cleaner disinfectants, field dilutable disinfectants and sanitizers, hospital
grade disinfectants  and sporicides, cold process sterilants, medical
device applications, and sanitizers approved for food processing
environments.  If we are successful in developing any such new
formulations, we expect be able to attract additional established partners and
distributors of our technology.




We are
working with U.S. universities to test our technology in new environments, and
we expect FTA Therapeutics, our partner for the development and
commercialization of certain FDA regulated SDC-based products, to work in
conjunction with medical establishments in the U.S. and overseas.




Our
existing cash resources will not be sufficient to fund our planned activities,
and in future periods we expect to seek additional capital through the issuance
of common stock, preferred stock, convertible securities or through other
means.  Such sources of new capital may not be available on terms
acceptable to us, or at all. If we, or our distributors, are unable to establish
SDC in the marketplace, or if we cannot raise additional capital on acceptable
terms, we may need to scale back our expenditures through reductions in our
workforce and operations, and we may not be able to develop or enhance our
products, execute our business plan, or take advantage of future
opportunities.  If we were unable to scale back the size and scope of
our operations sufficiently, we would have to cease operations
altogether.




Total
current assets at April 30, 2009 were $3,514,500, a decrease of $4,375,100 from
July 31, 2008.  Cash used in operating activities for the nine months
ended April 30, 2009 was $4,436,200, compared with $3,168,800 for the same nine
month period of the prior fiscal year.  The increase in operating cash
expenditures is primarily a result of increased general and administrative
expenses including payroll, insurance, legal fees and professional services, and
research and development expenses.  The value of our raw materials and
finished goods inventory grew by $72,700 over the same period, primarily due to
the purchase of raw materials for our concentrate manufacturing and our bottling
processes.  In addition, prepaid expenses increased by $49,300 from
July 31, 2008 to April 30, 2009.




During
the nine months ended April 30, 2009, cash provided by investing activities was
$4,463,700.  Of this amount, a net amount (cash sales less cash
purchases) of $4,589,300 was provided by short-term investments. In addition,
during the nine months ended April 30, 2009 we invested $52,600 in patents,
however the capitalized value of our patents at April 30, 2009 declined by
$75,900 from July 31, 2008 due to an excess of patent amortization over
capitalization.  Total property, plant and equipment at April 30,
2009, of $906,200, declined by $128,600 from July 31, 2008, due to an excess of
depreciation over new asset acquisitions.  Our purchases of property,
plant and equipment for the nine month period ended April 30, 2009 were
$73,000.




Total
cash inflows from financing activities for the nine months ended April 30, 2009
were $894,200, all of which was derived from proceeds from the exercise of stock
options and warrants.  In August 2008, we received an aggregate of
$150,000 from the exercise of non-employee options to purchase 50,000 shares of
our common stock at an exercise price of $3.00, and received $15,100 from the
exercise of options to purchase 28,450 shares of our common stock by two
officers, at an average exercise price of $0.53.  In December 2008, we
received an aggregate of $631,600 from a director for the exercise of options to
purchase 339,800 shares of our common stock at an average exercise price of
$1.86.  In January 2009, we received $79,500 from a director for the
exercise of options to purchase 150,000 shares of our common stock at an
exercise price of $0.53; and received $18,000 from the same director for the
exercise of common stock warrants to purchase 36,000 shares of our common stock
at an exercise price of $0.50.




Net
accounts receivable declined by $810,800 from July 31, 2008 to April 30,
2009.  During the three month period ended January 31, 2009 we
recorded an allowance for doubtful accounts of $781,600 related to amounts
billed in prior periods to two international distributors.




At April
30, 2009, we had current liabilities of $610,500, a decline of $371,000 from
July 31, 2008, primarily due to a decline in accounts payable of $214,900 and a
decline of $256,800 in deferred revenue.  In the Second Quarter of
2009, we recognized $250,000 of licensing revenue on the consolidated statements
of operations.  This amount had previously been recorded as deferred
revenue on receipt of a non-refundable fee.











