UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [X]
                    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For the quarterly
      period ended July
      31, 2009or
  [   ]
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Transition Period from __________ to
__________
 Commission
      file number: None
  
  PureDepth,
      Inc.(Exact
      name of registrant as specified in its
charter)
  Delaware
                  (State
      or other jurisdiction of incorporation or organization)
                20-4831825
                  (I.R.S.
      Employer Identification No.)
  303 Twin
Dolphin Drive, Suite 600, Redwood City, California 94065
 (Address
      of principal executive offices) (Zip
Code)
 
 (650)
      632-4651
 (Registrant’s
telephone number, including area code)
 
 230 Twin
Dolphin Drive, Suite 230D, Redwood City, California 94065
 
 (Registrant’s
former address, if changed since last report)
  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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted electronically and posted pursuant to Rule 405 of regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [  ] 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 (Do not check if a smaller reporting
company)            
[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
August 31, 2009, 68,991,352
shares of Issuer’s common stock, $0.001 par value, were
outstanding.
 1
  INDEX
  PagePART
      I - FINANCIAL
      INFORMATIONItem
      1
                      Financial
      Statements:
                      
                      3-
      Condensed Consolidated Balance Sheets (Unaudited)-
      Condensed Consolidated Statements of Operations and Comprehensive Loss
      (Unaudited)-
      Condensed Consolidated Statements of Cash Flows
(Unaudited)-
      Notes to Unaudited Condensed Consolidated Financial
    StatementsItem
      2
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      17Item
      3
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      28Item
      4T
                      Controls
      and Procedures
                      
                      28PART
      II - OTHER
      INFORMATIONItem
      1
                      Legal
      Proceedings
                      
                      29Item
      1A
                      Risk
      Factors
                      
                      29Item
      2
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      36Item
      3.
                      Defaults
      Upon Senior Securities
                      
                      36Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      
                      36Item
      5.
                      Other
      Information
                      
                      36Item
      6.
                      Exhibits
                      
                      37Signatures
                      
                      41
 2
  PART
I – FINANCIAL INFORMATION
 Item
1 - Financial Statements
 
 PUREDEPTH,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
  July
      31,
                                  2009
                                
                                
                                January
      31,
                                  2009ASSETSCurrent AssetsCash and cash equivalents
                                
                                $
                                5,317,321
                                
                                
                                $
                                7,275,435Restricted
      cash
                                
                                
                                15,000
                                
                                
                                
                                15,000Accounts
      receivable, net
                                
                                
                                245,342
                                
                                
                                
                                93,415Inventory
                                
                                
                                156,675
                                
                                
                                
                                118,355Other current assets
                                
                                
                                124,857
                                
                                
                                
                                210,398Total current assets
                                
                                
                                5,859,195
                                
                                
                                
                                7,712,603Property and Equipment, net
                                
                                
                                289,286
                                
                                
                                
                                265,934Other AssetsIntellectual
      property, net
                                
                                
                                2,358,381
                                
                                
                                
                                2,230,313Other
      assets
                                
                                
                                5,949
                                
                                
                                
                                45,949Total
      Assets
                                
                                $
                                8,512,811
                                
                                
                                $
                                10,254,799
 
 LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent LiabilitiesAccounts
      payable
                                  
                                  $
                                  487,152
                                  
                                  
                                  $
                                  286,369Accrued expenses
                                  
                                  
                                  656,349
                                  
                                  
                                  
                                  237,980Accrued interest
                                  
                                  
                                  256,618
                                  
                                  
                                  
                                  100,618Deferred revenue – current portion
                                  
                                  
                                  939,757
                                  
                                  
                                  
                                  939,757Convertible
      debt, net of discount
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,897,849Other
      current liabilities
                                  
                                  
                                  245,282
                                  
                                  
                                  
                                  13,646Total current liabilities
                                  
                                  
                                  2,585,158
                                  
                                  
                                  
                                  5,476,219Long Term LiabilitiesDeferred
      revenue
                                  
                                  
                                  10,550,185
                                  
                                  
                                  
                                  11,020,063Convertible
      debt - See Note 13
                                  
                                  
                                  3,900,000
                                  
                                  
                                  
                                  -Other
      long term liabilities
                                  
                                  
                                  
                                  
                                  
                                  
                                  15,000Total
      Liabilities
                                  
                                  
                                  17,035,343
                                  
                                  
                                  
                                  16,511,282Commitments
      and contingenciesStockholders' DeficitPreferred
      stock, $0.001 par value, 10,000,000 authorized and no outstanding
      shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common stock, $0.001 par value, 190,000,000 sharesauthorized,
      68,991,352 and 68,991,352 issued and outstanding
                                  
                                  
                                  68,992
                                  
                                  
                                  
                                  68,991Additional
      paid in capital
                                  
                                  
                                  35,492,674
                                  
                                  
                                  
                                  35,225,671Accumulated
      other comprehensive loss
                                  
                                  
                                  (251,321
                                  )
                                  
                                  
                                  (922,600
                                  )Accumulated
      deficit
                                  
                                  
                                  (43,832,877
                                  )
                                  
                                  
                                  (40,628,545
                                  )Total
      stockholders' deficit
                                  
                                  
                                  (8,522,532
                                  )
                                  
                                  
                                  (6,256,483
                                  )Total
      Liabilities and Stockholders' Deficit
                                  
                                  $
                                  8,512,811
                                  
                                  
                                  $
                                  10,254,799
  The
accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
 3
  PUREDEPTH,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (Unaudited)
  Three
      Months Ended
                                                      
                                                      
                                                      Six
      Months EndedJuly
      31,
                                                      
                                                      
                                                      July
      31,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008RevenueLicensing
                                                      
                                                      $
                                                      276,939
                                                      
                                                      
                                                      $
                                                      189,500
                                                      
                                                      
                                                      $
                                                      575,878
                                                      
                                                      
                                                      $
                                                      377,000Services
                                                      
                                                      
                                                      24,272
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      225,430
                                                      
                                                      
                                                      
                                                      110,052Product
      sales
                                                      
                                                      
                                                      328,500
                                                      
                                                      
                                                      
                                                      51,750
                                                      
                                                      
                                                      
                                                      377,300
                                                      
                                                      
                                                      
                                                      51,750Total
      revenue
                                                      
                                                      
                                                      629,711
                                                      
                                                      
                                                      
                                                      241,250
                                                      
                                                      
                                                      
                                                      1,178,608
                                                      
                                                      
                                                      
                                                      538,802Cost
      of licensing
                                                      
                                                      
                                                      50,330
                                                      
                                                      
                                                      
                                                      81,475
                                                      
                                                      
                                                      
                                                      86,213
                                                      
                                                      
                                                      
                                                      161,287Cost
      of services
                                                      
                                                      
                                                      38,777
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      205,513
                                                      
                                                      
                                                      
                                                      87,473Cost
      of product sales
                                                      
                                                      
                                                      250,584
                                                      
                                                      
                                                      
                                                      60,416
                                                      
                                                      
                                                      
                                                      366,552
                                                      
                                                      
                                                      
                                                      60,416Total
      cost of revenue
                                                      
                                                      
                                                      339,691
                                                      
                                                      
                                                      
                                                      141,891
                                                      
                                                      
                                                      
                                                      658,278
                                                      
                                                      
                                                      
                                                      309,176Gross
      margin
                                                      
                                                      
                                                      290,020
                                                      
                                                      
                                                      
                                                      99,359
                                                      
                                                      
                                                      
                                                      520,330
                                                      
                                                      
                                                      
                                                      229,626Operating ExpensesDepreciation
                                                      
                                                      
                                                      19,815
                                                      
                                                      
                                                      
                                                      32,141
                                                      
                                                      
                                                      
                                                      40,057
                                                      
                                                      
                                                      
                                                      64,353Research and development
                                                      
                                                      
                                                      649,928
                                                      
                                                      
                                                      
                                                      586,806
                                                      
                                                      
                                                      
                                                      1,199,139
                                                      
                                                      
                                                      
                                                      1,052,842Sales and marketing
                                                      
                                                      
                                                      269,321
                                                      
                                                      
                                                      
                                                      49,691
                                                      
                                                      
                                                      
                                                      485,184
                                                      
                                                      
                                                      
                                                      203,064General and administrative
                                                      
                                                      
                                                      839,130
                                                      
                                                      
                                                      
                                                      767,002
                                                      
                                                      
                                                      
                                                      1,819,427
                                                      
                                                      
                                                      
                                                      1,722,254Total
      operating expenses
                                                      
                                                      
                                                      1,778,194
                                                      
                                                      
                                                      
                                                      1,435,640
                                                      
                                                      
                                                      
                                                      3,543,807
                                                      
                                                      
                                                      
                                                      3,042,513Loss
      from operations
                                                      
                                                      
                                                      (1,488,174
                                                      )
                                                      
                                                      
                                                      (1,336,281
                                                      )
                                                      
                                                      
                                                      (3,023,477
                                                      )
                                                      
                                                      
                                                      (2,812,887
                                                      )Other Income ( Expense )Interest income
                                                      
                                                      
                                                      42,032
                                                      
                                                      
                                                      
                                                      3,472
                                                      
                                                      
                                                      
                                                      97,808
                                                      
                                                      
                                                      
                                                      10,132Interest expense
                                                      
                                                      
                                                      (78,052
                                                      )
                                                      
                                                      
                                                      (74,985
                                                      )
                                                      
                                                      
                                                      (158,264
                                                      )
                                                      
                                                      
                                                      (134,566
                                                      )Foreign exchange gain (loss)
                                                      
                                                      
                                                      91,252
                                                      
                                                      
                                                      
                                                      (49,141
                                                      )
                                                      
                                                      
                                                      124,883
                                                      
                                                      
                                                      
                                                      (63,683
                                                      )Total
      other income (expense)
                                                      
                                                      
                                                      55,232
                                                      
                                                      
                                                      
                                                      (120,654
                                                      )
                                                      
                                                      
                                                      64,427
                                                      
                                                      
                                                      
                                                      (188,117
                                                      )Loss
      before income taxes
                                                      
                                                      
                                                      (1,432,942
                                                      )
                                                      
                                                      
                                                      (1,456,935
                                                      )
                                                      
                                                      
                                                      (2,959,050
                                                      )
                                                      
                                                      
                                                      (3,001,004
                                                      )Income
      tax provision
                                                      
                                                      
                                                      116,282
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      245,282
                                                      
                                                      
                                                      
                                                      -Net
      loss
                                                      
                                                      $
                                                      (1,549,224
                                                      )
                                                      
                                                      $
                                                      (1,456,935
                                                      )
                                                      
                                                      $
                                                      (3,204,332
                                                      )
                                                      
                                                      $
                                                      (3,001,004
                                                      )Net
      loss per share, basic and diluted
                                                      
                                                      $
                                                      (0.02
                                                      )
                                                      
                                                      $
                                                      (0.02
                                                      )
                                                      
                                                      $
                                                      (0.05
                                                      )
                                                      
                                                      $
                                                      (0.04
                                                      )Weighted
      average shares outstanding, basic and diluted
                                                      
                                                      
                                                      68,991,352
                                                      
                                                      
                                                      
                                                      68,511,799
                                                      
                                                      
                                                      
                                                      68,991,352
                                                      
                                                      
                                                      
                                                      68,498,042Comprehensive LossNet
      loss, per statement of operations
                                                      
                                                      $
                                                      (1,549,224
                                                      )
                                                      
                                                      $
                                                      (1,456,935
                                                      )
                                                      
                                                      $
                                                      (3,204,332
                                                      )
                                                      
                                                      $
                                                      (3,001,004
                                                      )Foreign
      exchange gain
                                                      
                                                      
                                                      347,309
                                                      
                                                      
                                                      
                                                      49,290
                                                      
                                                      
                                                      
                                                      671,279
                                                      
                                                      
                                                      
                                                      42,455Comprehensive
      net loss
                                                      
                                                      $
                                                      (1,201,915
                                                      )
                                                      
                                                      $
                                                      (1,407,645
                                                      )
                                                      
                                                      $
                                                      (2,533,053
                                                      )
                                                      
                                                      $
                                                      (2,958,549
                                                      )
  The
accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
 4
  PUREDEPTH,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
  For
      Six Months EndedJuly
      31, 2009
                                        
                                        
                                        July
      31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                        
                                        $
                                        (3,204,332
                                        )
                                        
                                        $
                                        (3,001,004
                                        )Adjustments
      to reconcile net loss to net cash flows used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        126,270
                                        
                                        
                                        
                                        225,638Loss
      on disposal of assets
                                        
                                        
                                        24,094
                                        
                                        
                                        
                                        1,318Stock-based
      compensation expense
                                        
                                        
                                        267,003
                                        
                                        
                                        
                                        376,907Amortization
      of debt discount
                                        
                                        
                                        2,150
                                        
                                        
                                        
                                        73,205Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (151,927
                                        )
                                        
                                        
                                        (42,486
                                        )Restricted
      cash
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,256
                                        )Inventory
                                        
                                        
                                        (38,320
                                        )
                                        
                                        
                                        (184,312
                                        )Other
      current assets
                                        
                                        
                                        125,543
                                        
                                        
                                        
                                        51,234Accounts
      payable
                                        
                                        
                                        200,783
                                        
                                        
                                        
                                        (50,718
                                        )Deferred
      revenue
                                        
                                        
                                        (469,878
                                        )
                                        
