---

---

|UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
|------------------------------------------------
|Washington, D.C. 20549                          

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# FORM 10-Q

||X| | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

| | FOR
THE QUARTERLY PERIOD ENDED APRIL 30, 2008
| | ---------------------------------------------

||_| | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|--- | --------------------------------------------------------------------------------------------

# Commission File Number
0-21019

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|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
|X|    No |_|

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  |_| | Accelerated
filer  |_| | Non-accelerated filer  |X| | Smaller reporting company  |_|

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).     Yes |_|   No |X|

As
of June 12, 2008, there were 29,303,836 shares of the registrants common stock, no
par value, outstanding.

---



# PURE Bioscience
                                                               FORM 10-Q
                                             For the Quarterly Period Ended April 30, 2008

# TABLE OF CONTENTS

PART 1  FINANCIAL INFORMATION

| | Item 1. | Consolidated Financial Statements (unaudited):
| | ------- | ----------------------------------------------

| | Consolidated
Balance Sheets as of July 31, 2007 and April 30, 2008                       Consolidated
Statements of Operations for the nine and three months ended April 30, 2008 and 2007
                      Consolidated Statements of Cash Flows for the nine months ended
April 30, 2008 and 2007                       Notes to Consolidated Financial Statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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  6. | Exhibits
| | -------- | --------

SIGNATURES

2

---



# PURE Bioscience

# CONSOLIDATED BALANCE
SHEETS

|                                                            | (Unaudited)
April 30,
2008 |  | July 31,
2007 |            
|----------------------------------------------------------- | -------------------------- |  | ------------- | -----------
|ASSETS                                                      |                            |  |               |            
|Current Assets                                              |                            | 
|Cash and cash equivalents                                   |                            |  | $             | 1,643,768  
|Short-term investments                                      |                            |  |               | 5,890,564  
|Accounts receivable, net of allowance for doubtful accounts |                            | 
|of $0 at July 31, 2007 and $0 at April 30, 2008             |                            |  |               | 162,526    
|Inventories, net                                            |                            |  |               | 339,415    
|Prepaid expenses                                            |                            |  |               | 87,664     
|Prepaid consulting                                          |                            |  |               | 52,139     
|                                                            |                            |  |               |            
|Total current assets                                        |                            |  |               | 8,176,076  
|                                                            |                            | 
|Total property, plant and equipment, net                    |                            |  |               | 1,037,589  
|                                                            |                            | 
|Other Assets                                                |                            | 
|Prepaid consulting                                          |                            |  |               |           
|Deposits                                                    |                            |  |               | 2,436      
|Patents                                                     |                            |  |               | 2,124,200  
|                                                            |                            |  |               |            
|Total assets                                                |                            |  | $             | 11,340,301 
|                                                            |                            |  |               |            
|LIABILITIES AND STOCKHOLDERS' EQUITY                        |                            | 
|Current Liabilities                                         |                            | 
|Accounts payable                                            |                            |  | $             | 228,229    
|Accrued liabilities                                         |                            |  |               | 131,044    
|Taxes payable                                               |                            |  |               |           
|                                                            |                            |  |               |            
|Total current liabilities                                   |                            |  |               | 359,273    
|                                                            |                            | 
|Deferred rent                                               |                            |  |               | 13,821     
|                                                            |                            |  |               |            
|Total liabilities                                           |                            |  |               | 373,094    
|                                                            |                            | 
|Stockholders' Equity                                        |                            | 
|Preferred Stock, no par value:                              |                            | 
|5,000,000 shares authorized, no shares issued               |                            |  |               |           
|Class A common stock, no par value:                         |                            | 
|50,000,000 shares authorized                                |                            | 
|24,961,805 issued and outstanding at July 31, 2007, and     |                            | 
|29,294,153 issued and outstanding at April 30, 2008         |                            |  |               | 35,007,793 
|Additional Paid-In Capital                                  |                            |  |               | 4,107,913  
|Warrants:                                                   |                            | 
|391,698 issued and outstanding at July 31,2007, and         |                            | 
|880,351 issued and outstanding at April 30, 2008            |                            |  |               | 1,766,159  
|Accumulated other comprehensive income                      |                            |  |               | 6,688      
|Accumulated deficit                                         |                            |  |               | (29,921,346
|                                                            |                            |  |               |            
|Total stockholders' equity                                  |                            |  |               | 10,967,207 
|                                                            |                            |  |               |            
|Total liabilities and stockholders' equity                  |                            |  | $             | 11,340,301 
|                                                            |                            |  |               |            

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

3

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# PURE Bioscience

# CONSOLIDATED
STATEMENTS OF OPERATIONS      (Unaudited)

|                                               | For the Nine Months Ended
April 30, |  | For the Three Months Ended
April 30, |           
|---------------------------------------------- | ----------------------------------- |  | ------------------------------------ | ----------
|
|Net revenues                                   |                                     |  | $                                    | 664,188   
|Cost of sales                                  |                                     |  |                                      | 176,026   
|                                               |                                     |  |                                      |           
|Gross profit                                   |                                     |  |                                      | 488,162   
|                                               |                                     |  |                                      |           
|Selling expenses                               |                                     |  |                                      | 621,858   
|General and administrative expenses            |                                     |  |                                      | 3,874,246 
|Research and development                       |                                     |  |                                      | 1,162,861 
|                                               |                                     |  |                                      |           
|Total operating expenses                       |                                     |  |                                      | 5,658,965 
|                                               |                                     |  |                                      |           
|Loss from operations                           |                                     |  |                                      | (5,170,803
|                                               |                                     |  |                                      |           
|Other income and (expense):                    |                                     | 
|Interest income                                |                                     |  |                                      | 32,653    
|Other                                          |                                     |  |                                      | 109,343   
|                                               |                                     |  |                                      |           
|Total other income (expense)                   |                                     |  |                                      | 141,996   
|                                               |                                     |  |                                      |           
|Net loss before income taxes                   |                                     |  |                                      | (5,028,807
|Income tax provision                           |                                     |  |                                      |          
|                                               |                                     | 
|Net loss                                       |                                     |  |                                      | (5,028,807
|                                               |                                     |  |                                      |           
|Net loss per common share, basic and diluted   |                                     |  | $                                    | (0.19     
|                                               |                                     |  |                                      |           
|Weighted average shares used in                |                                     | 
|computing basic and diluted net loss per share |                                     |  |                                      | 26,962,731
|                                               |                                     |  |                                      |           

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

4

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# PURE Bioscience

# CONSOLIDATED
STATEMENTS OF CASH FLOWS     (Unaudited)

|                                                     | For the Nine Months
Ended April 30, | 
|---------------------------------------------------- | ----------------------------------- | 
|
|Cash flows from operating activities:                |                                     | 
|                                                     |                                     | 
|Net loss                                             |                                     | 
|                                                     |                                     | 
|Adjustments to reconcile net loss to net cash        |                                     | 
|used in operating activities:                        |                                     | 
|Amortization and depreciation                        |                                     | 
|Stock-based compensation                             |                                     | 
|Changes in assets and liabilities:                   |                                     | 
|Accounts receivable                                  |                                     | 
|Prepaid expense                                      |                                     | 
|Inventories                                          |                                     | 
|Deferred rent                                        |                                     | 
|Accounts payable and accrued liabilities             |                                     | 
|Increase (decrease) in income tax payable            |                                     | 
|                                                     |                                     | 
|Net cash (used) in operating activities              |                                     | 
|                                                     |                                     | 
|Cash flows from investing activities                 |                                     | 
|                                                     |                                     | 
|Investment in patents                                |                                     | 
|Purchase of property, plant and equipment            |                                     | 
|Purchases of short-term investments                  |                                     | 
|Sales of short-term investments                      |                                     | 
|                                                     |                                     | 
|Net cash (used) in investing activities              |                                     | 
|                                                     |                                     | 
|Cash flows from financing activities                 |                                     | 
|                                                     |                                     | 
|Net proceeds from the sale of common stock           |                                     | 
|Proceeds from exercise of stock options and warrants |                                     | 
|                                                     |                                     | 
|Net cash provided by (used in) financing activities  |                                     | 
|                                                     |                                     | 
|Net increase (decrease) in cash and cash equivalents |                                     | 
|                                                     |                                     | 
|Cash and cash equivalents at beginning of period     |                                     | 
|                                                     |                                     | 
|Cash and cash equivalents at end of period           |                                     | 
|                                                     |                                     | 

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 subsidiaries. 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, 2007, and their
accompanying notes, as filed with the Securities and Exchange Commission in our 10-KSB on
October 29, 2007.