We expect
to continue to invest in our manufacturing processes, to improve efficiency and
to be able to meet anticipated demand.  Additionally, during the next
twelve months, we anticipate making significant investments in regulatory
applications for new products or additional claims, in our corporate and
business development infrastructure and in programs required for us to maintain
our compliance with securities laws as well as the listing standards of the
NASDAQ Capital Market, among other investments.  We believe, however, that
our cash resources are sufficient to meet our anticipated needs during the next
twelve months.  Our assessment is based on historical working capital
needs, operating loss trends, and our current business
outlook.  However, we expect that we will need additional financing
and there can be no assurance that when additional financing is necessary it
will be available, or if available, that such financing can be obtained on
satisfactory terms or without undue dilution to, or an adverse impact on the
rights of, our shareholders.  If adequate funds are not available when
needed, we may be required to significantly modify our business model to reduce
spending to a sustainable level. Such modification of the business model could
also result in an impairment of assets which cannot be determined at this
time.




Off
Balance Sheet Arrangements




We do not
have any off balance sheet arrangements.













Item
3. Quantitative and Qualitative Disclosures About Market Risk




Our exposure to interest rate risk
at April 30, 2009 is related to our investment portfolio which consists largely
of debt instruments and other securities of high quality corporate issuers and
the U.S. government and its agencies.  From time to time our
investments may be exposed to market risk related to changes in interest
rates.  Our current investment policy is to maintain an investment
portfolio consisting only of diversified institutional money market mutual funds
investing in  A-1 (S&P) or Prime-1 (Moody’s); U.S. Treasury
Securities, or United States Government obligations issued by or backed by a
federal agency of the United States Government.  We do not enter into
investments for trading or speculative purposes, and our cash is deposited in,
and invested through, highly rated financial institutions in the United
States.  While our available for sale securities are subject to
interest rate risk and would fall in value if market interest rates increased,
we estimate that the fair value of our investment portfolio would not decline by
a material amount in the event of an increase in market interest
rates.  We therefore would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a change in
market interest rates on our investments.




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




Item
4. Controls and Procedures




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




Evaluation
of Disclosure Controls and Procedures




We have
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer/Principal Accounting Officer, of the effectiveness of the design and
operation of all of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer concluded that our disclosure controls and procedures were
effective as of April 30, 2009.




Changes
in Internal Control Over Financial Reporting




We made
no changes in our internal control over financial reporting during the Third
Quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.













PART
II – OTHER INFORMATION




Item
1.  Legal Proceedings




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




In April
2008, we obtained a default judgment of $6.53 million from the 18th Judicial
Circuit Court in the State of Illinois against an internet message board poster;
awarded for defamation and tortious interference.  We did not record
any part of the award as an asset on our consolidated balance
sheets.  In February 2009, the 18th Judicial Circuit Court in the
State of Illinois vacated the judgment.




Item
1A.  Risk Factors


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




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




We had a
loss $5,370,700 after taxes for the nine month period ended April 30, 2009, a
loss of $6,540,300 after taxes for the fiscal year ended July 31, 2008, and a
loss of $4,654,900 after taxes for the fiscal year ended July 31,
2007.  As of April 30, 2009, we had an accumulated deficit of
approximately $36.8 million.  We may continue to have losses in the
future.  If the penetration into the marketplace of SDC is later than
anticipated, revenue growth is slower than anticipated or operating expenses
exceed expectations, it may take an unforeseen period of time to achieve or
sustain profitability and we may never achieve or sustain
profitability.  Slower than anticipated revenue growth could force us
to reduce research, testing, development and marketing of our technology and/or
force us to reduce the size and scope of our operations, or cease operations
altogether.  If we do become profitable in future periods, we have an
employment contract with our Chief Executive Officer and President which
includes a provision for him to be paid an amount equal to 3% of our net income
before taxes, if any.  Such payments would reduce our
profitability.