                                        
                                        (375,000
                                        )Accrued
      expenses
                                        
                                        
                                        418,369
                                        
                                        
                                        
                                        (502,036
                                        )Accrued
      interest
                                        
                                        
                                        156,000
                                        
                                        
                                        
                                        60,859Other
      liabilities
                                        
                                        
                                        216,636
                                        
                                        
                                        
                                        15,000Net
      cash used in operating activities
                                        
                                        
                                        (2,327,609
                                        )
                                        
                                        
                                        (3,352,651
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sale of fixed assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14,948Purchases
      of fixed assets
                                        
                                        
                                        (87,503
                                        )
                                        
                                        
                                        (4,660
                                        )Expenditures
      for intellectual property
                                        
                                        
                                        (214,281
                                        )
                                        
                                        
                                        (228,916
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (301,784
                                        )
                                        
                                        
                                        (218,628
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock (net)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        24,712Proceeds
      from convertible debt
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,300,000Principal
      payments on notes payable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,979
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,311,733Effect
      of exchange rate on cash
                                        
                                        
                                        671,279
                                        
                                        
                                        
                                        42,455Net
      decrease in cash and cash equivalents
                                        
                                        
                                        (1,958,114
                                        )
                                        
                                        
                                        (217,091
                                        )Cash
      and cash equivalents at beginning of period
                                        
                                        
                                        7,275,435
                                        
                                        
                                        
                                        429,726Cash
      and cash equivalents at end of period
                                        
                                        $
                                        5,317,321
                                        
                                        
                                        $
                                        212,635
  The
accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
  5
 
 PUREDEPTH,
INC. AND SUBSIDIARIES
 Notes
to the Unaudited Condensed Consolidated Financial Statements
 
 Note
1 - Summary of Significant Accounting Policies
 
 Basis
of Presentation
 
 The
accompanying unaudited condensed consolidated financial statements of PureDepth,
Inc. and subsidiaries (“the Company") are presented in accordance with the
requirements for Form 10-Q and Article 8 of Regulation
S-X.  Accordingly, they do not include all of the disclosures required
by accounting principles generally accepted in the United States of
America.   The accompanying condensed consolidated balance sheet
as of January 31, 2009, and the accompanying unaudited condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission.  The interim period financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended January 31, 2009 included in the Company's Annual
Report on Form 10-K filed with the Commission on April 15, 2009.  Those
statements contain a summary of significant accounting policies.
 
 In the
opinion of management, all adjustments (all of which were of a normal recurring
nature) considered necessary to fairly present the financial position, results
of operations, and cash flows of the Company on a consistent basis, have been
made.
 
 These
results have been determined on the basis of accounting principles generally
accepted in the United States and practices applied consistently with those used
in the preparation of the Company's Annual Consolidated Financial Statements for
the years ended January 31, 2009 and 2008.  Operating results for the
three months and six months ended July 31, 2009 are not necessarily indicative
of the results that may be expected for the year ending January 31,
2010.
 
 As a
result of the Company experiencing losses and net cash used in its operating
activities this quarter, and in each of the last two years, and its anticipating
a loss and additional cash to be used in the next twelve months, the Company has
carefully assessed its anticipated cash needs for the next twelve months. The
Company has adopted an operating plan to manage the costs of its capital
expenditures and operating activities along with its revenues in order to meet
its working capital needs. Although the Company believes that it has sufficient
working capital to conduct its operations and meet its current obligations for
the next twelve months, it makes no assurance that it will be able to do so.
Accordingly, the accompanying consolidated financial statements are presented on
the basis that the Company is a going concern.
  Recently
Issued Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R))
and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements
— an amendment of ARB No. 51 ” (SFAS 160). SFAS 141(R) will significantly
change current practices regarding business combinations. Among the more
significant changes, SFAS 141(R) expands the definition of a business and a
business combination; requires the acquirer to recognize the assets acquired,
liabilities assumed and noncontrolling interests (including goodwill), measured
at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination;
and requires in-process research and development to be capitalized at fair value
as an indefinite-lived intangible asset. SFAS 160 will change the accounting and
reporting for minority interests, reporting them as equity separate from the
parent entity’s equity, as well as requiring expanded disclosures. SFAS 141(R)
and SFAS 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company adopted this standard effective
February 1, 2009. The implementation of this standard did not have a material
impact on our consolidated financial statements.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133 (“SFAS 161”) , which requires additional
disclosures about the objectives of using derivative instruments, the method by
which the derivative instruments and related hedged items are accounted for
under FASB Statement No.133 and its related interpretations, and the effect of
derivative instruments and related hedged items on financial position, financial
performance, and cash flows. SFAS 161 also requires disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
SFAS 161 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early
adoption encouraged.  The Company adopted this standard effective
February 1, 2009. The implementation of this standard did not have a material
impact on our consolidated financial statements.
 6
  In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP 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 (“SFAS 142”). The intent of
FSP FAS 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R) and other
applicable accounting literature. FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008. The Company adopted this standard
effective February 1, 2009. The implementation of this standard did not have a
material impact on our consolidated financial statements.
  In
November 2008, the FASB issued EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets” (EITF 08-7). EITF 08-7 addresses the accounting for
assets acquired in a business combination or asset acquisition that an entity
does not intend to actively use, otherwise referred to as a ‘defensive asset.’
EITF 08-7 requires defensive intangible assets to be initially accounted
for as a separate unit of accounting and not included as part of the cost of the
acquirer’s existing intangible asset(s) because it is separately identifiable.
EITF 08-7 also requires that defensive intangible assets be assigned a
useful life in accordance with paragraph 11 of SFAS 142 and is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company adopted this standard effective February 1,
2009 and the Company’s adoption of this EITF did not have a material impact on
its consolidated financial statements.
  In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments . This FSP amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change the FSP brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FSP FAS 115-2
and FAS 124-2 is effective for interim and annual reporting periods ending after
June 15, 2009. The Company adopted this standard effective July 31, 2009 and the
Company’s adoption of this EITF did not have a material impact on its
consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly . This FSP
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair Value
Measurements , when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FSP FAS 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and is applied
prospectively. The Company adopted this standard effective July 31, 2009 and the
Company’s adoption of this EITF did not have a material impact on its
consolidated financial statements.
  In April
2009, the FASB issued FSP FAS FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim and annual reporting periods ending after June 15, 2009.
The Company adopted this standard effective July 31, 2009 and the Company’s
adoption of this EITF did not have a material impact on its consolidated
financial statements
 
 7
   On May
28, 2009, FASB issued FASB Statement No. 165, Subsequent Events (FAS 165).
FAS 165 establishes the principles and requirements for the disclosure of
subsequent events. In particular, the Statement sets forth:
  o
                the
      period after the balance sheet date during which management of a reporting
      entity will evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements
  o
                the
      circumstances under which an entity will recognize events or transactions
      occurring after the balance sheet date in its financial
      statements
  o
                the
      disclosures that an entity will make about events or transactions that
      occurred after the balance sheet
date
  The
Company adopted this standard effective July 31, 2009 and the Company’s adoption
of this EITF did not have a material impact on its consolidated financial
statements
 
 In
June 2009, the FASB issued SFAS 168, Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles, replacing SFAS 162. SFAS 168 establishes
the FASB Accounting Standards CodificationTM as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with US GAAP. SFAS 168 will be effective for financial statements
issued for interim and annual periods ending after September 15, 2009, for most
entities. On the effective date, all non-SEC accounting and reporting standards
will be superseded. The Company will adopt SFAS 168 for the quarterly period
ended October 30, 2009, as required, and adoption is not expected to have a
material impact on the Company's financial statements.
 
 Use
of Estimates
  The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the use of management’s estimates. These estimates are subjective in
nature and involve judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements.  Actual results may differ from these
estimates.
 
 In the
three month period ended July 31, 2009, the Company changed its estimate of the
useful lives of its patents from 240 months to 204 months to reflect the patent
issue date.  This change was made to better match amortization expense
with the estimated useful life of, and the related revenue stream from these
assets. This change in estimate had the effect of increasing the expense for the
three and six month periods ended July 31, 2009 by approximately
$9,000.
 
 Subsequent
Events
 
 We
evaluated subsequent events through September 14, 2009, the date this quarterly
report on form 10-Q was filed with the Securities and Exchange Commission
(SEC).
  8
  Note
2 - Description of Business
  PureDepth,
Inc., (PDI) along with its wholly owned subsidiaries, PureDepth Limited (PDL),
PureDepth Incorporated Limited (PDIL), PureDepth Japan KK (PDKK), and
predecessor parent entity, Deep Video Imaging Limited (DVIL), (collectively, the
Company) develops, markets, licenses, and supports multi-layer display (MLD)
technology. The Company also sells prototype MLD-enabled display devices and
related components that it manufactures. The Company’s technology has
application in industries and markets where LCD monitors and displays are
utilized including location based entertainment, computer monitors,
telecommunications, mobile phones and other hand held devices.
 
 Restructuring
 
 On
February 8, 2009, and on July 24, 2009 we restructured our operations reducing
our research and development staff in our Auckland, New Zealand office. At July
31, 2009 we had 7 research and development staff, compared with 23 at July 31,
2008.  The company incurred a restructuring charge included in
Research and Development Operating Expenses that primarily related to employee
severance in the three and six months ended July 31, 2009 of approximately
$101,000 and $132,000, respectively.
 
 During
April 2009, our accounting function was transferred from our Redwood City,
California office, to our Auckland, New Zealand office.  On May 15,
2009, the former Chief Financial Officer left the company and a Chief Financial
Officer was retained on a part time basis from a leading financial and
management services firm. We relocated from 230 Twin Dolphin Drive, Suit 230D,
in Redwood City, California, to 303 Twin Dolphin Drive, Suite 600, also in
Redwood City, California. One time severance costs associated with these changes
were recognized in the three and six months ending July 31, 2009 of
approximately $59,000 and $127,000 respectively.  In addition, one
time relocation costs of approximately $96,000 were recognized in the three and
six months ending July 31, 2009.  These severance and relocation costs
are included in General and Administrative Operating Expenses.
  Note 3 - Inventory
 
 The
Company uses a series of subcontractors to manufacture a MLD component part that
is sold to a licensing customer.  The purchases of raw materials, work
in process and finished goods are recorded as inventory until the components are
sold to the licensing customers.  All inventories are located at
subcontractor facilities.   Inventories include materials,
subcontractor expenses and overhead and are stated at the lower of cost or
market.  Cost is determined using the first-in, first out (“FIFO”)
method.  Market is determined based on net realizable
value.  Appropriate consideration is given to obsolescence, excess
quantities, and other factors in evaluation of net realizable
value.
 
 Inventories:
                          
                          July
      31,
                            2009
                          
                          
                          January
      31,
                            2009Work-in-progress
                          
                          $
                          156,675
                          
                          
                          $
                          117,677Finished
      goods
                          
                          
                          -
                          
                          
                          
                          678Total
      inventories
                          
                          $
                          156,675
                          
                          
                          $
                          118,355
 Note
4 - Intellectual Property
 
 Intellectual
property consists of the following:
  July
      31,
                            2009
                          
                          
                          January
      31,
                            2009Patent
      registration costs
                          
                          $
                          3,034,151
                          
                          
                          $
                          2,819,828Software
      development costs
                          
                          
                          70,456
                          
                          
                          
                          70,456Acquired
      patent rights
                          
                          
                          333,400
                          
                          
                          
                          333,400Less:
      accumulated amortization
                          
                          
                          (1,079,626
                          )
                          
                          
                          (993,371
                          )Intellectual
      property, net
                          
                          $
                          2,358,381
                          
                          
                          $
                          2,230,313
 9
  Amortization
of intellectual property is included in the cost of
licensing.   For the six months ended July 31, 2009 and 2008,
amortization expense totaled approximately $86,000 and $161,000,
respectively.  For the three months ended July 31, 2009 and 2008,
amortization expense totaled approximately $50,000 and $81,000,
respectively.
  Amortization
expense for the next five years is summarized in the following
table:
  Years
      ending January 31 ,2010
                          
                          $
                          92,2232011
                          
                          
                          178,4792012
                          
                          
                          178,4792013
                          
                          
                          178,4792014
                          
                          
                          178,479Thereafter
                          
                          
                          1,552,242Total
                          
                          $
                          2,358,381
  Note
5 – Accounts Payable
 
 Accounts
payable consists of amounts payable to trade creditors.  The aging of
trade creditors remained consistent at July 31, 2009 with the previous year
end.  The bulk of the increase as of July 31, 2009 was due to
outsourcing to meet increased demand for the manufacture of a  MLD
component part and for design and prototyping services, outsourcing to expand
the scope of our patent management and outsourcing for other consulting
work.
  Note
6 - Convertible Notes
 
 Secured
Convertible Debt and Related Instruments
 
 On
February 4, 2008 and subsequently amended on July 4, 2008 and August 12, 2008,
the Company executed a Convertible Note Purchase Agreement (“Note Purchase
Agreement” or “notes”) with K One W One Ltd., a majority shareholder and
accredited investor, whereby the Company issued $3.9 million in secured
convertible promissory notes (the “Convertible Notes”). These notes bear an
interest rate of 8% per year, which accrues starting on October 4, 2008, and
were originally due to mature on February 4, 2009.
 
 This
financing was a private placement with an accredited investor and is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to a Security Agreement dated February 4, 2008, as amended on July 4,
2008 and August 12, 2008, by and between the Company and the Purchaser (the
“Security Agreement”); the Convertible Notes are secured by substantially all of
the assets of the Company, including the Company’s intellectual
property.
 