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, 2008 are not necessarily indicative of the results of operations for the
full year, or any future periods.

# Note 2.   Summary of
Significant Accounting Policies

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

Certain comparative figures for prior
periods have been reclassified. Specifically, we have reclassified $2,000,000 from cash
and cash equivalents to short-term investments on the consolidated balance sheets at
October 31, 2006, and have reclassified $1,488,000 from cash and cash equivalents to
short-term investments on the consolidated balance sheets at April 30, 2007. The balance
sheets at October 31, 2006 and April 30, 2007 are not presented herein, however the
reclassifications resulted in a $1,488,000 increase in short-term investments and a
corresponding decrease in cash and cash equivalents at the end of the period, as reflected
in the purchases and sales of short-term investments and the change in cash and cash
equivalents on the consolidated statements of cash flows for the nine months ended April
30, 2007.

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

During the periods presented herein
our 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.

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

Our intangible assets primarily
consist of the worldwide patent portfolio of our silver ion technologies, and to a lesser
extent our Triglycylboride technology. Outside legal costs and filing fees related to
obtaining patents are capitalized as incurred. The total amounts capitalized for pending
patents was $7,199 and $45,448 in the three month periods ended April 30, 2008 and 2007,
respectively, and $79,694 and $67,393 in the nine month periods ended April 30, 2008 and
2007, respectively. Patents are stated net of accumulated amortization of $1,120,624 and
$988,742 at April 30, 2008 and July 31, 2007, respectively.

The cumulative cost of acquiring
patents is amortized on a straight-line basis over the estimated remaining useful lives of
the patents, generally between 17 and 20 years from the date of issuance. At April 30,
2008, the weighted average remaining amortization period for all patents was approximately
12.5 years. Amortization expense for the three month periods ended April 30, 2008 and 2007
was $44,437 and $40,972, respectively, and for the nine month periods ended April 30, 2008
and 2007 was $131,882 and $122,235, 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, 2008 or 2007, any stock option awards with
market or performance conditions.

We
adopted the accounting provisions of SFAS No. 123(R) in the three month period ended
October 31, 2006, using the modified prospective application. Under the modified
prospective application, prior fiscal periods are not revised for comparative purposes.
Prior to August 1, 2006, we followed Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, as amended, in our accounting for share-based
compensation. The valuation provisions of SFAS No. 123(R) apply to new awards and to
awards that were outstanding on the adoption date and were or are subsequently modified or
cancelled. As of July 31, 2006, all outstanding share-based awards were fully vested, with
the exception of consultant options recorded in our balance sheets as prepaid
consulting (as further discussed in Note 6).

6

---



| | Stock
Options to Non-Employees
| | ------------------------------

Charges for stock options granted to
non-employees have been determined in accordance with SFAS No. 123(R) and EITF No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, whereby we use the
estimated fair value of the stock options issued, based on the Black-Scholes Option
Pricing Model. For such stock options, during the three month period ended April 30, 2008
we recorded $70,407 in selling expense; and during the three month period ended April 30,
2007 we recorded $65,038 in selling expense, and $9,758 in research and development
expense. During the nine month period ended April 30, 2008 we recorded $145,611 in selling
expense, and $13,011 in research and development expense; and during the nine month period
ended April 30, 2007 we recorded $195,114 in selling expense, $91,250 in general and
administrative expense, and $29,274 in research and development expense. Included in these
amounts is the amortization of consultant options recorded in our consolidated balance
sheets as prepaid consulting and further discussed in Note 6.

| | 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. All of our short-term investments as of July 31,
2007 or April 30, 2008 are carried at fair value, based upon market prices quoted on the
last day of the fiscal period, and are considered available for sale. We use the specific
identification method to determine the cost of debt securities sold, and include gross
realized gains and losses in investment income. Realized gains recorded for the three
month periods ended April 30, 2008 and 2007 were $92,027 and zero respectively, and for
the nine month periods ended April 30, 2008 and 2007 were $109,215 and zero respectively.
All interest and dividends received from short-term investments are included in interest
income.

As of April 30, 2008 and July 31,
2007, all cash deposits and short-term investments were invested in either U.S. FDIC
insured bank accounts; institutional money market mutual funds investing in A-1 (S&P),
Prime-1 (Moodys) or F1 (Fitch) short-term corporate debt obligations; U.S. Treasury
Securities, or United States Government obligations issued by or backed by a federal
agency of the United States Government.

| | 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, 2008 and 2007, our comprehensive loss
was $2,531,897 and $876,370, respectively. During the three month period ended April 30,
2008 we recorded unrealized gains on available for sale securities of $26,526, and
realized gains on the sale of available for sale securities, which are included in our net
loss, of $92,027. During the three month period ended April 30, 2007, we had no gains or
losses on available for sale securities. For the nine month periods ended April 30, 2008
and 2007, our comprehensive loss was $5,022,120 and $2,751,772, respectively, and included
unrealized holding gains on available-for-sale securities at the end of the
periods of $6,688 and zero, 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 the three and nine month periods
ended April 30 2008 and 2007, 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, 2008 and 2007 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. This pronouncement is effective for fiscal years beginning after November 15, 2007
(our fiscal year ending July 31, 2009). We do not expect the adoption of SFAS No. 157 to
have a material impact on our consolidated financial statements or results of operations.

7

---



In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115. This standard
permits an entity to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions in SFAS No. 159 are elective, however the amendment
to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
applies to all entities with available-for-sale and trading securities. The fair value
option established by SFAS No. 159 permits all entities to choose to measure eligible
items at fair value at specified election dates. Under SFAS No. 159, we would report
unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise accounted
for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c)
is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is
effective as of the beginning of the first fiscal year that begins after November 15, 2007
(our fiscal year ending July 31, 2009), however we do not currently expect the adoption of
SFAS No. 159 to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS
141R replaces SFAS No. 141, Business Combinations and requires an acquirer in a business
combination to recognize the assets acquired, the liabilities assumed, including those
arising from contractual contingencies, any contingent consideration, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions specified in SFAS 141R. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes referred to
as a step acquisition) to recognize the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). In addition, SFAS 141Rs
requirement to measure the non-controlling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. SFAS 141R amends SFAS No. 109,
Accounting for Income Taxes, to require the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the combination,
or directly in contributed capital, depending on the circumstances. It also amends SFAS
142, Goodwill and Other Intangible Assets, to provide guidance on the impairment
testing of acquired research and development intangible assets and assets that the
acquirer intends not to use. SFAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (our fiscal year ending July 31, 2010). We
do not currently expect the adoption of the provisions of SFAS 141R to have a material
effect on our financial condition, results of operations or cash flows.

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

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

# Note 3.   Private Placement

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

8

---



Under the terms of the placement
agreement, we were required to file a registration statement with the Securities and
Exchange Commission (SEC) within 90 days of the 2007 Private Placement, for
the resale of the shares issued, and the shares to be issued upon the exercise of the
warrants. If we had not filed the registration statement within the 90-day period, and if
the registration statement were not declared effective within 210 days after the filing
date, we would have been subject to repayment penalties. We filed a Form S-1 with the SEC
on January 17, 2008 for the resale of all shares issued in the October 2007 private
placement and the shares to be issued upon the exercise of the warrants. The S-1
registration statement, as amended, was subsequently declared effective and we received a
notice of effectiveness from the SEC on January 25, 2008.

# Note 4.   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 2007, we issued 12,500
unregistered shares of our common stock to a third party as part of a legal settlement,
with an estimated fair value of $43,750 based on a market price of $3.50 per share.

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

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

In December 2007, we issued options
to purchase 50,000 shares of our common stock in exchange for business development
services, at an exercise price of $5.29, valued at $140,814 (based on the Black-Scholes
Option Pricing Model assuming no dividend yield, volatility of 102.22% and a risk-free
interest rate of 4.25%). See Note 6 for further information regarding this option.

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

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

On March 10, 2008, Gary Brownell
resigned as a director of PURE Bioscience in order to allow us to meet corporate
governance standards which require that we have a majority of independent directors. On
that date, our Board extended the post-termination exercise period applicable to 837,500
vested and outstanding stock options held by Mr. Brownell from three days following his
resignation to September 10, 2008. We determined the fair value of the extension of these
options by using the Black-Scholes Option Pricing Model to determine the difference
between the estimated fair value of the options immediately before and immediately after
the extension. We recorded the fair value of the extension, which we determined to be
$23,040, as general and administrative expense within the consolidated statement of
operations for the three month period ended April 30, 2008.