We do not
yet have significant cash inflows from product sales or from other sources of
revenue to offset our ongoing and planned investments in corporate
infrastructure, research and development projects, regulatory submissions,
business development activities, and sales and marketing, among other
investments.  These investments may not be successful.  In
addition, some of these investments cannot be postponed and we may be
contractually or legally obligated to make them.  In future periods we
may need to seek additional capital through the issuance of debt, common stock,
preferred stock, convertible securities or through other means, any one of which
could reduce the value, perhaps substantially, of the common stock we have
issued as of the date of this Report on Form 10-Q.  We currently have
no long-term debt, however the issuance of debt, common stock, preferred stock,
or convertible securities in future periods, if any, could lead to the dilution
of our existing shareholders.  There is no guarantee that we would be
able to obtain capital on terms acceptable to us, or at
all.  Insufficient funds could cause us to fail to execute our
business plan, fail to take advantage of future opportunities, or fail to
respond to competitive pressures or unanticipated customer requirements, and
further may require us to delay, reduce or eliminate some or all of our research
and product development programs, license to third parties the right to
commercialize products or technologies that we would otherwise commercialize
ourselves, or to reduce or cease operations.




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












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




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




We are
marketing our new antimicrobial silver ion technology to industrial and consumer
markets.  These products have not yet been accepted into the
marketplace, and may never be accepted.  In addition, even if our
products achieve market acceptance, we may not be able to maintain product sales
or other forms of revenue over time if new products or technologies are
introduced that are more favorably received than our products, are more
cost-effective or otherwise render our products less attractive or
obsolete.  Other risks involved in introducing these new products
include liability for product effectiveness and safety, and competition from
existing or emerging sources.  Additionally, government regulation in
the U.S. and in other countries is a significant factor in the development,
manufacturing and marketing of many of our products and in our ongoing research
and development activities. All products derived from SDC require approval by
government agencies prior to marketing or sale in the U.S. or
overseas.  Complying with applicable government regulations and
obtaining necessary clearances or approvals can be time consuming and expensive,
and there can be no assurance that regulatory review will not involve delays or
other actions adversely affecting the marketing and sale of our
products.  For example, regulatory review of SDC by the U.S. EPA has
historically been time consuming and expensive, due primarily, we believe, to
the novel nature of our technology.  While we cannot accurately
predict such regulatory processes, we expect the review process to remain time
consuming and expensive as we, or our partners, apply for approval to market new
formulations or to make additional claims.  We also cannot predict the
extent or impact of future legislation or regulation in the U.S. or
overseas.




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




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




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




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




We are a
bioscience company focused on the marketing and continued development of our
electrolytically generated stabilized ionic silver technology, including our
flagship SDC antimicrobial.  While the rewards in these fields are
potentially great, the risks, regulatory hurdles and costs of doing business in
our target markets are high. Our SDC is a platform technology rather than a
single use applied technology. As such, products developed from the platform
fall under the jurisdiction of multiple U.S. and international regulatory
agencies. We currently have U.S. EPA registration for our 2400-parts per million
(ppm) technical grade SDC concentrate (trade name Axenohl), as well as for our
Axen and Axen30 hard surface disinfectant products for commercial, industrial
and consumer applications including restaurants, homes and medical facilities.
We intend to fund and manage additional U.S. EPA-regulated product development
internally, in conjunction with our regulatory consultants and potentially by
partnering with other third parties.  We are also partnering, or
intend to partner, with third parties who are seeking, or intend to seek,
approvals to market SDC-based products in markets outside the
U.S.  However, the introduction of additional regulated antimicrobial
products in the U.S. or in markets outside the U.S. could take several years, or
may never be achieved.  In addition, doing business internationally
carries a great deal of risk with regard to foreign government regulation,
banking, currency fluctuation, and many other factors.




We
are subject to intense competition




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












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




All of
the supply ingredients used to manufacture our products are readily available
from multiple suppliers.  However, commodity prices for these
ingredients can vary significantly and the margins that we are able to generate
could decline if prices rise.  For example, both silver and citric
acid prices have risen recently.  A decision is expected imminently by
the European Commission on an antidumping action against Chinese citric acid
producers, a dominant force in the global citric acid market, which has caused
global citric acid price increases in anticipation of antidumping duties that
the European Commission could impose on Chinese producers.  Any
measures could be followed by similar action from the authorities in the
U.S.  In many of our distribution and development agreements, we are
unable to raise our product prices to our customers quickly to maintain our
margins, and significant price increases for key inputs would therefore have an
adverse effect on our results of operations.