 On
February 4, 2009, Amendment 1 to the Note Purchase Agreement was signed
extending the maturity to February 10, 2010. On August 25, 2009, Amendment 2 to
the Note Purchase Agreement was signed further extending the maturity on these
notes to June 30, 2011. The principal and interest due on the Convertible Notes
are payable on the maturity date, subject to earlier conversion due to a
Qualified Financing event, as defined in the Convertible Notes or at the option
of the holder. If the Notes are not converted, the principal and accrued
interest will be due on June 30, 2011.
 
 Amendment
2 also provided for a change in the conversion terms. At the option of the
holder, principal and interest due on the Convertible Notes is payable either in
cash or in common stock. The price per share of common stock for any such
conversion shall be equal to an amount equal to the lower of (i) $0.15 or (ii)
the average of the daily volume-weighted average price of the Company’s common
stock over a period of ten trading days prior to the conversion date, as quoted
on the OTCBB.  Assuming, solely for the purposes of providing an
estimate, that the maturity date of the Notes was July 31, 2009, then the number
of shares of common stock that would have been issuable upon conversion on such
date is approximately 42,966,016.
 10
  The Notes
contain customary negative covenants for loans of this type, including
limitations on the Company’s ability to incur indebtedness, issue securities,
and dispose of assets. As of July 31, 2009, the Company is not in
default.
 
 Additionally,
the Convertible Notes were issued with embedded and potentially detachable
derivatives which included the conversion feature and warrants (contingent upon
the conclusion of a Qualified Event).
 
 The
Company applied the guidance in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”) and EITF Issue 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”, (“EITF 00-19”) in evaluating whether the
debt conversion feature for the secured convertible term note issued to the
holder is an embedded derivative that should be separated from the debt host and
accounted for as a derivative at fair value.  The Company determined
that the Convertible Notes did not meet the definition of conventional
convertible debt in paragraph 4 of EITF 00-19 and EITF 05-02, since the
conversion price is variable.  The Company evaluated the embedded
conversion feature pursuant to paragraphs 12-32 of EITF 00-19, and determined
that conversion feature did not require liability classification. Accordingly,
the value assigned to the embedded conversion feature of the Debentures followed
the guidance of the EITF Issue No. 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratio”, and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments” of the FASB’s Emerging Issues Task
Force.  The debt discount associated with the embedded conversion
feature is amortized to interest expense over the life of the Debenture or upon
earlier conversion of the Debenture using the effective yield
method.
  Contingent
Features
 
 The
Convertible Notes include a provision that results in an automatic conversion in
case the Company concludes a Qualified Financing prior to the Maturity Date.
Pursuant to the terms of the Notes, a “Qualified Financing” shall mean the
Company’s first financing transaction after the Initial Closing in which the
Company issues investment instruments of the Company and receives gross proceeds
of at least $3,000,000 for application to several corporate purposes from an
investor or investors (not including proceeds from the conversion of the
Note(s)); and provided that if the proposed investment instruments offered in
such financing transaction are other than capital stock or other equity
instruments (such as convertible debentures or other debt instruments), the
financing transaction shall require the written consent of K1W1 to be considered
a Qualified Financing for purposes of this Agreement. For the avoidance of
doubt, an investment instrument will not be deemed to be an equity instrument
for the purposes of the preceding sentence if such investment instrument is, by
its terms, convertible into or exchangeable for any type of debt instrument,
whether at the option of the Company or the holder.
  The debt
discount associated with the embedded conversion feature was amortized over the
first term of the notes, ending on February 4, 2009. Debt discount amortization
was recorded to interest expense in the amount of $2,150 for the three months
ended April 30, 2009, while none was recorded for the three months ended July
31, 2009. There was no debt discount associated with the extension on February
4, 2009.
 
 Warrant
 
 Pursuant
to the Note Purchase Agreement, the Company granted the note holder a warrant
which would become exercisable for shares of its common stock if and only if a
Qualified Financing takes place prior to termination of the
Warrant.  The Warrant will expire on February 4, 2011 or immediately
prior to a change in control pursuant to the terms of the Warrant.  If
the warrants are exercisable due to a Qualified Financing, the Warrants would
permit the Purchasers to purchase Common Stock at an exercise price of an amount
equal to 95% of the lower of (i) the average of the daily volume-weighted
average price of the Company’s stock over a period of 10 days prior to signing
of the Note Purchase Agreement, as quoted on the OTCBB or (ii) the average of
the daily volume-weighted average price of the Company’s common stock over a
period of ten trading days prior to the maturity date, as quoted on the
OTCBB.
 
 Because a
Qualified Financing has not yet taken place and because the warrants are only
exercisable upon a Qualified Financing, the warrant’s exercise price and number
of shares are not yet determinable. As such, the warrants have not been
measured.  If and when a Qualified Financing does occur, the warrants
will be measured and recognized at that time.
 
 Note
7 - Deferred Revenue
 
 Deferred
revenue represents payments from customers of non-refundable licensing fees that
are ultimately expected to be recognized as revenue, but for which not all
revenue recognition criteria have been met.  As the revenue
recognition criteria is met, deferred revenue is amortized in accordance with
the terms of the license agreement on the greater of the straight line basis
over the life of the agreement or the units of production method.
 
 11
  Note
8 - Stockholders’ Deficit
 
 Stock
warrants
 
 The
following table summarizes common stock warrant activity for:
  Six
      months ended
                                          July
      31, 2009Warrants
                                        
                                        
                                        Weighted
      Average
                                          Exercise
      PriceOutstanding
      at beginning of period
                                        
                                        
                                        16,063,876
                                        
                                        
                                        $
                                        1.15Issued
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Expired
                                        
                                        
                                        (16,063,876
                                        )
                                        
                                        $
                                        1.15Outstanding
      and exercisable at the end of the period
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
  The
Company values warrants issued as compensation at the fair value determined on
the date of grant using the Black-Scholes valuation model and the same
assumptions as used for employee stock-based compensation except for expected
terms which are determined by the respective warrant agreement.  See
Stock option plan note for related discussion and assumptions.
 
 Stock
option plan
 
 At July
31, 2009, the Company had reserved a total of 22,241,260 shares of common stock
for issuance under its 2006 Stock Incentive Plan (the Plan). The Plan is an
amendment of the Second Amended and Restated Executive Share Option Plan
No. 3 (Second Plan).  The Second Plan was as an amendment of the
First Amended and Restated Executive Share Option Plan No. 3 (First Plan), which
was assigned by DVIL in connection with the 2005 restructuring. The
First Plan, in turn, was a successor plan to the Executive Share
Option Plan No. 3 of DVIL. The predecessor options were denominated in New
Zealand dollars; options granted following the assignment are exercisable
in U.S. dollars.  Options granted in each successor plan were designed to
replace, without modification of terms, options of the predecessor
plan. Awards under the successor plans which did result in either a
modification or a new award of executive options were assigned a grant date fair
value which is charged to expense over the expected service period of the
recipient.
 
 Option
awards have generally been granted with an exercise price equal to the market
price of the Company’s stock at the date of grant; the option awards generally
vest over three years with 1/6 vesting at 6 months and 1/12 at quarterly
intervals thereafter.  The options expire in seven years from the date
of grant. Certain option awards included anti-dilution provisions resulting in
the original option grants becoming exercisable for an additional 280,445 of
shares of common stock (post merger adjusted additional shares were 642,277) to
existing employees as a result of the increase in shares from the private
placement offering.  On December 19, 2006, the stock option agreements
for certain executive officers and directors were amended  pursuant to
which the optionees are required to exercise shares, if at all, in
pre-determined annual allotments and to sell any such exercised shares on a
pre-determined scheduled.  Any portion of the options that are not
exercised pursuant to the exercise schedule set forth in the amendment will
expire. These modifications made the awards less favorable resulting in no
additional stock-based compensation expense.
  The fair
value of each option award was estimated on the date of grant using a
Black-Scholes option valuation model that uses the assumptions noted in the
following table. Expected volatilities were based on historical volatility of
similar companies considering characteristics such as industry, stage of life
cycle, size, financial leverage, and other factors. Expected forfeiture rates
were determined by considering the Company’s historical data to estimate option
exercise and employee termination.  The expected dividend yield is
based on our history of having never paid dividends and our expectation that we
will not pay dividends in the near future.  The expected term of our
employee option grants in the three months ended July, 31, 2009 is the
simplified approach as defined by SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB
107). This approach resulted in expected term of 5.0 years for stock
options.  The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury rate in effect at the time of
grant.
  12
  Three
      Months Ended
                                
                                
                                Six
      Months EndedJuly
      31
                                
                                
                                July
      31Significant
      Assumptions
                                
                                2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Expected
      volatility
                                
                                
                                70%
                                
                                
                                
                                70%
                                
                                
                                
                                70%
                                
                                
                                
                                70%Expected
      forfeiture rate
                                
                                
                                30%
                                
                                
                                
                                30%
                                
                                
                                
                                30%
                                
                                
                                
                                30%Expected
      dividend yield
                                
                                
                                0%
                                
                                
                                
                                0%
                                
                                
                                
                                0%
                                
                                
                                
                                0%Expected
      term (in years)
                                
                                
                                5.0
                                
                                
                                
                                5.0
                                
                                
                                
                                5.0
                                
                                
                                4.5
      to 5.0Risk-free
      rate
                                
                                
                                2.43%
                                
                                
                                3.18%
      to 3.19%
                                
                                
                                1.65%
      to 2.43%
                                
                                
                                2.66%
      to 3.19%
  The
following table summarizes common stock option activity under the plan
for:
  Six
      Months Ended July 31, 2009Option
      Shares
                                          
                                          Shares
                                          
                                          
                                          Weighted
      Ave.
                                            Exercise
      PriceOutstanding
      at beginning of year
                                          
                                          
                                          13,670,681
                                          
                                          
                                          $
                                          0.49Granted
                                          
                                          
                                          9,867,280
                                          
                                          
                                          $
                                          0.14Exercised
                                          
                                          
                                          -Forfeited
      and cancelled
                                          
                                          
                                          (8,764,195
                                          )
                                          
                                          $
                                          0.50Outstanding
      at end of the period
                                          
                                          
                                          14,773,766
                                          
                                          
                                          $
                                          0.24Exercisable
      at end of the period
                                          
                                          
                                          5,618,258
                                          
                                          
                                          $
                                          0.14
  The
following table summarizes significant ranges of outstanding and exercisable
options as of July 31, 2009:
 
 Outstanding
                                            
                                            
                                            ExercisableExercise
      Price
                                              Range
                                            
                                            Shares
                                            
                                            
                                            Weighted
                                              Average
                                              Life*
                                            
                                            
                                            Weighted
      Average
                                              Exercise
                                              Price
                                            
                                            
                                            Aggregate
                                              Intrinsic
                                              Value
                                            
                                            
                                            Shares
                                            
                                            
                                            Weighted
                                              Average
                                              Exercise
                                              Price
                                            
                                            
                                            Aggregate
                                              Intrinsic
                                              Value$0.09
      to $0.18
                                            
                                            
                                            9,134,502
                                            
                                            
                                            
                                            6.66
                                            
                                            
                                            
                                            $0.14
                                            
                                            
                                            
                                            $50,750
                                            
                                            
                                            
                                            955,175
                                            
                                            
                                            
                                            $0.15
                                            
                                            
                                            
                                            $313$0.21
      to $0.29
                                            
                                            
                                            4,755,513
                                            
                                            
                                            
                                            3.00
                                            
                                            
                                            
                                            $0.27
                                            
                                            
                                            
                                            $0.0
                                            
                                            
                                            
                                            4,046,409
                                            
                                            
                                            
                                            $0.28
                                            
                                            
                                            
                                            $0.0$0.41
      to $1.67
                                            
                                            
                                            728,751
                                            
                                            
                                            
                                            5.31
                                            
                                            
                                            
                                            $0.96
                                            
                                            
                                            
                                            $0.0
                                            
                                            
                                            
                                            461,674
                                            
                                            
                                            
                                            $0.95
                                            
                                            
                                            
                                            $0.0$2.07
      to $3.51
                                            
                                            
                                            155,000
                                            
                                            
                                            
                                            4.42
                                            
                                            
                                            
                                            $2.43
                                            
                                            
                                            
                                            $0.0
                                            
                                            
                                            
                                            155,000
                                            
                                            
                                            
                                            $2.43
                                            
                                            
                                            
                                            $0.0Totals
                                            
                                            
                                            14,773,766
                                            
                                            
                                            
                                            5.39
                                            
                                            
                                            
                                            $0.24
                                            
                                            
                                            
                                            $50,750
                                            
                                            
                                            
                                            5,618,258
                                            
                                            
                                            
                                            $0.37
                                            
                                            
                                            
                                            $313
  *Average
contractual remaining life in years
 
 The
aggregate intrinsic value in the preceding table represents the total pretax
intrinsic value based on stock options with an exercise price less than the
Company’s closing stock price of $0.12 as of July 31, 2009, which would have
been received by the option holders had those option holders exercised their
options as of that date.  There were 31,250 in-the-money stock options
exercisable as of July 31, 2009.  At July 31, 2009, 5,618,258 options
were exercisable with a weighted-average exercise price of these options was
$0.14. Of the 22,241,260 shares of common stock reserved for issuance under its
2006 Stock Incentive Plan, 14,773,766 options were outstanding, 2,798,821
options have been exercised, 125,000 have been granted to a third party service
provider and 4,543,673 options are available for grant at July 31,
2009.
 