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

9

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

# Note 5.   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 our Board of Directors. 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. As of July 31, 2006, all outstanding share-based awards were fully
vested, with the exception of the consultant options recorded in our balance sheets as
prepaid consulting (as further discussed in Note 6). We recognize compensation
expense for stock option awards on a straight-line basis over the applicable service
period of the award, which is the vesting period. 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, 2008 and 2007:

|                               | For the nine month periods ended April 30 | 
|------------------------------ | ----------------------------------------- | 
|
|Expected price volatility      |                                           | 
|Risk-free interest rate        |                                           | 
|Expected rate of forfeiture    |                                           | 
|Expected dividend yield        |                                           | 
|Weighted average expected term |                                           | 

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

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

10

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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.

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, 2008 and 2007 resulting from share-based
compensation awarded to our employees, directors and third party service providers,
excluding the amortization of prepaid consulting as detailed in Note 6:

|                                                                 | Three Months Ended
April 30, 2008 |  | Three Months Ended
April 30, 2007 |          
|---------------------------------------------------------------- | --------------------------------- |  | --------------------------------- | ---------
|Share-based compensation for employees and directors:            |                                   |  |                                   |          
|Selling expense                                                  |                                   |  | $                                 | 98,784   
|General and administrative expenses                              |                                   |  |                                   | 1,179,108
|Research and development                                         |                                   |  |                                   | 148,176  
|                                                                 |                                   |  |                                   |          
|Total share-based compensation for employees and directors       |                                   |  |                                   | 1,426,068
|                                                                 |                                   | 
|Share-based compensation for third party service providers:      |                                   | 
|Selling expense                                                  |                                   |  | $                                 |         
|General and administrative expenses                              |                                   |  |                                   |         
|Research and development                                         |                                   |  |                                   |         
|                                                                 |                                   |  |                                   |          
|Total share-based compensation for third party service providers |                                   |  |                                   |         
|                                                                 |                                   |  |                                   |          
|                                                                 |                                   | 
|Total share-based compensation expense                           |                                   |  | $                                 | 1,426,068
|                                                                 |                                   |  |                                   |          
|                                                                 |                                   | 

|                                                                 | Nine months Ended
April 30, 2008 |  | Nine months Ended
April 30, 2007 |          
|---------------------------------------------------------------- | -------------------------------- |  | -------------------------------- | ---------
|Share-based compensation for employees and directors:            |                                  |  |                                  |          
|Selling expense                                                  |                                  |  | $                                | 98,784   
|General and administrative expenses                              |                                  |  |                                  | 1,579,762
|Research and development                                         |                                  |  |                                  | 148,176  
|                                                                 |                                  |  |                                  |          
|Total share-based compensation for employees and directors       |                                  |  |                                  | 1,826,722
|                                                                 |                                  | 
|Share-based compensation for third party service providers:      |                                  | 
|Selling expense                                                  |                                  |  | $                                | 51,736   
|General and administrative expenses                              |                                  |  |                                  | 43,750   
|Research and development                                         |                                  |  |                                  |         
|                                                                 |                                  |  |                                  |          
|Total share-based compensation for third party service providers |                                  |  |                                  | 95,486   
|                                                                 |                                  |  |                                  |          
|                                                                 |                                  | 
|Total share-based compensation expense                           |                                  |  | $                                | 1,922,208
|                                                                 |                                  |  |                                  |          
|                                                                 |                                  | 

11

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|                            | Number of
Shares |  | Weighted-Average
Exercise Price ($) |            | Aggregate Intrinsic
Value ($000's)
|--------------------------- | ---------------- |  | ----------------------------------- | ---------- | ----------------------------------
|Balance at July 31, 2007    |                  |  |                                     | 10,293,750 |                                   
|                            |                  |  |                                     |           
|Granted                     |                  |  |                                     | 38,300     |                                   
|Exercised                   |                  |  |                                     | (465,000   | )                                 
|Forfeited /  Cancelled      |                  |  |                                     | (650,000   | )                                 
|                            |                  |  |                                     |           
|Balance at October 31, 2007 |                  |  |                                     | 9,217,050  |                                   
|                            |                  |  |                                     |           
|Granted                     |                  |  |                                     | 200,000    |                                   
|Exercised                   |                  |  |                                     | (680,200   | )                                 
|Forfeited /  Cancelled      |                  |  |                                     | (33,550    | )                                 
|                            |                  |  |                                     |           
|Balance at January 31, 2008 |                  |  |                                     | 8,703,300  |                                   
|                            |                  |  |                                     |           
|Granted                     |                  |  |                                     | 305,000    |                                   
|Exercised                   |                  |  |                                     | (1,336,070 | )                                 
|Forfeited /  Cancelled      |                  |  |                                     |           |                                   
|                            |                  |  |                                     |           
|Balance at April 30, 2008   |                  |  |                                     | 7,672,230  |                                   
|                            |                  |  |                                     |           

|               |  | Outstanding | Exercisable
|-------------- |  | ----------- | -----------
|
|$0.50 to $0.75 |  |             |            
|$0.80 to $1.20 |  |             |            
|$1.50 to $7.50 |  |             |            
|               |  |             |            
|               |  |             |            
|               |  |             |            

Cash received from options exercised
for the three month periods ended April 30, 2008 and 2007, was $1,033,619 and $177,315,
respectively. The intrinsic value of all options exercised during the three month periods
ended April 30, 2008 and 2007, was $5,219,189 and $313,600, respectively, and the
weighted-average grant date fair value of equity options granted during the three month
periods ended April 30, 2008 and 2007, was $3.22 and $1.65, respectively.

Cash received from options exercised
for the nine month periods ended April 30, 2008 and 2007, was $1,800,119 and $355,815,
respectively. The intrinsic value of all options exercised during the nine month periods
ended April 30, 2008 and 2007, was $11,841,865 and $1,267,300, respectively, and the
weighted-average grant date fair value of equity options granted during the nine month
periods ended April 30, 2008 and 2007, was $3.05 and $1.85, respectively.

As of April 30, 2008, there was
$230,872 of unrecognized non-cash compensation cost related to unvested options to be
recognized over a weighted average period of 1.4 years.

# Note 6.   Prepaid
Consulting

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

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

During the six months ended January
31, 2008, we amortized $13,011 of the prepaid asset to selling expense, at which time the
prepaid asset was fully amortized.

12

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In August 2007, Mr. Sittons
consulting agreement was terminated, and Mr. Sittons 1,300,000 options are no longer
exercisable.

In December 2007, we entered into a
separate six month consulting agreement with an independent third party for domestic
business development, the compensation being a fee of $13,683 per month and a two-year
option to purchase 50,000 shares of our common stock granted under the PURE Bioscience
Consultant and Advisors Stock Option Plan. At the time of the grant in December 2007, we
recorded the fair value of the 50,000 stock options as a prepaid asset to be amortized
over the six month term of the consulting agreement. The options, which have an exercise
price of $5.29, were valued at $140,814 using the Black-Scholes Option Pricing Model and
assuming no dividend yield, volatility of 102.22% and a risk-free interest rate of 4.25%.
The fair value of the grant is being amortized at $23,469 per month for the six month term
of the associated consulting agreement. During the three month period ended April 30, 2008
we amortized $70,407, and during the nine month period ended April 30, 2008 we amortized
$93,876, of the fair value of the stock option grant to selling expense, and we recorded
$46,938 as prepaid consulting on the consolidated balance sheets at April 30,
2008.

In addition, on the consolidated
balance sheets at April 30, 2008, we recorded an additional $5,200 of prepaid consulting
resulting from a cash prepayment to a separate consultant.

# Note 7.   Inventory

Inventories are stated at the lower
of cost or net realizable value using the average cost method. Inventories at April 30,
2008 and July 31, 2007 consisted of:

|                 | April 30, 2008 |  | July 31, 2007 |        
|---------------- | -------------- |  | ------------- | -------
|Raw Materials    |                |  | $             | 236,965
|Work in Progress |                |  |               |       
|Finished Goods   |                |  |               | 102,450
|                 |                |  |               |        
|                 |                |  | $             | 339,415
|                 |                |  |               |        

# Note 8.   Commitments and
Contingencies

During the three month period ended
October 31, 2007, we issued 12,500 shares of our common stock with a fair value of $43,750
and paid an additional $30,000 for a legal settlement. During the three month period ended
April 30, 2008, we paid $105,000 for a legal settlement resulting from a claim made during
the quarter for services provided to us in a prior year.