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




In
addition to its use on inanimate surfaces, we believe that our SDC technology
also shows promise as a broad-spectrum antimicrobial for use in human and
veterinary healthcare products.  We plan to pursue additional U.S. EPA
and FDA regulatory approvals for other applications. We have entered into
agreements with FTA Therapeutics for the development and commercialization of
certain FDA regulated SDC-based products.  However, we do not exercise
any control over these development partners.  FTA’s resources are
limited and progress to date on all indications has been slow.  The
FDA and comparable agencies in many foreign countries impose substantial
limitations on the introduction of new products through costly and
time-consuming laboratory and clinical testing and other
procedures.  The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain.  There is no
guarantee that either our existing or any other potential partner, or we, will
be able to obtain the resources necessary to further develop our technology or
obtain regulatory approvals, or that the products will be successful in meeting
the strict criteria imposed by the FDA.  It may be several years
before we, or any third party to whom we grant rights to use our silver ion
technologies, are able to introduce any FDA regulated antimicrobial
pharmaceutical products containing our technology.  Such products may
never achieve regulatory approval and may never be commercialized.  If
they are commercialized, we may not receive a share of future revenues that
provides an adequate return on our historical or future investment.




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




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




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




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




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




·
            we
      may not establish and maintain effective marketing programs and continue
      to build our brand identity;




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




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




·
            we
      may not effectively manage our anticipated
  growth.




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




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




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











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




We rely
and expect in the future to rely on a combination of patent, trademark, trade
secret and copyright law, and contractual restrictions to protect the
proprietary aspects of our technology and business. These legal protections
afford only limited protection for our intellectual property and trade secrets.
Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our proprietary technology or otherwise obtain and
use information that we regard as proprietary.  As a result, we cannot
be assured that our means of protecting our proprietary rights will be
adequate.




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




Litigation
may be necessary to enforce our intellectual property rights and protect our
trade secrets. If third parties prepare and file applications in the U.S. or
other countries that claim trademarks used or registered by us, we may oppose
those applications and may be required to participate in proceedings before the
regulatory agencies who determine priority of rights to such trademarks. Any
litigation or adverse priority proceeding could result in substantial costs and
diversion of resources, and could seriously harm our business and operating
results.  If we are found to have violated the trademark, trade
secret, copyright, patent or other intellectual property rights of others, such
a finding could result in the need to cease use of a trademark, trade secret,
copyrighted work or patented invention in our business and the obligation to pay
a substantial amount for past infringement. It could also be necessary for us to
pay a substantial amount in the future if the rights holders are willing to
permit us to continue to use the intellectual property rights. Either having to
cease use or pay such amounts could make us much less competitive and could have
a material adverse impact on our business, operating results and financial
condition.




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




We
may become subject to product liability claims




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




Litigation
may harm our business or otherwise distract our management




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




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




Our
common stock is registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  It is therefore subject to the information,
proxy solicitation, insider trading and other restrictions and requirements of
the SEC under the Exchange Act.  The SEC continues to issue new and
proposed rules, and complying with existing and new rules results in significant
costs to us of being a public company, including substantial costs during the
fiscal year ending July 31, 2009 and in future years.  In addition, in
April 2008 we obtained a listing of our common stock on the NASDAQ Capital
Market, adding the additional cost and administrative burden of maintaining such
a listing.  These additional regulatory costs and requirements will
reduce our future profits or increase our future losses, and a greater
proportion of management time and effort will be needed to meet our regulatory
obligations than before.