 The
stock-based compensation cost for options issued in the six months ended July
31, 2009 and 2008 was $267,003 and $376,907, respectively.  The
stock-based compensation cost for options issued in the three months ended July
31, 2009 and 2008 was $112,401 and $186,447, respectively.  The total
income tax benefit recognized in the income statement for stock-based
compensation arrangements was zero, due to the Company's net operating loss
carry-forwards and the associated valuation allowance which results in an
effective tax rate of zero. None of the stock-based compensation cost recognized
for option issuances has been capitalized.  Total unrecorded
stock-based compensation cost at July 31, 2009 associated with employee and
director stock options was approximately $0.8 million and is expected to be
recognized over a weighted-average period of 2.4 years.
  13
  Note
9 – Major Customer
 
 One
customer accounted for 85% and 82% of the Company’s licensing revenues in the
three and six months ended July 31, 2009.  The same customer accounted
for 99% of the Company’s licensing revenues in the three and six months ended
July 31, 2008 and the entire ending balance of deferred revenue at July 31, 2009
and January 31, 2009.
 
 Note
10 – Provision for Income Taxes
 
 In early
2009, the State of California legislature enacted significant California tax law
changes. As a result of the enacted legislation, the Company expects that, based
upon its current projected taxable income for the year, its tax obligation in
the year 2010 will be approximately $309,000 due to a change in treatment of
NOL’s and
deferred revenue. We recorded a provision of approximately $111,000 this quarter
for income taxes related to this expected payment.
 
 Note
11 – Net Loss per Share
 
 Basic net
loss per share is calculated on the basis of the weighted-average number of
common shares outstanding during the reporting periods. Diluted net loss per
share is calculated on the basis of the weighted-average number of common shares
outstanding and taking into account the dilutive effect of all potential common
stock equivalents outstanding. Potentially dilutive common stock equivalents
primarily consist of convertible debt, warrants and employee stock options.
Diluted net loss per share for the three months and six months ended July 31,
2009 and 2008 is equal to basic net loss per share because the effect of all
potential common stock outstanding during the periods, including convertible
debt, warrants and employee stock options is anti-dilutive. The components of
basic and diluted net loss per share were as follows:
 
 Three
      Months Ended
                              
                              
                              Six
      Months EndedJuly
      31,
                              
                              
                              July
      31,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Numerator:Net
      loss
                              
                              $
                              (1,549,224
                              )
                              
                              $
                              (1,456,935
                              )
                              
                              $
                              (3,204,332
                              )
                              
                              $
                              (3,001,004
                              )Denominator:Weighted
      average shares outstanding, basic and diluted
                              
                              
                              68,991,352
                              
                              
                              
                              68,511,799
                              
                              
                              
                              68,991,352
                              
                              
                              
                              68,498,042Net
      loss per share, basic and diluted
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.05
                              )
                              
                              $
                              (0.04
                              )
  The Company excluded the
following shares from the denominator of the diluted net loss per share
calculation as the effect of including them would have been
anti-dilutive:
  Three
      Months Ended
                                                                                                
                                                                                                
                                                                                                
                                                                                                Six
      Months EndedJuly
      31,
                                                                                                
                                                                                                
                                                                                                
                                                                                                July
      31,2009
                                                                                                
                                                                                                
                                                                                                
                                                                                                2008
                                                                                                
                                                                                                
                                                                                                
                                                                                                2009
                                                                                                
                                                                                                
                                                                                                
                                                                                                2008Convertible
      notes
                                                                                                
                                                                                                
                                                                                                42,966,016
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,890,127
                                                                                                
                                                                                                
                                                                                                
                                                                                                42,966,016
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,890,127Warrants
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                17,290,468
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                17,290,468Employee
      stock options
                                                                                                
                                                                                                
                                                                                                14,773,766
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,072,739
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,773,766
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,072,739
 14
  Note
12 - Related Party Transactions
  On
February 20, 2009, the Board of Directors approved the cancellation of certain
options previously granted to the executive officers and certain of the
Directors of the Company and, effective February 23, 2009, granted new options
to those executive officers and directors.  The Board took this action
in light of the recent trading prices for the Company’s common stock and in
order to provide adequate performance and retention incentives.  The
executive officers and directors included in this option exchange, together with
the number and exercise prices of shares subject to previously outstanding
options which were cancelled and the respective new option grants which were
issued are as follows:
  Name
                              Title
                              Number
      of Shares Subject
                                to
      Outstanding Options
                                Cancelled
      (1)
                              Exercise
      Price ofShares
                                Subject
      to Options
                                Cancelled
                              Number
      of New Options
                                GrantedAndy
      L. Wood
                              Chief
      Executive Officer and Director
                              3,400,000
                              $0.29
                              3,400,000Jonathan
      J. McCaman
                              Chief
      Financial Officer and Secretary
                              250,000
                              $2.20
                              250,000John
      Blair
                              Director
                              375,000
                              $0.27
                              375,000Kristin
      Bowman
                              Director
                              375,000
                              $0.28
                              375,000Mark
      Kalow
                              Director
                              375,000
                              $0.27
      to $3.51
                              375,000
  (1)
Optionees were required to cancel vested shares subject to outstanding options,
to the extent available.  Any shares subject to an option which were
not cancelled remain outstanding on the initial terms of such
option.
  In
addition, Mr. McCaman was granted on February 23, 2009 an additional option to
purchase 400,000 shares of our common stock.
  All of
the new options granted will vest monthly over three years from the grant date
and have an exercise price of $0.15, which was the closing price of the
Company’s common stock on the grant date as reported by the OTC Bulletin
Board.  The new options are subject to the terms and conditions of the
2006 Stock Incentive Plan and related form of stock option
agreement.
  With
respect to the options granted to Mr. Wood and Mr. McCaman, 100% of the shares
subject to such options will vest in the event the individual’s service is
terminated without cause (which may include a voluntary resignation by Mr. Wood
or Mr. McCaman in certain circumstances following a material adverse change) on
or within twelve months following the effective date of a change in control,
subject to certain release conditions.  Each of Mr. Wood and Mr.
McCaman’s employment agreements were amended on February 20, 2009 to provide
that the new and any future options granted to Mr. Wood and Mr. McCaman will
have acceleration provisions consistent with the foregoing.  For
purposes of the foregoing, the terms “cause,” “material adverse change” and
“change in control” have the meanings set forth in the employment
agreements.
  On April
13, 2009 the Board of Directors approved the cancellation of 375,000 options
previously granted to Director, David Teece at $0.18, and effective April 13,
2009, granted the same number of new options at $0.11. The Board took this
action in light of the recent trading prices for the Company’s common stock and
in order to provide adequate performance and retention incentives.
 
 With
respect to the options granted to the Directors listed above, 100% of the shares
subject to such options will vest if the individual’s service is terminated on
or within twelve months following the effective date of change in
control.  For purposes of the foregoing, the definition of “change in
control” is the same as that used in the employment agreements with Mr. Wood and
Mr. McCaman.
 
 On August
25, 2009, the Company entered into an Amendment No. 2 to Convertible Promissory
Notes (the “Amendment”), which amends each of the  Convertible
Promissory Notes previously issued by the Company to K One W One Limited
(“K1W1”) on February 4, 2008, March 14, 2008, July 4, 2008 and August 12, 2008,
respectively (collectively, the “Notes”), pursuant to the  Convertible
Note Purchase Agreement dated as of February 4, 2008 and Security Agreement
dated as of February 4, 2008, in each case as amended by Amendment No. 1 to
Convertible Note Purchase Agreement and Security Agreement dated July 4, 2008
and Amendment No. 2 to Convertible Note Purchase Agreement and Security
Agreement dated August 12, 2008 and Amendment No. 1 to Convertible Promissory
Notes dated February 3, 2009.  The Amendment restates and extends the
maturity date of each of the Notes to June 30, 2011. The Amendment also allows
K1W1 the option to convert the Note and accrued interest prior to maturity at
the lower of the 10-day weighted average share price prior to the conversion
date or $0.15. All other terms and conditions of the Notes and the Convertible
Note Purchase Agreement and Security Agreement, as amended, remain the
same.
  15
  Note
13 - Subsequent Event
 
 On August
25, 2009, the Company entered into an Amendment No. 2 to Convertible Promissory
Notes (the “Amendment”), which further amends each of the  Convertible
Promissory Notes previously issued by the Company to K One W One Limited
(“K1W1”) on February 4, 2008, March 14, 2008, July 4, 2008 and August 12, 2008,
respectively (collectively, the “Notes”), pursuant to the  Convertible
Note Purchase Agreement dated as of February 4, 2008 and Security Agreement
dated as of February 4, 2008, in each case as amended by Amendment No. 2 to
Convertible Note Purchase Agreement and Security Agreement dated July 4, 2008
and Amendment No. 2 to Convertible Note Purchase Agreement and Security
Agreement dated August 12, 2008 and Amendment No. 1 to Convertible Promissory
Notes dated February 3, 2009.  The Amendment restates and extends the
maturity date of each of the Notes to June 30, 2011. The Amendment also allows
K1W1 the option to convert the Note and accrued interest prior to maturity at
the lower of the 10-day weighted average share price prior to the conversion
date or $0.15. All other terms and conditions of the Notes and the Convertible
Note Purchase Agreement and Security Agreement, as amended, remain the
same.  As a result of this amendment and as of the date of this
report, the Notes have been classified as Convertible Debt under Long Term
Liabilities.
  16
  Item
2 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations
  Special
Note Regarding Forward-Looking Information
  This
Quarterly Report of PureDepth, Inc. on Form 10-Q contains certain
“forward-looking statements” All statements in this Quarterly Report other than
statements of historical fact are “forward-looking statements” for purposes of
these provisions, including any statements of the plans and objectives for
future operations and any statement of assumptions underlying any of the
foregoing. Statements that include the use of terminology such as “may,” “will,”
“expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,” or the
negative thereof or other and similar expressions are forward-looking
statements. Forward-looking statements in this Quarterly Report include, but are
not limited to, statements regarding expanding the use of our technologies in
existing and new markets; demand for and future revenues from the sale of visual
display products incorporating our technologies; growth opportunities in the
visual display market; opportunities to incorporate our technologies in markets
outside the traditional consumer product markets; the rate of adoption and sales
of MLD visual displays; diversification of sources of licensing revenue; our
expected profit margin from our MLD product sales; the future impact of our
critical accounting policies, including those regarding revenue recognition,
allowance for doubtful accounts, accounting for income taxes, and stock-based
compensations; statements regarding the sufficiency of our cash reserves; and
our expected rate of return on investments. Actual results may differ materially
from those discussed in these forward looking statements due to a number of
factors, including: the rate of growth of the markets for MLD visual displays
that include our technologies; the extent to which our expectations regarding
new licensing markets are realized; whether our competitors are able to develop
and sell alternative 3-D or MLD visual display technologies to our partners; the
accuracy of our identification of critical accounting policies and the accuracy
of the assumptions we make in implementing such policies; the accuracy of our
estimates regarding our taxable income and cash needs for the next twelve
months; the accuracy of our calculations of royalties due to our licensors; and
fluctuations in interest rate and foreign currencies.  These
forward-looking statements involve risks and uncertainties, and it is important
to note that our actual results could differ materially from those projected or
assumed in such forward-looking statements. Among the factors that could cause
actual results to differ materially are the factors detailed under the heading
“Risk Factors” as well as elsewhere in this Quarterly Report on Form 10-Q. All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to us as of the date
hereof, and we assume no obligation to update any forward-looking statement or
risk factor. You should consider the factors affecting results and risk factors
listed from time to time in our filings with the Securities and Exchange
Commission (SEC), including our Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to such
reports.  Such filings are available on our website, free of charge,
at www.puredepth.com ,
but the information on our website does not constitute part of this Quarterly
Report.
  Company
and Fiscal Year
  As used
herein, unless the context otherwise requires, PureDepth, Inc., together with
its New Zealand subsidiaries PureDepth Limited and PureDepth Incorporated
Limited, and Japanese subsidiary, PureDepth Japan KK, are referred to in this
Quarterly Report on Form 10-Q as the “Company,” “we,” “us” and “our.” References
herein to year ending 2010, and years ended 2009 and 2008 mean the fiscal year
ending January 31, 2010, and the fiscal years ended January 31, 2009 and January
31, 2008, respectively.
 17
  Management’s
Discussion and Analysis
 
 The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included under Item 1 of
this Part I entitled “Financial Statements” and the above section entitled
“Special Note Regarding Forward-Looking Statements”.
 
 PureDepth,
Inc. is a technology and licensing company focusing on the visual display
experience by delivering award-winning Multi-Layer Display (MLD)
technology.  We derive revenues primarily from the licensing of our
technology to our product partners and LCD manufacturing partners and, to a
lesser extent, from sales of prototype MLD-enabled display devices and MLD
components that we manufacture. Licensees are and will be responsible for the
manufacture and sale of display-based products incorporating our technology and
related software.  In connection with our licensing arrangements, we
may also derive revenues from the sale of software tools and drivers for
market-specific applications and from various support services, including
engineering consulting services, technical services for implementation and
optimization of our technology and software support and training.
 