In April 2008, we obtained a judgment
of $6.53 million from the 18th Judicial Circuit Court in the State of Illinois against an
internet message board poster. The judgment was awarded for defamation and tortious
interference.  We are currently evaluating the extent to which we will be able to
collect on the award, however we have not recorded any part of the award as an asset on
our consolidated balance sheets at April 30, 2008, as the collectability of the award is
currently unknown.

# Note 9.   Taxes

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

FIN 48 became effective for us on
August 1, 2007, however the adoption of FIN 48 did not have a material impact on our
consolidated results of operations and financial position as we had no unrecognized tax
benefits that, if recognized, would affect our effective income tax rate in future
periods. Our practice is to recognize interest and/or penalties related to income tax
matters in income tax expense, however we had no accrued interest or penalties at either
August 1, 2007 or April 30, 2008. We are subject to taxation in the United States and in
California, and our historical tax years remain subject to future examination by the U.S.
and California tax authorities.

At April 30, 2008, we had federal and
California tax net operating loss carry-forwards of approximately $38,040,400 and
$27,939,000, respectively. The difference between federal and California tax loss
carry-forwards is primarily due to limitations on California loss carry-forwards. The
federal tax loss carry-forwards will begin expiring in the fiscal year ending July 31,
2017 unless previously utilized, and will completely expire in the fiscal year ending July
31, 2027. The California tax loss carry-forwards will begin to expire in the fiscal year
ending July 31, 2013 and will completely expire in the fiscal year ending July 31, 2017.

Realization of our deferred tax
assets, which relate to operating loss carry-forwards and timing differences, is dependent
on future earnings. The timing and amount of future earnings are uncertain and therefore
we have established a 100% valuation allowance.

13

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# Note 10.   Business
Segment and Sales Concentrations

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

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

During the three month period ended
April 30, 2008, 93% of sales were made to three strategic partners that are also
developing markets for our products. 42% of sales for the period were made to U.S.
domestic customers and 58% were made to international customers. During the nine month
period ended April 30, 2008, 87% of sales were made to four strategic partners, and 64% of
sales for the period were made to U.S. domestic customers.

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

# Note 11.   Subsequent
Events

Subsequent to April 30, 2008 we
entered into an agreement whereby we have allowed a third party a limited time period to
exclusively evaluate our SDC technology for use within specified indications and for
certain products, in consideration for the payment to us of a non-refundable fee of
$250,000.

14

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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 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 under the captions Managements Discussion and Analysis of
Financial Condition and Results of Operations, and Risk Factors and in
our audited consolidated financial statements and related notes included in our Annual
Report on Form 10-KSB for the fiscal year ended July 31, 2007, 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 this Quarterly Report on Form 10-Q.

# OVERVIEW

PURE Bioscience 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 and patent-pending boric acid based
pesticide technologies. In May 2005, we sold the assets of our Water Treatment Division
and are now focused exclusively on the development and commercialization of our current
and future bioscience products.

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 TechnologyOur flagship technology is a
patented, aqueous antimicrobial called silver dihydrogen citrate (SDC). SDC is
an electrolytically generated source of stabilized ionic silver that can serve as the
basis for a broad range of products in diverse markets. Colorless, odorless, tasteless and
non-caustic, the aqueous SDC formulates well with other compounds. We produce and have
begun to market, through our distributors, pre-formulated, ready-to-use products for
private label distribution, as well as varying strengths of SDC concentrate as an additive
or raw material for inclusion in the products of other companies who are, or may become,
our partners.

We currently have Environmental
Protection Agency (EPA) registration for our 2400-parts per million (ppm)
technical grade SDC concentrate (trade name Axenohl) as well as for our Axen and Axen30
hard surface disinfectant products for commercial, industrial and consumer applications
including restaurants, homes and medical facilities. The Axen30 EPA registration includes
claims such as a 30-second kill time on standard indicator bacteria, a 24 hour residual
kill on standard indicator bacteria, a 2-minute kill time on some resistant strains of
bacteria, 10-minute kill time on fungi, 30-second kill time on HIV Type I, and 3
to10-minute kill time on certain other viruses. These claims distinguish the efficacy of
Axen30 from many of the leading commercial and consumer products currently on the market,
while maintaining lower toxicity ratings. Based on the EPA toxicity categorization of
antimicrobial products that ranges from Category I (high toxicity) down to Category IV,
Axen30, with its combination of the biocidal properties of ionic silver and citric acid,
is an EPA Category IV antimicrobial for which precautionary labeling statements are
normally not required. This compares with Category II warning statements for most leading
brands of antimicrobial products. The tests conducted to obtain the EPA registration were
performed by nationally recognized independent laboratories Nelson Laboratories of Salt
Lake City, Utah and AppTec ATS of St. Paul, Minnesota, under AOAC protocol and GLP
regulations in accordance with EPA regulations.

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

15

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During the fiscal year ended July 31,
2007, we began a program whereby we utilize our expertise to source, assemble and build
SDC blending systems for sale to our distributors. These systems allow our distributors to
blend our SDC concentrate into lower concentrations, thereby significantly reducing the
cost of shipping products from our El Cajon facility, particularly for overseas markets.
No information regarding the method of making SDC is passed to our distributors as in all
of our third party agreements we are, and intend to continue to be, the sole manufacturer
and sole source of SDC concentrate.

We plan to pursue additional EPA and
FDA regulatory approvals for other applications. For example, in September 2003, we
entered into an agreement with Therapeutics, Inc. (Therapeutics), a drug
development company based in La Jolla, California, for the development and
commercialization of certain Food and Drug Administration (FDA) regulated
silver dihydrogen citrate-based products (the Therapeutics Agreement).
Therapeutics funds and directs all development activities and FDA regulatory filings under
the Therapeutics Agreement, initially focusing on development of silver dihydrogen
citrate-based products for the treatment of bacterial, viral and fungal mediated diseases
and conditions. In May 2004, Therapeutics began development of SDC within the first two
groups of products subject to FDA regulation; womens health products and acne
products. In May 2006, we expanded the Therapeutics Agreement to include development of
SDC as an active pharmaceutical ingredient in products for treatment of dermatophytoses
such as Tinea pedis (athletes foot), onychomycosis (nail fungus), among others, as
well as development of antimicrobial skin wash products, beginning with a hand sanitizer.
In December 2006, Therapeutics submitted an Investigational New Drug (IND)
application with the FDA for an SDC-based hand sanitizer, to enable initiation of the
first clinical trial of a product containing SDC as an active pharmaceutical ingredient.
After reviewing the submission, the FDA determined that the product testing on humans may
begin as proposed. Multiple hand sanitizer formulations containing SDC have been tested
for safety and efficacy in proof of concept studies. We do not currently anticipate any
additional IND applications to the FDA under the Therapeutics Agreement, or under any
agreement with another potential partner for products containing SDC, in the current year.

Our SDC technology also shows promise
as a broad-spectrum antimicrobial for multiple other medical indications, including wound
and burn care, as well as for dental and veterinary indications.

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

TriglycylborideIn addition to our antimicrobial
technology, we own the marketing rights to a line of pesticide technologies. Like the SDC
antimicrobial technology, we believe the boric acid based pesticides may offer competitive
advantages in the market place with regard to efficacy when compared to leading brands,
while maintaining lower toxicity ratings. Branded as Innovex, the product line
launched in October 2001 with our EPA-approved, patent-pending RoachX®, and we
subsequently developed additional products in the product line, including the EPA-approved
AntX75®, EPA-exempt non-toxic TrapX rodent lure and EPA approved CleanKill, the
SDC-based hard surface disinfectant for the pest control industry.

Marketing efforts behind these
products to date, and resulting sales, have been very limited. We believe that investment
in additional formulations, greater marketing efforts and wider distribution could result
in significantly greater sales and profits than we have historically achieved with the
technology. We continue to evaluate such investments, however in recent years and months
we have entirely focused our resources on the development of SDC, which we believe has
greater market potential than the Triglycylboride technology. If we decide not to make
additional investments ourselves, we may pursue alternatives for our Triglycylboride
technology that could include discontinuing to actively market the Innovex line of
products and selling or licensing our rights to the technology.