We are
required to evaluate our internal controls systems in order to allow management
to report on our internal controls as required by Section 404 of the
Sarbanes-Oxley Act.  Based on the market capitalization of our common
stock at January 31, 2009, we met the defined requirements for remaining an
accelerated filer, which require us to attest to, and have our Independent
Registered Public Accounting Firm attest to, our internal
controls.  We are also required to file our annual and quarterly
reports with the Securities and Exchange Commission (“SEC”) on an accelerated
basis.  Recent SEC pronouncements suggest that in the next several
years we may be required to report our financial results using new International
Financial Reporting Standards, replacing U.S. GAAP, which would require us to
make significant investments in training, hiring, consulting and information
technology, among other investments.  All of these and other reporting
requirements and heightened corporate governance obligations that we will face
or are already facing will further increase the cost to us, perhaps
substantially, of remaining compliant with our obligations under the Exchange
Act and the Sarbanes-Oxley Act.  In order to meet these incremental
obligations, we will need to invest in our corporate and accounting
infrastructure and systems, and acquire additional services from third party
advisors.  As a result of these requirements and investments, we will
incur significant additional expenses and will suffer a significant diversion of
management’s time.  There is no guarantee that we will be able to
continue to meet these obligations in a timely manner, and we could therefore be
subject to sanctions or investigation by regulatory authorities such as the SEC
or the NASDAQ Capital Market.  Any such actions could adversely affect
our financial results and the market price of our common stock, perhaps
significantly.




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




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




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




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




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




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




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




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











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




As of
June 5, 2009, Michael L. Krall, our President and Chief Executive Officer,
beneficially owned, including exercisable options, approximately 6.3% of our
common stock.  As of the same date, our directors and officers as a
group beneficially owned, including exercisable options and warrants,
approximately 19.7% of our common stock.  As a result, our management,
and Mr. Krall in particular, are in a position to significantly influence our
direction and policies, the election of our Board, and the outcome of any other
matters requiring shareholder approval.  This concentration of
ownership may harm the market price of our common stock by, among other
things:




·
            delaying,
      deferring, or preventing a change in control of our
    Company;




·
            impeding
      a merger, consolidation, takeover, or other business combination involving
      our Company; or




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




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




Since our
initial public offering in August 1996, the price and trading volume of our
common stock have been highly volatile. The price has ranged from below $1 per
share to over $8 per share, and the monthly trading volume has varied from under
200,000 shares to over 7.8 million shares.  During the twelve months
prior to June 5, 2009, the closing price of our common stock on any given day
has ranged from $1.69 to $8.50 per share, and the monthly trading volume has
varied from approximately 1.2 million shares to approximately 4.9 million
shares. In the future, the market price of our common stock may be volatile and
could fluctuate substantially due to many factors, including:




·
            actual
      or anticipated fluctuations in our results of
  operations;




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




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




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




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




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




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




·
            conditions
      and trends in our industry;




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




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




·
            general
      economic conditions.




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




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




Our
capital requirements will depend on many factors, including:




·
            acceptance
      of, and demand for, our products;




·
            the
      success of strategic partners in selling our
  products;




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




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




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




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











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




We
may not be able to maintain our NASDAQ listing




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




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




We have
approximately 7,856,441 shares of common stock reserved for issuance, which
includes shares under equity compensation plans, vested and unvested options,
and warrants. These shares have a weighted-average exercise price of
approximately $2.30.  In addition, approximately 9,915,800 authorized
shares of our common stock remain available for future issuance under equity
compensation plans or otherwise.  The exercise of options and
warrants, and the sale of shares underlying such options or warrants, could have
an adverse effect on the market for our common stock, including the price that
an investor could obtain for their shares.  Investors may experience
dilution in the net tangible book value of their investment upon the exercise of
outstanding options and warrants granted under our stock option plans, and
options and warrants yet to be granted or issued.




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




At April
30, 2009, we had federal and California tax net operating loss carry-forwards of
approximately $40,316,600 and $30,146,800 respectively.  The
difference between federal and California tax loss carry-forwards is primarily
due to limitations on California loss carry-forwards.




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




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




We
may never pay dividends




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




Item
5.  Other Information




None.
























Item
6.    Exhibits




A.   Exhibits




The
following Exhibits are filed as part of this report pursuant to Item 601 of
Regulation S-K:





31.1
            --
      Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*





31.2
            --
      Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*





32.1
            --
      Certification of Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*





32.2
            --
      Certification of Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002*







* Filed
herewith.

















Signatures


Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




PURE
      BioscienceBy:
            /s/
      Michael L. KrallMichael
      L. Krall
              President
      / Chief Executive Officer
              (Principal
      Executive Officer)
              June
      9, 2009By:
            /s/
      Andrew J. BucklandAndrew
      J. Buckland
              Chief
      Financial Officer
              (Principal
      Financial Officer)
              June
      9, 2009