 We
continue to execute on our strategy of expanding our presence in the US Casino
market by working with Game Development companies to place potential games
before IGT. In this regard, agreements have been announced with ADI and No 8.
Additional opportunities are being explored. In addition, we continue our
primary focus of expanding our Japan market presence in both the Pachinko and
Pachislot markets, as well as the Amusement and Public Information Display
markets. We believe steady progress is being made to identify the potential
partners to penetrate these markets. We continue to support our existing
licensees and are pleased that IGT has now taken MLD product distribution into
over 500 properties worldwide and that Sanyo, along with it’s customer, plan
to launch a new Pachinko MLD game onto the market. In addition, we are pleased
to announce that we are now introducing our  MOBILE MLD prototype to
selected customers. This shows, in our view, excellent visual impact with only
1mm (millimeter) between the two displays with market-compatible battery
performance.
 
 In the
Japanese market, we are responding to customer input by providing Evaluation
Kits consisting of Hardware, our Software Development Platform, training and
support, to allow for testing of our technology in real-world environments with
fixed time periods associated. In addition we are formulating partnerships with
hardware suppliers to enable both the provision of the hardware component of the
Evaluation Kits as well as full product channel supply.
 
 In
addition, we have continued to progress the strategy that is focused on those
companies that have demonstrated an interest in MLD by filing for their own
patents or launching products in this market space. Several discussions are
underway with regard to these target companies.
 
 Our
primary operating costs relate to compensation for employees, including stock
options and other incentives; ongoing research and development of our
technology; legal services including patent applications and defense of
currently-held patents; and rental of premises in Redwood City, CA, Auckland,
New Zealand and Tokyo, Japan. Other than our research and development expenses,
no significant capital equipment purchases are expected during the year ending
2010.
 
 Our
critical research and development activities include: further enhancing our
existing MLD technology, developing productized software and content development
pipelines, environments, and tools; developing, manufacturing and testing
prototype MLD-enabled electronic display devices for our existing licensee
partners and potential licensee partners; designing and customizing features to
the specification of potential licensee partners;  patent defense; and
strengthening and leveraging the  application for our existing and new
technology developments. Our goal is to enhance our existing technology based
upon research and development in optics, LCD technology, backlighting, and
component technologies and software. We currently have 72 granted and allowed
patents in 20 countries and 136 granted, allowed, and applied for
patents.
  We
maintain three facilities, a U.S. office in Redwood City, California, our
research and development center in Auckland, New Zealand and our office in
Tokyo, Japan.  Our facility lease in New Zealand expires on October
31, 2011, and has a provision for a second term which, if exercised, will
commence on November 1, 2011 and expire October 31, 2014. In June 2009, we
exercised our option to provide a six month notice to exit our lease on one of
the units in Auckland by December 23, 2009. In July 2009, we moved our U.S.
office to a new location in Redwood City, California, which we rent
month-to-month.   Our sales office lease in Japan expires on
April 19, 2010.
  18
  During
the three months ended July 31, 2009, we reduced our overall headcount in our
New Zealand office in order to better align our cash resources with our
strategic plans. This restructuring impacted our research and development group
and was made possible by the achievement of key milestones on the delivery of
substantially improved content capability and related architecture and
supporting software tools.   In aggregate, we have reduced the
number of worldwide employees from a 27 full time employees at January 31, 2009
to 11 at July 31, 2009. One of the employees is located in the U.S., one is
located in Tokyo, Japan and the remaining 9 are located in Auckland, New
Zealand. We expect that these reductions, along with our planned process
improvements will produce a significant cost savings for us.  We
believe the current level of employees is adequate to run our operations and
support our existing customer agreements. We will continue to monitor our
staffing levels in the business and if necessary, will make changes in relation
to our business strategy and customer activity.
  Our
operations have resulted in operating losses to date and are expected to
continue to have operating losses in the year ending 2010 We believe that, as a
result of the cost reduction actions taken, future losses will be reduced versus
historical performance assuming that there are no unforeseen circumstances
arising.
  On
September 10, 2008 we entered into an amendment to the Patent and Technology
License and Technology Transfer Agreement with International Game Technology
(IGT) dated October 13, 2006.  Pursuant to the amendment, we have
agreed to an automatic renewal term of ten years after expiration of the initial
five year term of the original license agreement.  Upon execution of
the amendment, IGT made an advance, non-refundable payment of licensing fees to
us in the amount of $10 million.  Among other additional terms, IGT
agreed to modify the royalty schedule for the extended term and redefined the
existing limited worldwide license rights of the Company’s technology and
patents to develop, manufacture, market, sell, and distribute products for use
in wager-based gaming.
 
 In
addition to our receipt of the advance, non-refundable payment of licensing
fees, we raised $3.9 million in 2008 in secured convertible debt from our
majority shareholder.  That debt was originally due February 10, 2009
but was first extended to February 10, 2010 and subsequently to June 30, 2011.
We may also continue to consider raising additional funds from a number of
sources, including, but not limited to, additional sales of equity
or convertible debt securities, loans from banks, other financial
institutions or affiliates, or a credit facility. If additional funds are raised
by the issuance of debt or other equity instruments, we may become subject to
certain operational limitations, and such securities may have liquidation rights
senior to those of the then existing holders of common stock
 
 The funds
from the non-refundable payment of licensing fees under the IGT agreement and
the secured convertible debt will be used to fund our operations, continue our
efforts to fulfill and promote existing customer agreements with Sanyo Electric
Corporation (Sanyo), and International Game Technology (IGT) and expand our
customer base to diversify our sources of licensing revenue.  
  We believe that the advance, non-refundable payment of licensing
fees, along with the actions taken by management referred to
above,   allows us to effectively address our going concern
issues for the remainder of the year ending January 31, 2010 and into the year
ending January 31, 2011
 
 Results
of Operations
 
 For the
three months ended July 31, 2009, we reported net losses of $1.5 million which
is consistent when compared to the $1.5 million reported in the three months
ended July 31, 2008.  For the six months ended July 31, 2009, we
reported net losses of $3.2 million which is consistent when compared to the $3
million reported in the six months ended July 31, 2008.  However, the
loss this year includes one-time costs in the three and six months ended July
31, 2009 of approximately $279,000 and $488,000, respectively.  These
one-time costs include a substantial reduction of our research and development
staff and the transfer of our accounting function from California to Auckland,
New Zealand.  As a result of these actions, we expect our operating
costs to be significantly lower in the remainder of the year.  The
one-time costs also include expenses to establish our subsidiary in
Japan.  Our net losses are primarily derived from total operating
expenses and will continue to be so until our licensing revenues become
significant.  Our operations have not generated net income to date and
are not expected to do so in the year ending 2010.
   19
  Licensing
Revenue and Cost of Licensing
  Three
      Months Ended
                                  
                                  Six
      Months EndedJuly
      31,
                                  
                                  Change
                                  
                                  July
      31,
                                  
                                  Change($
      in thousands)
                                  2009
                                  
                                  2008
                                  
                                  $
                                  
                                  
                                  
                                  %
                                  
                                  2009
                                  
                                  2008
                                  
                                  $
                                  
                                  
                                  
                                  %Licensing
      revenue
                                  
                                  $
                                  277
                                  
                                  
                                  $
                                  190
                                  
                                  
                                  $
                                  87
                                  
                                  
                                  
                                  46%
                                  
                                  
                                  $
                                  576
                                  
                                  
                                  $
                                  377
                                  
                                  
                                  $
                                  199
                                  
                                  
                                  
                                  53%Cost
      of licensing
                                  
                                  
                                  50
                                  
                                  
                                  
                                  81
                                  
                                  
                                  
                                  (31)
                                  
                                  
                                  
                                  -38%
                                  
                                  
                                  
                                  86
                                  
                                  
                                  
                                  161
                                  
                                  
                                  
                                  (75)
                                  
                                  
                                  
                                  -47%Gross
      margin - $
                                  
                                  $
                                  227
                                  
                                  
                                  $
                                  109
                                  
                                  
                                  $
                                  118
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  490
                                  
                                  
                                  $
                                  216
                                  
                                  
                                  $
                                  274Gross
      margin - %
                                  
                                  
                                  82%
                                  
                                  
                                  
                                  57%
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  85%
                                  
                                  
                                  
                                  57%
 
 We are a
party to a patent and technology license and technology transfer agreement with
International Game Technology (IGT) that involves the manufacture and
distribution of products by IGT, incorporating MLD technology for sale in the
wagering-based gaming segment of the location-based entertainment display device
market. This agreement grants IGT certain rights of exclusivity for the
development and sale of MLD-based products in the wagering-based gaming market.
In aggregate, we have received advance, non-refundable payments of license fees
of $13.75 million under the terms of the agreement.   Our licensing
revenue for the three and six months ended July 31, 2009 consisted primarily of
the amortization of advance non-refundable license fee payments;
however,  royalty revenues received were also received from another
customer.  Substantially all of our licensing revenue for the three
and six months ended July 31, 2008 was from the amortization of the IGT advance
non-refundable license fee payments.  The increase in the amount of
licensing revenue for the three and six months ended July 31, 2009 when compared
with the corresponding periods in the prior year  is due to the
amortization of an additional $10.0 million in advance, non-refundable payments
of license fees from IGT and the receipt of royalty revenues from
SANYO.  The balance of the IGT advance on licensing revenues is
recorded as deferred revenue and will continue to be earned through the year
ending 2022, the remaining term of the agreement.
  Our
patent and technology licensing agreements provide royalties to us when our
customers sell or ship products incorporating our MLD
technology.   Except for advanced, non-refundable payments, we do
not recognize licensing revenues until our customers sell or ship their products
incorporating MLD technology.  Therefore, a majority of our potential
licensing revenue is dependent upon our customers’ sales and marketing
programs.  We expect to continue to recognize increasing licensing
revenue from SANYO and the continued recognition of IGT deferred revenue in the
year ending 2010; however, we have no control over the timing or success of our
customer’s sales or marketing programs.
 
 Cost of
licensing is primarily the amortization of capitalized costs related to our
patents.  In December 2001, DVIL entered into an agreement with BASS
Group LLC, a Florida limited liability company, whereby John and Robert Bass
assigned the rights and interest to three patents granted in the U.S. These
rights were subsequently assigned to PureDepth Limited.  In
consideration of the assignment, PureDepth Limited was required to pay BASS
Group approximately $175,000 per year through 2010.   On January 29,
2009, we entered into a new settlement agreement with The Bass Group, pursuant
to which the original settlement agreement between us and The Bass Group dated
as of December 2001, expired on February 27, 2009 and we made a one-time payment
to The Bass Group of approximately $43,000.  Pursuant to the
agreement, we retained ownership of the patents covered by the original
settlement until they expired on February 27, 2009 and no further amounts are or
will be due the BASS Group. The substantial decrease in cost of licensing for
the three and six months ending July 31, 2009 compared with the corresponding
periods in the prior year is the result of the termination of the payments due
for these patents acquired from the BASS Group LLC.    Cost
of licensing is not expected to grow proportionately with revenues as our costs
related to intellectual property (including legal fees, registration costs and
ongoing maintenance costs) are generally capitalized and amortized on a
straight-line basis over the expected statutory lives of the related patents, of
up to 20 years.
  20
  Services
Revenue and Cost of Services
 
 Three
      Months Ended
                                  
                                  
                                  Six
      Months EndedJuly
      31,
                                  
                                  
                                  Change
                                  
                                  
                                  July
      31,
                                  
                                  
                                  Change($
      in thousands)
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  $
                                  
                                  
                                  %
                                  
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  $
                                  
                                  
                                  
                                  %Services revenue
                                  
                                  $
                                  24
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  24
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  225
                                  
                                  
                                  $
                                  110
                                  
                                  
                                  $
                                  115
                                  
                                  
                                  
                                  105%Cost
      of services
                                  
                                  
                                  39
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  206
                                  
                                  
                                  
                                  87
                                  
                                  
                                  
                                  119
                                  
                                  
                                  
                                  137%Gross
      margin - $
                                  
                                  $
                                  (15)
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (15)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  19
                                  
                                  
                                  $
                                  23
                                  
                                  
                                  $
                                  (4)Gross
      margin - %
                                  
                                  
                                  -63%
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8%
                                  
                                  
                                  
                                  21%
 
 Our
services revenue in the three and six months ended July 31, 2009 and 2008
consisted entirely of billings for technical and professional services provided
to IGT.  We offer professional services to IGT and our other licensees
in order for them to develop, test, and promote MLD applications in their
products.  Our service revenue in the three months ended July 31, 2009
was nominal and we had no service revenue in the three months ended July 31,
2008.  The increase in revenue in the six months ended July 31, 2009
is the result of services performed on two major design and prototyping
contracts with IGT, compared to one in the same period last year, and of
providing software training. We believe that services revenues will continue as
relationships with new and existing partners evolve, but will continue to
represent a small portion of our total revenues.
 
 Cost of
services provided in the six months ended July 31, 2008 represents direct labor
and overhead costs of providing the respective services.   Cost of
services provided in the six months ended July 31, 2009 primarily represents
outsourcing costs.   We have strengthened our relationships with
outsourcing vendors, reduced the number of employees from the same period last
year, and increased our managed outsourcing.  We expect cost of
services to fluctuate with changes in services revenues and the related gross
margins to improve as the volume of services revenues increase.
 