16

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# CRITICAL ACCOUNTING
POLICIES

Accounting for
Long-Lived Assets / Intangible AssetsWe assess the impairment of
long-lived assets, consisting of property, plant, equipment and finite-lived intangible
assets, whenever events or circumstances indicate that the carrying value may not be
recoverable. Examples of such events or circumstances include:

| |  | An
asset's ability to continue to generate income from operations and positive cash flow in
future periods;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Loss
of legal ownership or title to an asset;
| | - | ---------------------------------------------

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

| |  | The
impact of significant negative industry or economic trends.
| | - | ---------------------------------------------------------------

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

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 did not 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, 2008 VS. THREE MONTHS ENDED APRIL 30, 2007

Revenue and Gross Margin
For the three months ended April 30,
2008 (the Third Quarter), revenues of $416,500 increased by $284,100, or 215%,
compared with the three months ended April 30, 2007. The increase is primarily due to new
customers with whom we have entered into development and distribution agreements over the
last year. 93% of sales for the Third Quarter were made to three strategic partners that
are pursuing regulatory approvals and developing markets for our products. 42% of sales
for the Third Quarter were to U.S. domestic customers, and 58% were to international
customers.

Gross profit for the Third Quarter
was $322,600, compared with $43,500 in the same period of the prior fiscal year. The gross
margin percentage improved from 33% in the prior fiscal year to 77% in the current period,
due primarily to product mix. During the three months ended April 30, 2007, sales were
primarily from finished packaged products, while in the Third Quarter a higher proportion
of sales were from bulk SDC concentrate, which we sell at higher margins.

Operating Costs
Operating costs increased by
$1,934,000, from $961,000 in the three months ended April 30, 2007, to $2,895,000 in the
Third Quarter. Within these aggregate operating costs, selling expenses increased by
$202,000, to $327,000 in the Third Quarter compared with the same period in the prior
fiscal year. The increase in selling expenses is primarily due to approximately $60,000 of
additional salary expense and $99,000 of non-cash stock option expense for fully vested
grants made to officers in the Third Quarter. In addition, consulting fees and prepaid
stock option amortization expense of $111,000 in the Third Quarter were partially offset
by $103,000 of such expense in the three month period ended April 30, 2007.

General and administrative expenses
increased by $1,414,000, to $1,997,000 in the Third Quarter, compared with the three
months ended April 30, 2007. 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 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 Third Quarter. No expense was recorded for
option or stock grants made to officers or directors during the three month period ended
April 30, 2007. General and administrative costs for the Third Quarter also included
$81,000 in fees related to the April listing of our common stock on the NASDAQ Capital
Market. Additionally, payroll expense, accounting fees, legal fees, Sarbanes-Oxley
compliance costs, depreciation, and health insurance costs all increased in the Third
Quarter compared with the same period in the prior fiscal year. Research and development
costs, including in-house costs, patent amortization, outside legal costs for maintaining
approved patents, and product registration expenditures, increased for the Third Quarter
by $318,000, to $571,000, compared with the same period in the prior fiscal year. Expense
for the Third Quarter includes $148,000 of non-cash stock option expense for fully vested
grants made to officers during the period. Additionally, during the Third Quarter, we
incurred $105,000 of expense for patent related legal services provided in prior periods,
and charged approximately $60,000 to research and development expense for manufacturing
and R&D facility overheads incurred during periods in which we were designing and
implementing new manufacturing and bottling processes. 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.

17

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Our loss from operations before taxes
increased by $1,655,000, from a loss of $917,000 for the three months ended April 30, 2007
to a loss of $2,572,000 for the Third Quarter.

Other IncomeOther income increased by $65,000 in
the Third Quarter compared to the same period of the prior fiscal year. Gains on the sale
of U.S. Treasury Bills were partially offset by decreased interest income from lower
average cash balances and lower interest rates.

Income Taxes
Income tax expense for each of the
periods presented was zero as our tax liabilities were offset by current period losses or
available federal and California net operating loss carry-forwards. In June 2006, the
Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. Under FIN 48, we must recognize the tax benefit from an uncertain tax position
if it is more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position.

FIN 48 became effective for us on
August 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated
results of operations and financial position as we had no unrecognized tax benefits that,
if recognized, would affect our effective income tax rate in future periods. Our practice
is to recognize interest and/or penalties related to income tax matters in income tax
expense, however we had no accrued interest or penalties at either August 1, 2007 or April
30, 2008.

At April 30, 2008, we had federal and
California tax net operating loss carry-forwards of approximately $38,040,400 and
$27,939,000, respectively. The difference between federal and California tax loss
carry-forwards is primarily due to limitations on California loss carry-forwards.
Realization of our deferred tax assets, which relate to operating loss carry-forwards and
timing differences, is dependent on future earnings. The timing and amount of future
earnings are uncertain and therefore we establish a 100% valuation allowance.

Net Income (Loss)
Our net loss after taxes increased by
$1,590,000, from a net loss of $876,000 for the three months ended April 30, 2007 to a net
loss of $2,466,000 for the Third Quarter.

RESULTS OF OPERATIONS FOR THE
NINE-MONTHS ENDED APRIL 30, 2008 VS. NINE-MONTHS ENDED APRIL 30, 2007

Revenue and Gross Margin
For the nine months ended April 30,
2008, revenues of $664,200 increased by $335,300, or 102%, compared with the nine months
ended April 30, 2007. The increase is primarily due to new customers with whom we have
entered into development and distribution agreements during the fiscal year ending July
31, 2008. 87% of sales for the nine month period ended April 30, 2008 were made to four
strategic partners that are pursuing regulatory approvals and developing markets for our
products. 64% of sales for the nine month period ended April 30, 2008 were made to U.S.
domestic customers, and 36% were made to international customers.

Gross profit for the nine months
ended April 30, 2008 was $488,200, compared with $113,000 in the same period of the prior
fiscal year. The gross margin percentage improved from 34% in the prior fiscal year to 73%
in the current period, due primarily to product mix. During the nine month period ended
April 30, 2008, a higher proportion of revenues were from bulk SDC concentrate than in the
same period of the prior fiscal year, when finished packaged products contributed a higher
proportion of sales.

Operating CostsOperating costs increased by
$2,656,000, from $3,003,000 in the nine months ended April 30, 2007, to $5,659,000 in the
nine months ended April 30, 2008. Within these aggregate operating costs, selling expenses
increased by $98,000, to $622,000 in the current period compared with the same period in
the prior fiscal year. The increase in selling expenses is primarily due to an increase of
approximately $150,000 in payroll and related expense, and $99,000 of non-cash stock
option expense for fully vested grants made to officers during the Third Quarter.
Additionally, consulting fees and prepaid stock option amortization expense of $154,000 in
the nine month period ended April 30, 2008 was more than offset by $308,000 of such
expense in the nine month ended April 30, 2007.

18

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General and administrative expenses increased by $2,269,000, to $3,874,000 in the nine months ended
April 30, 2008, compared with the nine months ended April 30, 2007. In April 2008, we granted options to
purchase 275,000 shares of our common stock, which vested on their date of grant, to directors and
officers of the Company at an exercise price of $5.70, valued at approximately $906,000. We also granted
30,000 shares of common stock to each of three directors of the Company, the aggregate of 90,000 shares
being valued at $463,500. $1,123,000 of the expense for these option and stock grants was booked to
general and administrative expense during the nine month period ended April 30, 2008. During the nine
months ended April 30, 2008 we also issued 100,000 fully vested options to purchase our common stock to
a new director, for which we recorded $351,000 of general and administrative expense. No expense was
recorded for option or stock grants made to officers or directors during the nine month period ended
April 30, 2007. During the nine months ended April 30, 2008, we also issued 12,500 shares of our common
stock with a fair value of $44,000 and paid an additional $30,000, for a legal settlement. General and
administrative payroll expense increased by approximately $200,000 year over year due to new hires and
salary increases, accounting and legal fees increased by approximately $210,000, and costs for the nine
months ended April 30, 2008 also included $81,000 in fees related to the April listing of our common
stock on the NASDAQ Capital Market. Additionally, Sarbanes-Oxley compliance costs, depreciation, and
health insurance costs all increased in the nine month period ended April 30, 2008 compared with the
same period in the prior fiscal year. These increases were partially offset by $95,000 of stock option
expense in the nine month period ended April 30, 2007 for options issued under a consulting contract.

Research and development costs,
including in-house costs, patent amortization, outside legal costs for maintaining
approved patents, and product registration expenditures, increased in the nine month
period ended April 30, 2008 by $288,000, to $1,163,000, compared with the same period in
the prior fiscal year. During the nine month period ended April 30, 2008, approximately
$190,000 of the costs charged to R&D related to manufacturing and R&D facility
overheads incurred during periods in which we were designing and implementing new
manufacturing and bottling processes. Expense for the nine months ended April 30, 2008
also included $148,000 of non-cash stock option expense for grants made to officers during
the period. There were no such grants made to officers during the same period of the prior
fiscal year. Additionally, during the nine month period ended April 30, 2008, we incurred
$105,000 of expense for patent related legal services provided in prior periods. These
expense increases were partially offset by consulting fees paid to outside advisors during
the nine month period ended April 30, 2007, including $65,000 of non-cash expense for the
issuance of 30,000 shares of our common stock, and additional testing expenses to support
regulatory filings. 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 $2,281,000, from a loss of $2,890,000 for the nine months ended April 30,
2007 to a loss of $5,171,000 for the nine months ended April 30, 2008.