  Product
Sales Revenue and Cost of Product Sales
 Three
      Months Ended
                                    
                                    
                                    Six
      Months EndedJuly
      31,
                                    
                                    
                                    Change
                                    
                                    
                                    July
      31,
                                    
                                    
                                    Change($ in
      thousands)
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    $
                                    
                                    
                                    
                                    %
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    $
                                    
                                    
                                    
                                    %Product
      sales revenue
                                    
                                    $
                                    329
                                    
                                    
                                    $
                                    52
                                    
                                    
                                    $
                                    277
                                    
                                    
                                    
                                    533%
                                    
                                    
                                    $
                                    377
                                    
                                    
                                    $
                                    52
                                    
                                    
                                    $
                                    325
                                    
                                    
                                    
                                    625%Cost
      of product sales
                                    
                                    
                                    251
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    191
                                    
                                    
                                    
                                    318%
                                    
                                    
                                    
                                    367
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    307
                                    
                                    
                                    
                                    512%Gross
      margin - $
                                    
                                    $
                                    78
                                    
                                    
                                    $
                                    (8)
                                    
                                    
                                    $
                                    86
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    10
                                    
                                    
                                    $
                                    (8)
                                    
                                    
                                    $
                                    18Gross
      margin - %
                                    
                                    
                                    24
                                    %
                                    
                                    
                                    (15%)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3%
                                    
                                    
                                    
                                    (15%)
  Product sales represent
sales of MLD components and prototypes of MLD-enabled display devices to
existing and potential licensing customers. We design and manufacture MLD
components and MLD prototypes specifically for sale to these customers, who use
them in their manufacturing process or to develop, test and promote MLD
applications in their products.  The increase in product sales revenue
for the three and six months ended July 31, 2009 compared with the corresponding
periods in the prior year is due to an increase in MLD component sales to an IGT
subassembly vendor who manufactures MLD products.   We expect
product sales revenue of our MLD component and prototypes of MLD-enabled display
devices will fluctuate and may increase as our customers launch and market their
MLD products and as relationships with new and existing partners evolve, but
will continue to represent a small portion of our overall revenues in the year
ending 2010.
 
 Cost of
product sales represents materials, sub-contractor services, direct labor and
overhead costs of assembling the components or prototypes at subcontractor’s
facilities.  We usually have minimal to negative margins on our
product sales as we acquire small quantities of materials at higher costs than
we would have paid had we been able to buy in bulk and because the engineering
for prototype MLD-enabled display devices has, to date, required the use of
non-standard parts and manual or unique assembly.   As the
engineering and material standards for form factors are finalized, we expect the
cost of materials and associated labor to decline. As a result of these factors,
we still expect to see our cost of product sales as a percentage of product
revenues decline in the year ending 2010.
  21
  Operating
Expenses
 Three
      Months Ended
                                        
                                        Six
      Months EndedJuly
      31,
                                        
                                        
                                        Change
                                        
                                        July
      31,
                                        
                                        
                                        Change($ in
      thousands)
                                        
                                        2009
                                        
                                        
                                        % of
      Total
                                        
                                        
                                        2008
                                        
                                        
                                        % of
      Total
                                        
                                        
                                        $
                                        
                                        
                                        
                                        %
                                        
                                        2009
                                        
                                        
                                        % of
      Total
                                        
                                        
                                        2008
                                        
                                        
                                        % of
      Total
                                        
                                        
                                        $
                                        
                                        
                                        
                                        %Depreciation
                                        
                                        $
                                        20
                                        
                                        
                                        
                                        1%
                                        
                                        
                                        $
                                        32
                                        
                                        
                                        
                                        2%
                                        
                                        
                                        $
                                        (12)
                                        
                                        
                                        
                                        (38%)
                                        
                                        $
                                        40
                                        
                                        
                                        
                                        1%
                                        
                                        
                                        $
                                        64
                                        
                                        
                                        
                                        2%
                                        
                                        
                                        $
                                        (24)
                                        
                                        
                                        
                                        (38%)Research
      and development
                                        
                                        
                                        650
                                        
                                        
                                        
                                        37%
                                        
                                        
                                        
                                        587
                                        
                                        
                                        
                                        41%
                                        
                                        
                                        
                                        63
                                        
                                        
                                        
                                        11%
                                        
                                        
                                        1,199
                                        
                                        
                                        
                                        34%
                                        
                                        
                                        
                                        1,053
                                        
                                        
                                        
                                        35%
                                        
                                        
                                        
                                        146
                                        
                                        
                                        
                                        14%Sales
      and marketing
                                        
                                        
                                        269
                                        
                                        
                                        
                                        15%
                                        
                                        
                                        
                                        50
                                        
                                        
                                        
                                        3%
                                        
                                        
                                        
                                        219
                                        
                                        
                                        
                                        438%
                                        
                                        
                                        485
                                        
                                        
                                        
                                        14%
                                        
                                        
                                        
                                        203
                                        
                                        
                                        
                                        6%
                                        
                                        
                                        
                                        282
                                        
                                        
                                        
                                        139%General
      and administrative
                                        
                                        
                                        839
                                        
                                        
                                        
                                        47%
                                        
                                        
                                        
                                        767
                                        
                                        
                                        
                                        54%
                                        
                                        
                                        
                                        72
                                        
                                        
                                        
                                        9%
                                        
                                        
                                        1,819
                                        
                                        
                                        
                                        51%
                                        
                                        
                                        
                                        1,722
                                        
                                        
                                        
                                        57%
                                        
                                        
                                        
                                        97
                                        
                                        
                                        
                                        6%Total
      operating expenses
                                        
                                        $
                                        1,778
                                        
                                        
                                        
                                        100%
                                        
                                        
                                        $
                                        1,436
                                        
                                        
                                        
                                        100%
                                        
                                        
                                        $
                                        342
                                        
                                        
                                        
                                        24%
                                        
                                        $
                                        3,543
                                        
                                        
                                        
                                        100%
                                        
                                        
                                        $
                                        3,042
                                        
                                        
                                        
                                        100%
                                        
                                        
                                        $
                                        501
                                        
                                        
                                        
                                        16%
 
 Included
in our operating expenses are stock-based compensation costs related to the
granting of options to employees and directors.  For the three months
ended July 31, 2009 and 2008, our stock-based compensation totaled $112,401 and
$186,447, respectively.  For the six months ended July 31, 2009 and
2008, our stock-based compensation totaled $267,003 and $376,907,
respectively.  The decrease of stock-based compensation is primarily
the result of the issuance of stock options at a lower exercise price. We intend
to continue to offer stock options as part of compensation packages to motivate
and retain employees.  As a result, stock-based compensation on
existing and new grants will continue to be recognized.  In the six
months ended July 31, 2009, we expensed stock-based compensation of
approximately $75,000 in research and development, $2,000 in sales &
marketing, and $190,000 in general and administrative operating expense
categories.
 
 Depreciation.
Depreciation represents the depreciation expense on our fixed
assets.  The decrease in depreciation expense for the three and six
months ended July 31, 2009 compared with the corresponding periods in the prior
year is primarily the result of fully amortizing leasehold improvements in our
Auckland, New Zealand location in the last quarter of last year.  It
is unlikely we will need to make significant purchases of fixed assets in the
foreseeable future and accordingly, the depreciation expense is not expected to
change proportionately with revenue or total operating expenses.
 
 Research and
development. Our research and development activities include;
research, patent development and management, prototype development, product
design development and development of software applications and the development
of content tools. Research and development expenses consist primarily of
personnel salary, benefits and stock-based compensation, consultant and
contractor fees, materials, and travel.
 
 On
February 8, 2009, and on July 24, 2009 we restructured our operations reducing
our research and development staff in our Auckland, New Zealand office. During
the three months ended July 31, 2009, we completed a major engineering milestone
in the release of a new version of the software that drives the MLD screens,
improving 3-D imaging and allowing for easier development of content that could
utilize the capabilities of the MLD. Because of the completion of this milestone
and after assessing the likely timeframe required to execute its market
strategies management concluded that we needed fewer resources in research and
development and would focus its efforts primarily on the Japanese market. 
At July 31, 2009 we had 7 research and development staff, compared with 23 at
July 31, 2008.  The company incurred a restructuring charge included
in Research and Development Operating Expenses that primarily related to
employee severance in the three and six months ended July 31, 2009 of
approximately $101,000 and $132,000, respectively.
 
 During
April 2009 our accounting function was transferred from our Redwood City,
California office, to our Auckland, New Zealand office.  On May 15,
2009, the former Chief Financial Officer left the company and a Chief Financial
Officer was retained on a part time basis from a leading financial and
management services firm. We relocated from 230 Twin Dolphin Drive, Suit 230D,
in Redwood City, California, to 303 Twin Dolphin Drive, Suite 600, also in
Redwood City, California. One time severance costs associated with these changes
were recognized in the three and six months ending July 31, 2009 of $59,000 and
$127,000 respectively.  In addition, one time  relocation
costs of $96,000 were recognized in the three and six months ending July 31,
2009.  These severance and relocation costs are included in General
and Administrative Operating Expenses.
  22
  During
the three and six months ended July 31, 2009, we expanded the scope of our
patent management activities beyond patent issuance, to address patent strategy,
patent infringement, and market opportunities.  We utilize the
services of specialized consultants with in depth knowledge and experience in
our industry to manage our patents.  In the same periods last year
patent management was handled in-house and the main focus was on the issuance of
new patents.
 
 The bulk
of cost increases in the three and six months ended July 31, 2009 are the result
of the expansion of the scope of our patent management, the severance and other
costs associated with the restructuring and staff reductions, as well as the
payment of scheduled bonuses.  These cost increases were partially
offset by a significant drop in foreign exchange rates during the three and six
months ended July 31, 2009, compared to the same periods last
year.  Our research and development work is conducted in New Zealand
and the costs incurred are primarily in New Zealand dollars.
 
 As a
result of the reductions taken, we expect research and development expenses to
be significantly lower in the remainder of the year.  Our focus will
be on refining the productization of our platform capability for easier adoption
by our partners.  Also, we will continue to proactively manage, expand
and protect our intellectual property assets.
  Sales and
marketing. During the latter part of fiscal year 2009,
we re-evaluated our strategy and shifted our focus to expanding our initial
presence in the Pachinko and Pachislot market in Japan, and developing technical
and commercial approaches for potential licensees in the newly identified public
information display markets in Japan.  We hired a country manager and
formed a Japanese subsidiary, PureDepth Japan K.K., in April
2009.  During the three and six months ended July 31, 2009 we incurred
one-time costs to establish our subsidiary in Japan of approximately $23,000 and
$133,000, respectively.  Our Japanese subsidiary became operational in
April 2009 and the bulk of the ongoing operating costs were recognized in the
three months ended July 31, 2009.  During the three and six months
ended July 31, 2008 we curtailed our marketing efforts in the United States and
our costs consisted primarily of severance costs and outside consultants. In the
three months ended July 31, 2008 our costs had been reduced to a nominal
level.
 
 General and
administrative.  General and administrative expenses
consist primarily of personnel salary and benefits, stock-based compensation,
travel, insurance, rent and professional fees related to our public company
filing requirements.  During the three months ended April 30, 2009,
our accounting function was transferred from our Redwood City, California
office, to our Auckland, New Zealand office.  In May 2009, the former
Chief Financial Officer left the company and a Chief Financial Officer was
retained on a part time basis from a leading financial and management services
firm. We relocated from 230 Twin Dolphin Drive, Suit 230D, in Redwood City,
California, to 303 Twin Dolphin Drive, Suite 600, also in Redwood City,
California. One time severance and relocation costs associated with these
changes totaled $127,000 and $96,000 respectively.  Cost savings from
the transfer of our accounting function to New Zealand, were achieved, but were
exceeded by one-time severance and relocation costs, and by bonus payments
pertaining to the transfer, as well as scheduled executive bonuses, some of
which had been restructured to reflect 6 months of objectives rather than the
usual 3 months. The cost increase from severance, relocation and bonuses was
reduced in part due to a drop in foreign exchange rates.  Our costs
were slightly higher in the three and six months ended July 31, 2009 compared
with the corresponding periods in the prior year, largely because of the
one-time restructuring costs.  As a result of the restructuring action
taken so far this year, we expect general and administrative expenses to be
significantly lower in 2010.
 
 As a
public company we have certain unavoidable expenses related to our public filing
requirements, legal obligations, insurance needs, and other necessary
expenditures to fulfill our fiduciary and regulatory
requirements.  These unavoidable expenses could increase due to the
reduction of inside legal and technical employees and our reliance of external
professionals.  We may also experience increased legal and capital
raising costs associated with any capital raising activities we may undertake in
the year ending 2010.  We anticipate that the overall cost savings
measures we have progressively introduced will help us maintain or offset
increases in our general and administrative expenses in the year ending 2010 as
we have re-balanced our costs in support of our strategy. A portion of our
general and administrative costs are incurred in New Zealand dollars and may be
impacted by currency fluctuations.
 