Other IncomeOther income increased by $4,000 in
the current nine month period compared to the same period of the prior fiscal year. Gains
on the sale of U.S. Treasury Bills were almost entirely offset by decreased interest
income from lower average cash balances and lower interest rates.

Income TaxesIncome tax expense for each of the
periods presented was zero as our tax liabilities were offset by current period losses or
available federal and California net operating loss carry-forwards. See Income
Taxes under Results of Operations for the Three Months Ended April 30, 2008
vs. Three Months Ended April 30, 2007 above, for a further discussion of our tax
position and our net operating loss carry-forwards.

Net Income (Loss)Our net loss after taxes increased by
$2,277,000, from a net loss of $2,752,000 for the nine months ended April 30, 2007 to a
net loss of $5,029,000 for the nine months ended April 30, 2008.

19

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# 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, 2008, we had cash, cash equivalents and short-term
investments of $7,534,000, an increase of $6,091,000 from July 31, 2007, and no long-term
debt. During the Third Quarter, cash, cash equivalents and short-term investments declined
by $27,000, from $7,561,000 at January 31, 2008.

Total current assets at April 30,
2008 were $8,176,000, an increase of $6,482,000 from July 31, 2007. The increase primarily
relates to a private placement completed in October 2007 in which we sold 1,677,596
unregistered securities units to accredited investors, at $5.03 per unit (the 2007
Private Placement). Each unit consisted of one share of our common stock and one
quarter of a five-year warrant to purchase our common stock at a price of $7.17 per share.
A total of 419,394 of such five-year warrants were issued to the investors and the fair
value of the warrants, based on their fair value relative to the common stock issued, was
$1,143,676. Additionally, Taglich Brothers, Inc. acted as placement agent in the 2007
Private Placement and received a cash fee of $675,065 and a five-year warrant to purchase
167,759 shares of our common stock at $8.60 per share. The fair value of the 167,759
placement agent warrants, based on their fair value relative to the common stock issued,
was $441,970. Other cash fees paid to third parties, for legal and other fees associated
with the 2007 Private Placement, were $22,277. The gross proceeds of the 2007 Private
Placement were $8,438,308 and the net proceeds to us, after fees and expenses, were
$7,740,967.

Total cash inflows from financing
activities for the nine months ended April 30, 2008 were $9,567,000, which included
proceeds of $1,826,000 from the exercise of options and warrants, in addition to the
$7,741,000 of net proceeds from the 2007 Private Placement. During the nine months ended
April 30, 2008, we received $625,000 from the exercise of options by officers and
directors of the Company to purchase 626,070 shares of our common stock at an average
exercise price of $1.00 per share, received $77,000 from the exercise of options by other
employees to purchase 113,750 shares of our common stock at an average exercise price of
$0.68 per share, received $1,098,000 from the exercise of options by third parties to
purchase 1,512,500 shares of our common stock at an average exercise price of $0.73 per
share, and received $25,560 from the exercise of warrants to purchase 10,000 shares of our
common stock at an average exercise price of $2.56.

Cash and cash equivalents at April
30, 2008 were $1,644,000, an increase for the nine month period from July 31, 2007 of
$908,000, while short-term investments increased over the same period by $5,183,000, to
$5,891,000. During the nine months ended April 30, 2008, cash used in investing activities
was $5,490,000. Of this amount, a net amount (cash purchases less cash sales) of
$5,176,000 was invested in short-term investments, and $314,000 was invested in patents
and in property, plant and equipment.

In April 2008, we obtained a judgment
of $6.53 million from the 18th Judicial Circuit Court in the State of Illinois against an
internet message board poster, Robert Pisano. The judgment was awarded for defamation and
tortious interference.  We are currently evaluating the extent to which we will be
able to collect on the award, however we have not recorded any part of the award as an
asset on our consolidated balance sheets at April 30, 2008, as the collectability of the
award is currently unknown.

Cash used in operating activities for
the nine months ended April 30, 2008 was $3,169,000, compared with $1,938,000 for the nine
month period of the prior fiscal year. The increase in operating cash expenditures is
primarily as a result of increased general and administrative expenses including payroll,
patent related research and development expenditures, and investments in new manufacturing
staff and inventory to support new partners and anticipated product needs. Accounts
receivable grew by $155,000 from July 31, 2007 to April 30, 2008, while the value of our
raw material and finished goods inventory grew by $97,000 over the same period, primarily
due to the purchase of raw materials for our concentrate manufacturing and our bottling
processes. Prepaid expenses grew by $88,000 from July 31, 2007 to April 30, 2008,
primarily due to the payment in December 2007 of our insurance policies for the succeeding
year. In the prior fiscal year we financed the insurance policies and paid the premiums,
and interest, each month. Prepaid consulting, which reflects the unamortized fair value of
stock options granted for services under consulting agreements, increased by $39,000 from
July 31, 2007 to April 30, 2008. We capitalize the fair value of such stock options when
they are granted, and amortize the fair value over the term of the associated consulting
agreements. In December 2007, we entered into a six month consulting agreement with an
independent third party for domestic business development, the compensation being a fee of
$13,683 per month and a two-year fully vested option to purchase 50,000 shares of our
common stock. On their granting in December 2007, we recorded the fair value of the 50,000
stock options, $141,000, as a prepaid asset to be amortized over the six month term of the
consulting agreement at approximately $23,500 per month. Through April 30, 2008, we had
amortized $94,000 of the stock option grant to selling expense and recorded the remaining
balance of $47,000 as prepaid consulting on the consolidated balance sheets at
April 30, 2008.

During the nine months ended April
30, 2008, we invested $80,000 of cash in patents; however the capitalized value of our
patents at April 30, 2008, primarily related to our silver ion technology, declined by
$52,000 from July 31, 2007, to $2,124,000 due to an excess of patent amortization over
capitalization. Total property, plant and equipment at April 30, 2008 of $1,038,000
increased by $69,000 from July 31, 2007, as our investments exceeded asset depreciation.
During the nine months ended April 30, 2008, we invested $149,000 in software and
consulting services related to the April 2008 implementation of a new Enterprise Resource
Planning (ERP) System, the software for which was provided by Microsoft Corporation.

At April 30, 2008, we had current
liabilities of $359,000, a decrease of $129,000 from July 31, 2007, primarily due to a
decline in accounts payable.

20

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During the fiscal year ended July 31,
2007, we redeveloped the manufacturing and office areas of our facility in El Cajon,
California and invested in new manufacturing equipment. While this redevelopment is
complete, we expect to continue to invest in our manufacturing processes, to improve
efficiency and to ensure that we are able to meet anticipated demand. Additionally, during
the next twelve months we anticipate making significant investments in information
technology, 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 the securities laws as well as the listing standards of the
NASDAQ Capital Market. In particular, based on the market capitalization of our common
stock at January, 31 2008, we have met the defined requirements for becoming an
accelerated filer, which will require us to attest to, and have our Independent Registered
Public Accounting Firm attest to, our internal controls under Section 404 of the
Sarbanes-Oxley Act for the fiscal year ending July 31, 2008. This will add to the cost of
us remaining compliant with our obligations as a publicly traded company. However, we
believe that our existing cash resources are sufficient to meet our anticipated needs
during the next twelve months.

# OFF BALANCE SHEET
ARRANGEMENTS

We do not have any off balance sheet
arrangements.

21

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# ITEM 3.   QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk at
April 30, 2008 is related to our investment portfolio which consists largely of debt
instruments and other securities of high quality corporate issuers and the U.S. government
and its agencies. From time to time our investments may be exposed to market risk related
to changes in interest rates. Our current investment policy is to maintain an investment
portfolio consisting only of diversified institutional money market mutual funds investing
in A-1 (S&P), Prime-1 (Moodys) or F1 (Fitch) short-term corporate debt
obligations; U.S. Treasury Securities, or 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.

# Changes in Internal
Control Over Financial Reporting

In April 2008, we implemented a new
Enterprise Resource Planning (ERP) System. The software solution we chose and
implemented, Microsoft Dynamics AX, was provided by Microsoft Corporation and we used
Advanced Systems Integration, Inc, a Microsoft Gold Certified Partner, as independent
consultants on the implementation. Dynamics AX now forms the basis of our computerized
accounting and operational control systems, replacing multiple legacy systems. The new
system was fully tested, and we have completed a full evaluation of the effectiveness of
its design and operation.

In February 2008, our Board of
Directors approved the formation of an audit committee of the Board of Directors (the
Audit Committee), consisting of three independent directors within
the meaning of definitions established by the Securities and Exchange Commission. At least
one of the members of the Audit Committee is an audit committee financial
expert, who understands generally accepted accounting principles and financial
statements; is able to assess the general application of such principles in connection
with accounting for estimates, accruals and reserves; has experience preparing, auditing,
analyzing or evaluating financial statements comparable to the breadth and complexity of
our financial statements; understands internal controls over financial reporting, and
understands audit committee functions. All members of our Audit Committee are able to read
and understand financial statements, including our balance sheets, income statements, cash
flows statements, and statements of shareholders equity.

In addition to approving the
formation of the Audit Committee, our Board of Directors adopted a charter for the Audit
Committee which defines the committees role in overseeing the Companys
accounting and financial reporting processes, and the audits of the Companys
financial statements. Prior to establishing the Audit Committee, the functions of the
Audit Committee were performed by the entire Board of Directors.

# Evaluation of Disclosure
Controls and Procedures

In addition to the evaluation of our
new ERP system, 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, 2008. There
have been no other changes in our internal controls, or in other factors that could
materially affect the internal controls, subsequent to the date we completed our
evaluation.

22

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# 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 affect on our business, financial
condition or operating results.

In April 2008, we obtained a judgment
of $6.53 million from the 18th Judicial Circuit Court in the State of Illinois against an
internet message board poster, Robert Pisano. The judgment was awarded for defamation and
tortious interference.  We are currently evaluating the extent to which we will be
able to collect on the award.

# ITEM 1A.   RISK FACTORS

You should consider carefully the
following information regarding the risks of investing in our common stock, together with
the other information contained in this Quarterly Report on Form 10-Q, in our Annual
Report on Form 10-KSB for the year ended July 31, 2007, and in our other filings with the
Securities and Exchange Commission, before you decide to buy or maintain an investment in
our common stock. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we currently
consider immaterial may also impair our business operations. If any of the events
described below were to occur, our financial condition, results of operations and future
growth prospects could be materially and adversely affected and the market price of our
common stock could decline. As a result you could lose some or all of any investment you
may have made or may make in our common stock.

We may not generate sufficient
positive cash flows from our operations to meet our anticipated capital needs

We do not yet have significant cash
inflows from product sales to offset our ongoing planned investments in corporate
infrastructure, research and development projects, regulatory submissions, business
development activities, and sales and marketing, among other investments. Some of these
investments cannot be postponed and we may be contractually or legally obligated to make
them. In future periods we may need to seek additional capital through the issuance of
debt, equity, convertible securities or through other means, any one of which could reduce
the value to us, perhaps substantially, of our technology and its commercial potential.
The issuance of debt, equity or convertible securities, or the conversion of existing
convertible securities, 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 take
advantage of future opportunities, or fail to respond to competitive pressures or
unanticipated customer requirements, and further may require us to delay, scale back or
eliminate some or all of our research and product development programs, license to third
parties the right to commercialize products or technologies that we would otherwise
commercialize ourselves, or to reduce or cease operations.

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

We had a loss of $5,029,000 after
taxes for the nine month period ended April 30, 2008, a loss of $4,655,000 after taxes for
the fiscal year ended July 31, 2007, and a loss of $3,683,000 after taxes for the fiscal
year ended July 31, 2006. 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. We continue to use our capital resources to invest in the development of
our technology, in our manufacturing operations and in our corporate infrastructure, among
other investments, however our future revenues may not provide an adequate return, if any,
on such investments. We may never achieve or sustain cash inflows that exceed our cash
outflows. Slower than anticipated revenue growth would or could force us to scale back
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.

If our efforts to increase
awareness and expand sales of our technology are not successful, or we fail to obtain
necessary governmental approval, we may not be able to generate sufficient revenue to
attain profitability

We are marketing our new
antimicrobial silver ion technology, and to a lesser extent market our environmentally
safe pesticides, to industrial and consumer markets. These products have not yet been
accepted into the marketplace, and may never be accepted. In addition, even if our
products achieve market acceptance, we may not be able to maintain that market acceptance
over time if new products or technologies are introduced that are more favorably received
than our products, are more cost-effective or otherwise render our products 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 United States and in other countries is a significant factor
in the development, manufacturing and marketing of many of our products and in our ongoing
research and development activities. Complying with applicable government regulations and
obtaining necessary clearances or approvals can be time consuming and expensive, and there
can be no assurance that regulatory review will not involve delays or other actions
adversely affecting the marketing and sale of our products. We also cannot predict the
extent or impact of future legislation or regulation. Some of our new bioscience
applications for the healthcare markets and food preparation markets will require approval
by government agencies prior to marketing or sale in the United States. We have not yet
applied for Food and Drug Administration or Department of Agriculture approval to market
any such products. If any future product applications are not approved by the appropriate
regulatory authority, we will not be able to market or sell such products, which would
limit the revenues which may be realized. Even after approval, if any, we will remain
subject to changing governmental policies regulating antimicrobial products.

23

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We, or our partners, have also begun
to take our technologies to the international marketplace, and we intend to expand the
international presence of our technology. However, doing business internationally carries
a great deal of risk with regard to foreign government regulation, banking and other
factors.

Our silver ion, pesticide and other
products will be competing in markets dominated by extremely large, well financed
domestically and internationally recognized chemical and pharmaceutical companies. 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. We or our
partners or distributors may never be successful in doing so. Many of our competitors
already have well established brands and distribution, as well as many times our financial
resources or those of our distributors or partners. 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.

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

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

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

We are a bioscience company focused
on the marketing and continued development of our electrolytically generated stabilized
ionic silver technology, including our flagship silver dihydrogen citrate antimicrobial,
and to a much lesser extent our Triglycylboride pesticide technology. While the rewards in
these fields are potentially great, the risks, the regulatory hurdles and the costs of
doing business are also high. Our silver dihydrogen citrate is a platform technology
rather than a single use applied technology. As such, products developed from the platform
fall under the jurisdiction of multiple U.S. and international regulatory agencies. We
currently have U.S. Environmental Protection Agency (EPA) registration for our
2400-parts per million (ppm) technical grade SDC concentrate (trade name Axenohl), as well
as for our Axen and Axen30 hard surface disinfectant products for commercial, industrial
and consumer applications including restaurants, homes and medical facilities. 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 United
States. However, the introduction of additional regulated antimicrobial products in the
U.S. or in markets outside the U.S. could take several months or years, or may never be
achieved.

Our future sales are heavily
dependent on a single core technology, and a decrease in sales or anticipated sales of
products based on this core technology could seriously harm our business

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

We 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 Commission could impose on Chinese producers. Any measures
could be followed by similar action from the authorities in the United States. 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.

24

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If we are unable to successfully
develop or commercialize new products, our operating results will suffer

In addition to its use on inanimate surfaces,
we believe that our technology also shows promise as a broad-spectrum antimicrobial for
use in human and veterinary healthcare products. We are pursuing certain approvals through
the U.S. Food and Drug Administration (FDA) by partnering with Therapeutics, Inc.
(Therapeutics) which has assumed responsibility for the testing and regulatory
process for selected potential FDA regulated silver dihydrogen citrate-based products. The
development of SDC-based products could lead to multiple IND, NDA and/or 510-K filings for
silver dihydrogen citrated-based healthcare products with the FDA. In December 2006,
Therapeutics submitted an Investigational New Drug (IND) application with the FDA for an
SDC-based hand sanitizer, to enable initiation of the first clinical trial of a product
containing SDC as an active pharmaceutical ingredient. After reviewing the submission the
FDA determined that the product testing on humans may begin as proposed. However, we do
not exercise any control over Therapeutics, Therapeutics resources are very limited
and progress to date on all indications has been slow. We are also subject to risks
associated with termination of our agreement with Therapeutics. Additionally, the FDA and
comparable agencies in many foreign countries impose substantial limitations on the
introduction of new products through costly and time-consuming laboratory and clinical
testing and other procedures. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain. There is no guarantee that either
Therapeutics, 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 a 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.
In addition, our ability to generate increased revenue depends in part upon the ability
and willingness of our current and potential strategic partners 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.