 Other
Income and Expense
 Three
      Months Ended
                                              
                                              
                                              Six
      Months EndedJuly
      31,
                                              
                                              
                                              Change
                                              
                                              
                                              July
      31,
                                              
                                              
                                              Change($ in
      thousands)
                                              
                                              2009
                                              
                                              
                                              2008
                                              
                                              
                                              $
                                              
                                              
                                              
                                              %
                                              
                                              
                                              2009
                                              
                                              
                                              2008
                                              
                                              
                                              $
                                              
                                              
                                              
                                              %Interest
      income
                                              
                                              $
                                              42
                                              
                                              
                                              $
                                              3
                                              
                                              
                                              $
                                              39
                                              
                                              
                                              
                                              1300%
                                              
                                              
                                              $
                                              98
                                              
                                              
                                              $
                                              10
                                              
                                              
                                              $
                                              88
                                              
                                              
                                              
                                              880%Interest
      expense
                                              
                                              
                                              (78)
                                              
                                              
                                              
                                              (75)
                                              
                                              
                                              
                                              (3)
                                              
                                              
                                              
                                              4%
                                              
                                              
                                              
                                              (158)
                                              
                                              
                                              
                                              (135)
                                              
                                              
                                              
                                              (23)
                                              
                                              
                                              
                                              17%Foreign
      exchange gain (loss)
                                              
                                              
                                              91
                                              
                                              
                                              
                                              (49)
                                              
                                              
                                              
                                              140
                                              
                                              
                                              
                                              (286%)
                                              
                                              
                                              
                                              125
                                              
                                              
                                              
                                              (63)
                                              
                                              
                                              
                                              188
                                              
                                              
                                              
                                              (298%)Total
      other income(expense), net
                                              
                                              $
                                              55
                                              
                                              
                                              $
                                              (121)
                                              
                                              
                                              $
                                              176
                                              
                                              
                                              
                                              (145%)
                                              
                                              
                                              $
                                              65
                                              
                                              
                                              $
                                              (188)
                                              
                                              
                                              $
                                              253
                                              
                                              
                                              
                                              (135%)
 23
  Other
income and expense consists of interest income, interest expense, foreign
exchange gain or loss and other miscellaneous income or
expense.  Interest income is earned on our cash, and cash equivalent,
balances.  Interest income was higher in the three and six months
ended July 31, 2009, compared with the corresponding periods in the prior year
as a result of the investment of advanced licensing payments received in the
later part of last year, in certificates of deposit and cash
alternatives.  We expect interest income to fluctuate in the year
ending 2010 depending on the amount and timing of any capital raised, advanced
licensing payments received or royalty payments received and the rate at which
we use such funds to pay our ongoing operating
expenses.   Interest expense increased during the six months
ended July 31, 2009, compared with the corresponding period in the prior year
due to the step up of interest rates on our convertible notes from 2.7% to 8%,
which was partly offset by a reduction due to the settlement of the Bass loan
late last year.    Our foreign exchange gains and losses result
from transactions with our New Zealand and Japanese subsidiaries, with our
overseas customers and translation of our overseas subsidiaries into U.S.
dollars.   The increase in the foreign exchange gain for the
three and six months ended July 31, 2009 compared with the corresponding periods
in the prior year, is due to the an increase in cash balances held in New
Zealand and fluctuations in the international exchange rates.
  Liquidity
and Capital Resources
 
 We have
funded our operations from inception through July 31, 2009 primarily through the
sale and exercise of common stock and warrants, the sale of convertible notes
and the use of advance, non-refundable payments of licensing fees.  In
the six months ended July 31, 2009, net cash used by operating activities was
$2.3 million and an additional $0.3 million was used for investment in fixed
assets and intellectual property.  In the six months ended July 31,
2008, net cash used by operating activities was $3.3 million and an additional
$0.2 million was used for investment in fixed assets and intellectual property.
Our operating and asset purchasing activity during the six months ended July,
2009, was primarily funded by available cash of $7.3 million at January 31,
2009.  Our operating and asset purchasing activity during the six
months ended July, 2008, was primarily funded by $3.3 million in proceeds from
convertible debt.  We expect the cash balance of $5.3 million at July
31, 2009 to be adequate to fund our operations in the year ending
2010.
 
 We have
issued options to employees and directors pursuant to our 2006 Stock Incentive
Plan. As of July 31, 2009, we had 14,773,766 options outstanding under our 2006
Stock Incentive Plan with a weighted exercise price of
$0.24.   In July 2009, the remaining 7,060,044 warrants with a
weighted average exercise price of $1.20 expired without exercise.  We
have no other warrants outstanding as of July 31, 2009.
 
 Subject
to approval of our Board of Directors, the 2006 Stock Incentive Plan allows
option holders to exercise options using a “cashless exercise,” whereby vested
shares would be used as payment for the exercise of options.  While
the exercise of stock options for cash will generally increase immediate working
capital, the approval of a cashless exercise by our Board of Directors would
impact directly on the extent of this working capital and our ability to use
existing options as a capital resource.
 
 Provision
for State and Federal Income Taxes
 
 From
inception through July 31, 2009, we have incurred net losses for federal and
state tax purposes. We have also incurred foreign net losses in respect of our
predecessor entity and two New Zealand subsidiaries.
 
 We have
not recorded a tax benefit for domestic tax losses because of the uncertainty of
realization. We adhere to SFAS No. 109 Accounting for Income Taxes
(“SFAS 109”), which requires an asset and liability approach to financial
accounting and reporting for income taxes. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Under paragraph 17e of SFAS 109, deferred tax assets are reduced by a
valuation allowance if the weight of the available positive and negative
evidence suggests that it is more likely than not some portion or all of the
deferred tax asset will not be realized.
  We have
generated net losses since our inception, and since our current projections are
based upon predictions that cannot ensure sustained profitability in future
years, we have provided a full valuation allowance against the deferred tax
assets at July 31, 2009.
  As a
result of the adoption of FIN 48, there was no impact to our consolidated
financial position at July 31, 2009, results of operations for the three and six
months ended July 31, 2009 or cash flows for the six months ended July 31,
2009.  In accordance with FIN 48, we recognize interest and penalties
related to unrecognized tax benefits as a component of income
taxes.  For the three months and six months ended July 31, 2009, no
interest or penalties related to unrecognized tax benefits had been
recorded.  There was no change to our unrecognized tax benefits for
the three months and six months ended July 31, 2009.
 
 We are
subject to taxation in the U.S. and California. Our subsidiaries are subject to
taxation in New Zealand and Japan.  All of our tax years in the U.S.
will be open to examination by the federal and California tax authorities
because the statute of limitations are open and due to our overall net operating
loss carryforward position.  Our subsidiaries are subject to
examination by foreign tax authorities for all tax years.
  24
  Obligations
 
 Our
obligations as of July 31, 2009 consisted of operating leases for facilities and
secured convertible notes.  The convertible notes were originally due
February 4, 2009. On February 4, 2009, an extension was signed to February 10,
2010 which was subsequently extended to June 30, 2011 on August 25,
2009.  The aggregate principal amount of the secured convertible notes
at July 31, 2009, totaled $3.9 million and is convertible at a discount of five
percent (5%) into investment instruments issued by us pursuant to and upon a
qualified financing.  If such qualified financing does not occur,
prior to or upon maturity on June 30, 2011, the secured convertible notes may,
at the holder’s option, convert into our common stock at the lower of the 10-day
weighted average share price prior to the conversion date or $0.15. The
secured convertible notes accrue interest at the annual rate of 8%, commencing
October 4, 2008.  In addition, pursuant to the secured convertible
note purchase agreement, the note holder has received in the form of a warrant
the right to participate in qualified financing, for a period of three years, in
an amount equal to ten percent (10%) of the aggregate principal under the
secured convertible notes, and at a discount of five percent (5%) of the
purchase price of the investment instruments issued in such qualified
financing.  The secured convertible notes are secured by our
assets.  At July 31, 2009, minimum lease payments required under the
operating leases amounted to $0.2 million and are payable through
2011.
 
 We intend
to fund our obligations from our ongoing operations, existing cash resources,
subleasing agreements, and other capital raising activities.
 
 We
anticipate that our existing licensing contracts will require limited capital
investment and will be supported by our current staff levels.
 
 Off-Balance
Sheet Arrangements
  We do not
have any off-balance sheet arrangements.
  Critical
Accounting Policies
 
 There
have been no significant changes in our critical accounting policies included in
our Annual Report on Form 10-K for the year ended 2009.
  The
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, (“U.S. GAAP”). The preparation of these financial statements in
accordance with U.S. GAAP requires us to utilize accounting policies and make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingencies as of the date of the financial
statements and the reported amounts of revenue and expenses during a fiscal
period. We have described our accounting policies in Note 1 to our condensed
consolidated financial statements included in the Form 10-K under Item 8
of  Part II entitled “Financial Statements and Supplementary
Data”.  The SEC considers an accounting policy to be critical if it is
both important to a company’s financial condition and results of operations and
it requires significant judgment and estimates on the part of management in its
application.
  We have
discussed the selection and development of the critical accounting policies with
the audit committee of our board of directors, and the audit committee has
reviewed our related disclosures in this Quarterly Report on Form 10-Q. Although
we believe that our judgments and estimates are appropriate and correct, actual
results may differ from those estimates.  See also the section
entitled “Risk Factors” for certain matters which may affect our future results
of operations.
  Revenue
Recognition.   We evaluate revenue recognition for transactions
to sell products and services and to license technology, trademarks and know-how
using the criteria set forth by the SEC in Staff Accounting Bulletin 104,
Revenue Recognition (SAB 104). For revenue transactions that involve software or
software-related products, we recognize revenue under the guidance established
by Statement of Position No. 97-2, Software Revenue Recognition (SOP
97-2).  Both SAB 104 and SOP 97-2 state that revenue is recognized
when each of the following criteria is met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller’s price to the buyer is fixed or determinable, and collectability is
reasonably assured.  If we make different judgments or utilize
different evidence in relation to the revenue recognition criteria, the amount
and timing of our revenue could be materially affected.
  Licensing.
Licensing revenue is primarily derived from royalties received from licensees of
our intellectual property rights, including patents, trademarks and know-how.
Royalties are recognized when all revenue recognition criteria have been met.
Judgments are made as to whether collectability can be reasonably assured based
on the licensee’s recent payment history and credit worthiness.
  25
  Deferred
revenue related to agreements involving both an exclusive license for a term and
a provision for royalty payments per units beyond a minimum threshold will be
recognized as follows: the initial payment amount will be either (a) recognized
equally over the term or (b) based upon customer license usage, whichever
cumulative figure is higher.
 
 If we
were to make different judgments or utilize different evidence in relation to
licensing revenue agreements, collectability and the amount of deferred revenue
related to the agreements and the terms, the amount and timing of our revenue
could be materially affected.
  Research
and Development Costs.  Research and
development costs are recognized in the period incurred in accordance with SFAS
No. 2 Accounting for Research and Development Costs. Research and development
expenses primarily include prototype development costs, contractor fees, and
administrative expenses directly related to research and development
support.  If we make different judgments in relation to the nature of
research and development costs, the amount of research and development costs and
operating expenses could be affected.
 
 Intellectual
Property.   Intangible assets (intellectual property) consist
of acquired technology and patents, and internally developed patents and
software costs.  All of the acquired technology was transferred to the
Company from its predecessor company and are recorded at the predecessor’s
original cost.  Acquired technology is amortized on a straight-line
basis over the life of the original agreement.
 
 The costs
of internally developing intellectual property that are not specifically
identifiable, have indeterminate lives, or are inherent in a continuing business
and related to an entity as a whole have been expensed as incurred pursuant to
the requirements of SFAS No. 142, Goodwill and Other Intangible Assets. Legal
fees, registration costs, and ongoing maintenance costs relating to intellectual
property are capitalized as incurred and are amortized on a straight line basis
over the estimated remaining statutory lives of the patents, ranging from one to
twenty years. We evaluate the recoverability of our intellectual property
periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. No
impairments of intellectual property have been identified during the periods
presented.
  Our
impairment analysis contains judgments, uncertainties and estimates in order to
estimate future cash flows and fair values, if we were to make different
judgments and estimates, the outcome of the impairment analysis could be
materially affected.
 
 Foreign
Operations and Foreign Currency.   We have two wholly-owned
subsidiaries incorporated in New Zealand. Our direct subsidiary, PureDepth Ltd.,
is the holding entity for the intellectual property portfolio, which is subject
to an exclusive license with us for its use, exploitation and future
development. Our indirect subsidiary, PureDepth Incorporated Ltd., undertakes
the operations in respect of any future research and development of the
intellectual property portfolio on our behalf. This activity is governed by a
development agreement with us pursuant to which an annual development fee of
cost plus 7.5% is calculated at the end of each quarter.  Income and
expenditures relating to the license and future development of the intellectual
property are inter-company transactions and are eliminated on consolidation.
Therefore, these amounts are not shown in the financial statements. We
(including our subsidiaries) use the U.S. dollar as our functional currency. We
determined that the cash flow, sales price, sales market, expense, financing and
intercompany transaction indicators had reached a significant level where under
SFAS 52 each of the entities would be best represented by the U.S. dollar as the
functional currency.  Our currency decisions contain judgments and
uncertainties that if we were to make different judgments, the outcome could
have a material affect to our operating results and fiscal period ending
balances.
 
 Accounting
for Income Taxes.   In preparing our consolidated financial
statements, we are required to make estimates and judgments that affect our
accounting for income taxes. This process includes estimating actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences, including
differences in the timing of recognition of stock-based compensation expense,
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheets. We also assess the likelihood that our deferred tax
assets will be recovered from future taxable income and, to the extent that we
believe that recovery is not likely, we have established a valuation
allowance.
 