Because we are an early stage
company, it is difficult to evaluate our prospects

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:

| |  | we
may not increase our sales to our existing customers and expand our customer base;
| | - | -------------------------------------------------------------------------------------

| |  | we
may not be successful 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 be successful 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.

We have no product distribution
experience and will depend significantly 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 agreement 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 be materially dependent upon the
success of the efforts of these third parties.

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

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

We have filed for U.S. and foreign
patent applications and trademark registrations for our patents and trademarks. We may not
be successful in obtaining these patents and trademarks, and we may be unable to obtain
additional patent and trademark protection in the future. Furthermore, legal standards
relating to the validity, enforceability and scope of protection of intellectual property
rights are uncertain. It is possible that, despite our efforts, competitors or others will
create and use products in violation of our patents and/or adopt service names similar to
our service names or otherwise misappropriate our intellectual property. Such patent
infringement or misappropriation could have a material, adverse effect on our business.
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.

25

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Litigation may be necessary to
enforce our intellectual property rights and protect our trade secrets. If third parties
prepare and file applications in the United States 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 many countries may not protect our proprietary rights to as
great an extent as do the laws of the United States. Many countries have a
first-to-file trademark registration system. As a result, we may be prevented
from registering or using our trademarks in certain countries if third parties have
previously filed applications to register or have registered the same or similar
trademarks. Our means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.

# We may become subject to
product liability claims

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

# Litigation may harm our
business or otherwise distract our management

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

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

Our common stock is registered under
the Securities Exchange Act of 1934, as amended (the Exchange Act). It is
therefore subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 was signed into law. The Sarbanes-Oxley Act relates to us and
adds to our obligations for regulatory reporting, accounting, corporate governance,
internal controls and business practices. The SEC continues to issue new and proposed
rules implementing various provisions of the Sarbanes-Oxley Act, and meeting these rules
will substantially increase the cost to us of being a public company, including
substantial costs during the fiscal year ending July 31, 2008. This additional cost will
reduce our future profits or increase our future losses, and a greater proportion of
management time and effort will be needed to meet our regulatory obligations than before.

During the fiscal year ending July
31, 2008, we will be required to evaluate our internal controls systems in order to allow
management to report on our internal controls as required by Section 404 of the
Sarbanes-Oxley Act. Based on the market capitalization of our common stock at January, 31
2008, we have met the defined requirements for becoming an accelerated filer, which will
require us to attest to, and have our Independent Registered Public Accounting Firm attest
to, our internal controls under Section 404 of the Sarbanes-Oxley Act for the fiscal year
ending July 31, 2008.

Commencing with our 10-K for the
fiscal year ending July 31, 2008, we will be required to file our annual and quarterly
reports with the SEC on an accelerated basis. In addition, from the time we became a
public company in August 1996 and until we filed our 10-Q for the three months ended
October 31, 2007, we filed our annual and periodic reports as a small business issuer
using Forms 10-KSB and 10-QSB, however we no longer meet the requirements for filing
within the small business reporting category under the Exchange Act. The increased
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 or Sarbanes-Oxley Act. In
order to meet these incremental compliance obligations, we will need to invest in our
corporate and accounting infrastructure 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 meet the requirements of Section 404 or our
other compliance obligations in a timely manner, and we could therefore be subject to
sanctions or investigation by regulatory authorities such as the Securities and Exchange
Commission, the Public Company Accounting Oversight Board (PCAOB), or the NASDAQ Capital
Market. Any such actions could adversely affect our financial results and the market price
of our common stock, perhaps significantly.

26

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

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

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

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

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

To successfully meet our objectives,
we must continue to attract and retain highly qualified business development and
bioengineering personnel with specialized skill sets focused on our industry. Competition
for qualified business development and bioengineering personnel can be intense. Our
ability to meet our business development objectives will depend in part on our ability to
recruit, train and retain top quality people with advanced skills who understand our
industry. In addition, it takes time for our new business development personnel to become
productive, particularly with respect to obtaining major customer accounts. In many cases,
newly hired business development personnel are unable to develop their skills rapidly
enough, which results in a relatively high turnover rate and a corresponding increased
need to make continual new hires. If we are unable to hire or retain qualified business
development and bioengineering personnel, or if newly hired personnel fail to develop the
necessary skills or reach productivity slower than anticipated, it would be more difficult
for us to sell our products or to license our technology, and we may experience a
shortfall in revenue and not achieve our planned growth.

Our Board of Directors has
significant powers, which may delay or prevent a change of control of the company or
adversely affect our stock price

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, even if such events may be beneficial to the interests of shareholders. For
example, our Board of Directors, without shareholder approval, has the authority and power
to issue all authorized and unissued shares of common stock and preferred stock which have
not otherwise been reserved for issuance on such terms as the Board of Directors
determines. The Board of Directors could also issue 5,000,000 shares of preferred stock
and such preferred stock could have voting or conversion rights which could adversely
affect the voting power of the holders of our common stock. In addition, California law
contains provisions that have the effect of making it more difficult for others to gain
control of us.

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

As of June 12, 2008, Michael L.
Krall, our President and Chief Executive Officer, beneficially owned, including
exercisable options, approximately 7% of our common stock. As of the same date, our
directors and officers as a group beneficially owned, including exercisable options and
warrants, approximately 21% of our common stock. As a result, our management, and Mr.
Krall in particular, are in a position to significantly influence our direction and
policies, the election of our Board of Directors 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.
| | - | ----------------------------------------------------------------------------------------------------------------------

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The price of our common stock may
be volatile, which may limit our ability to raise capital in the future or cause
investment losses for our shareholders

Since our initial public offering in
August 1996, the price and trading volume of our common stock have been highly volatile.
The price has ranged from below $1 per share to over $8 per share, and the monthly trading
volume has varied from under 200,000 shares to over 7.8 million shares. During the twelve
months prior to June 2008, the closing price of our common stock on any given day has
ranged from $2.80 to $8.50 per share, and the monthly trading volume has varied from
approximately 1.3 million shares to approximately 7.9 million shares. In the future, the
market price of our common stock may be volatile and could fluctuate substantially due to
many factors, including:

| |  | actual
or anticipated fluctuations in our results of operations;
| | - | ----------------------------------------------------------------

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

| |  | developments
with respect to our or our competitors' intellectual property rights;
| | - | ----------------------------------------------------------------------------------

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

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

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

| |  | conditions
and trends in our industry;
| | - | --------------------------------------

| |  | changes
in our pricing policies or the pricing policies of our competitors;
| | - | ---------------------------------------------------------------------------

| |  | changes
in the estimation of the future size and growth of our markets; and
| | - | ---------------------------------------------------------------------------

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

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

Our common stock has previously
been and may again be considered in the future to be penny stock, which may
make it more difficult for investors to resell their shares to third parties

Although our common stock is not
currently characterized as a penny stock under SEC regulations, it has been so
characterized in the past and may be so characterized in the future. Were our common stock
to be characterized as penny stock, broker-dealers dealing in our common stock
would be subject to the disclosure rules for transactions involving penny stocks, which
generally require that, prior to a purchase, the broker-dealer determine if purchasing the
common stock is suitable for the applicable purchaser. The broker-dealer would also have
to obtain the written consent of the applicable purchasers to purchase the common stock
and disclose the best bid and offer prices available for the common stock and the price at
which the broker-dealer last purchased or sold the common stock. These additional burdens
imposed upon broker-dealers could discourage them from effecting transactions in our
common stock, which could make it difficult for an investor to sell their shares at any
given time.

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

We have approximately 8,542,898
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 $2.03. In addition, approximately
12,153,533 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.

# It is uncertain whether
we will ever pay dividends

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

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# 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 significantly impact your ability to sell your
shares.

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# ITEM 6.   EXHIBITS

# A.   Exhibits

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

|3.1 | (1)
-- Articles of Incorporation
|--- | --------------------------------

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

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

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

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

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

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

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

|(1) | Incorporated
by reference from Exhibit 3.1 to the Form SB-2 registration statement, SEC File
#333-00434 effective August 8,        1996
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference from Exhibit 3.1.2 to the Annual Report on Form 10KSB for the fiscal year
ended July 31, 2002,        filed with the SEC on October 29, 2003
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
by reference from Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on
February 25, 2008
|--- | ---------------------------------------------------------------------------------------------------------------------

* 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 BIOSCIENCE                                                                                                                                            
| | ------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | By: 
    
    
By: | /s/ Michael L. Krall
Michael L. Krall, President/CEO
June 12, 2008/s/ Andrew J. Buckland
Andrew J. Buckland, CFO/Principal Accounting Officer
June 12, 2008

30

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