 During
fiscal year ended 2008, we adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertain Income
Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”).  FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes” (“FAS 109”) and prescribes a recognition threshold
and measurement attributes for financial statement disclosure of tax positions
taken or expected to be taken on a tax return.
  Significant
judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities and the valuation allowance against our deferred tax
assets. Our financial position and results of operations may be materially
affected if actual results significantly differ from these estimates or the
estimates are adjusted in future periods.
  26
 
 Stock-Based
Compensation.   We follow the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS
123R). SFAS 123R requires measurement of all employee and non-employee
stock-based compensation awards using a fair-value method and recording of such
expense in the consolidated financial statements over the requisite service
period.  We estimate our stock-based compensation using the
Black-Scholes option-pricing model.  The Black-Scholes option-pricing
model requires judgmental assumptions including expected option life,
volatility, and forfeiture rates.  If we make or utilize different
assumptions used in the Black-Scholes option-pricing model, the amount of
stock-based compensation expense could be materially affected.
  27
  Item
3 – Qualitative and Quantitative Disclosures about Market Risk
 
 The
primary objectives of our investment activity are to preserve principal, provide
liquidity and maximize income without significantly increasing the risk. Some of
the securities we invest in are subject to market risk. To minimize this risk,
we maintain our portfolio of cash equivalents and short term investments in
money market funds, and certificates of deposit.  Since our results of
operations are not dependent on investment performance, we believe that such
risks would not have a significant impact on our results from
operations.
 
 Transactions
with our New Zealand research facility and with suppliers and manufacturers in
Asia are denominated in local currencies and thus, we are subject to foreign
currency exchange fluctuations associated with re-measurement to U.S.
dollars.We are prepared to hedge against any fluctuations in foreign currencies
should such fluctuations have a material economic impact on us, although we have
not engaged in hedging activities to date.
  Item
4T - Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our
principal executive and principal financial officer, we have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), as of July 31, 2009.  Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms and that such information is accumulated and communicated to management,
including the principal executive and principal financial officer, to allow
timely decisions regarding required disclosures.  Based on that
evaluation, and in light of the previously identified material weaknesses in our
internal control over financial reporting, as of January 31, 2009, relating to
ineffective control environment for inadequate segregation of duties and
information technology access as described in the our Annual Report on Form
10-K, our principal executive officer and our principal financial officer have
concluded that our disclosure controls and procedures were not effective as of
July 31, 2009.
 
 Changes
in Internal Control over Financial Reporting
 
 There has
been no change in our internal control over financial reporting that occurred
during the three months ended  that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 
 Inherent
Limitations of Any Control System
 
 We do not
expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected.
  28
  PART
II – OTHER INFORMATION
 
 Item
1 - Legal Proceedings
  We are
not currently involved in any legal proceedings.
 
 Item
1A - Risk Factors
 
 The Risk
Factors included in our Annual Report on Form 10-K for the year ended 2009 have
not materially changed except for the deletion of the Risk Factor beginning with
“WE MAY NOT SUCCEED IN EFFORTS
TO HAVE OUR COMMON STOCK LISTED ON THE NASDAQ GLOBAL MARKET OR A SECURITIES
EXCHANGE.”  This risk factor has been deleted because we do not
presently plan to seek listing of our common stock on the national securities
exchange.
 
 You
should carefully consider the risks described below before making an investment
decision. If any of the following risks actually occur, our business, financial
condition or results of operations could be materially and adversely affected.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
  IF
OUR STRATEGY IS NOT SUCCESSFUL, OR IF EXPANSION OPPORTUNITIES ARISE THAT REQUIRE
CASH INVESTMENT, WE WILL NEED TO SEEKADDITIONAL FINANCING TO FUND ONGOING
OPERATING LOSSES OR EXPANSION, THAT WILL DILUTE SHAREHOLDINGS, AND OUR FAILURE
TO OBTAIN ADDITIONAL FINANCING AS AND IF NEEDED WILL RESTRICT OUR OPERATIONS AND
MAY CAUSE US TO CEASE OPERATIONS ALTOGETHER .
 
 Our
strategy and related plans have not been sufficiently implemented for us to make
an assessment of their ultimate potential outcome. Should they fail, or if they
do not achieve the desired result, we will likely not attract sufficient sources
of revenues to achieve or maintain profitability. Our failure to achieve or
maintain profitability will require us to seek additional funding to fund these
operating losses.
 
 The
implementation of our strategy is dependent upon having sufficient resources to
make necessary investments, including investments in prototypes or support that
may be required by new potential customers, and cover operating losses until we
can achieve profitability. We do not believe we have sufficient cash to fully
execute our strategy and achieve profitability if we are required to pay the
$3,900,000, plus interest to K1W1 when it is due in June 2011. We have
negotiated a second extension of the Note Purchase Agreement and Security
Agreement with K1W1 to June 2011 from its previous due date of February 2010,
and our plans are to again negotiate the conversion of the notes when due, or an
extension for at least another year. If K1W1 do not convert the notes, or agree
to an extension of the loan when due, we will likely need to seek additional
funding.
 
 Opportunities
to expand our business through investment, acquisition or merger may arise. We
do not now have, and we do not expect in the near future to have, sufficient
cash to fund such expansion. Should we determine these expansion plans will be
in the best interests of the shareholders we would likely seek to finance these
expansion plans through additional funding.
 
 We
expect that if our strategy is not successful, it will be necessary for us to
obtain additional financing or other funding in order to fund our operations
some time in our year ending 2011. If an expansion opportunity arises we may
need to secure additional financing, irrespective of the success of our
strategy. We cannot, however, be certain that any such financing or funding will
be available on terms favorable to us, or if such financing or funding will be
available to us at all. If additional funds are raised by the issuance of our
equity securities, such as through the issuance of stock, convertible
securities, or the issuance and exercise of warrants, then the ownership
interest of our existing stockholders would be further diluted. If additional
funds are raised by the issuance of debt or other equity instruments, we may
become subject to certain operational limitations, and such securities may have
liquidation rights senior to those of the then existing holders of common
stock.
  29
  Ultimately,
if no additional financing or funding is obtained as and when needed, or if our
current strategy is not successful, we may be required to significantly
reduce our level of operations, including by further slowing our
growth, delaying  hiring, abandoning certain product development
including product development on which we may have already spent considerable
resources and otherwise further reducing expenses, or eventually, if
necessary, enter in to a strategic transaction or cease operations
altogether.  Further, if we do not enter into a qualified financing
resulting in the conversion of the notes issued to K1W1, or do not satisfy the
payment obligations under the notes, K1W1 may elect to exercise its remedies
with respect to its security interest described below under the heading “We have
granted our lender a security interest in our assets, and a default of our
obligations under our outstanding convertible notes could result in the seizure
or forced sale of our assets.”
 
 WE
HAVE GRANTED OUR LENDER A SECURITY INTEREST IN OUR ASSETS, AND A DEFAULT OF OUR
OBLIGATIONS UNDER OUR OUTSTANDING CONVERTIBLE NOTES COULD RESULT IN THE SEIZURE
OR FORCED SALE OF OUR ASSETS.
 
 Our
obligations under the note purchase agreement and security agreement, under
which we raised $3,900,000, are secured by a first priority security interest in
substantially all of our assets, including patents and intellectual
property.  If there is an event of default under the loan and/or
security agreements, including of the Company’s fault to meet its payment
obligations, is liquidated or becomes insolvent, K1W1 would be entitled to
exercise the remedies available to a secured lender under applicable law and/or
pursuant to the applicable loan and security agreements, including its ability
to exercise its rights associated with the security interests in the Company’s
assets.  See the description of the Note Purchase Agreement transaction in
this Quarterly report on Form 10-Q under Item 2 Part I entitled ”Management
Discussion and Analysis of Financial Condition and Results of
Operations”.
 
 WE
ARE NOT CURRENTLY PROFITABLE AND MAY NEVER BECOME PROFITABLE.
 
 We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future..  As a result, we will need to
generate significant revenue in order to achieve and maintain profitability.
Currently, we have limited sources of revenue. Even if we succeed in developing
and commercializing our current and additional products, we expect that we will
continue to incur substantial losses for the foreseeable future. In sum, we may
never achieve or maintain profitability. Our failure to achieve or maintain
profitability will likely negatively impact the value of our
securities.
 
  IF OUR PARTNERS ARE UNABLE TO
INNOVATE, DEVELOP AND MARKET ATTRACTIVE NEW PRODUCTS INTO WHICH OUR TECHNOLOGY
CAN BE INCORPORATED, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
  We do not
manufacture, market or sell visual display consumer products, other than
prototypes, and expect to derive a substantial portion of our future revenues
from the licensing of our MLD technology to our partners for their incorporation
into innovative new products for sale.  We expect that these revenues
will generally be based on royalty payments calculated on a per unit sold or
shipped basis.  Accordingly, our licensing revenues depend on the
success of our licensees in launching products in volume that incorporate our
technology. We cannot control these manufacturer’s product development or
commercialization efforts or predict their success. The process of
developing and marketing new products is generally complex and uncertain, and
involves a number of risks including, without limitation, the
following:
  ▪
                our
      partners may be unable to obtain adequate funding and resources necessary
      for investments in new products and
  technologies;
  ▪
                our
      partners’ investments and commitment of significant resources may not
      result in successful new products or
  technologies;
  ▪
                our
      partners may misunderstand their customers’ product needs and
      desires;
  ▪
                our
      partners may not be able to successfully anticipate the new products and
      technologies which will gain market acceptance, especially since the
      industry in which they operate is characterized by rapid changes,
      including technological changes;
 
 ▪
                our
      partners’ technology may become obsolete earlier than expected due to
      rapid advancements in technology and changes in consumer preferences,
      and
  ▪
                delays
      in being first to market with new technologies and products may prevent
      our partners from successfully competing with their
  rivals.
 30
  If our
partners fail to develop and market innovative new products, or if any of the
risks described above materialize, our licensing revenues from our arrangements
with these partners will decline and our business may be negatively and
adversely affected.
 
 OUR
LICENSING ARRANGEMENTS HAVE LENGTHY SALES CYCLES THAT MAKE IT DIFFICULT TO PLAN
OUR EXPENSES AND FORECAST RESULTS.
  Our
technology is generally incorporated in our partners’ products at the design
stage.  However, their decision to use our technology often requires
significant expenditures by us for engineering, prototype manufacturing and
sales consultation without any assurance of success, and often precedes volume
sales of products incorporating our technology, if any, by a year or
more.  If a partner decides at the design stage not to incorporate our
technology into their products, we may not have another opportunity for a design
win with respect to that customer's product for many months or years, if at all.
Our sales cycle can take up to 24 months to complete and because of this
lengthy sales cycle, we may experience a delay between increasing expenses for
research and development and our sales and marketing efforts and the generation
of volume licensing revenues, if any, from these expenditures. Moreover, the
value of any design win will largely depend on the commercial success of our
product and LCD manufacturing partners' products. In addition, our customers may
develop products that require government approval which may delay their time to
market. There can be no assurance that we will continue to achieve licensing
wins or that any licensing win will result in future revenues.
  A SMALL NUMBER OF PARTNERS ACCOUNT
FOR A SIGNIFICANT PORTION OF OUR REVENUES AND ACCOUNTS RECEIVABLE IN ANY PERIOD,
AND IF ANY ONE OF THEM FAILS TO SHIP PRODUCTS INCORPORATING OUR TECHNOLOGY OR
FAILS TO PAY US, OUR OPERATING RESULTS WILL SUFFER.
  We
currently have licensing arrangements only with IGT and Sanyo, and expect to
derive a majority of our revenues for the year ending 2010 in the form of the
recognition of deferred revenue resulting from prepaid royalties under our
licensing agreement with IGT and royalties from Sanyo unit sales under our
agreement with them.  If for any reason our partners do not ship
products incorporating our technology, we will not receive additional licensing
revenues and our operating results will suffer.
  At any
given time, the majority of our accounts receivable will be comprised of amounts
due from a small number of these partners.  Generally, we do not
require collateral from our partners.   If any of our partners do
not pay us, our operating results will be harmed.
 
 EVEN
WITH SIGNIFICANT CAPITAL SPENDING IN THE FUTURE TO KEEP PACE WITH TECHNOLOGICAL
CHANGES, WE MAY NOT BE ABLE TO DEVELOP NEW TECHNOLOGIES THAT ARE ACCEPTED BY THE
MARKET.
  Advances
in technology typically lead to a decline in sales volumes for products made
with older technologies and may even lead to those products becoming obsolete.
As a result, we will likely be required to make significant expenditures to
enhance our existing technology or to develop or acquire new technologies to be
incorporated into our partners’ products, including technologies that may cause
our MLD technology to obsolesce. We may not be able to successfully enhance our
technology or develop new technologies that keep pace with technological changes
through our own research and development efforts or through our acquisition of
technology licenses. This may be true even after we have spent significant
amounts of capital. Furthermore, even if we are successful in enhancing,
developing or acquiring any particular technology, we may not be able to
effectively market and license our technology to our partners, or our partners
may not be able to effectively commercialize or market the resulting MLD based
products into which our technology has been incorporated.
 
 THE
AVERAGE SELLING PRICES OF DISPLAYS USING OUR TECHNOLOGY MAY DECLINE OVER TIME
AND NEGATIVELY AFFECT OUR OPERATING RESULTS.
  The
average selling prices of displays using our technology are expected to
continually decline over time as a result of, among other factors, technology
advances, cost reductions and increased competition. Although we may initially
be able to take advantage of higher selling prices that may be associated with
the new MLD-based products that our partners may bring to market, we cannot
provide assurance that we will be able to maintain licensing royalty rates with
our partners in the face of market competition for these products. If we are
unable to effectively anticipate and counter the price erosion that accompanies
our partners’ products and may affect our licensing royalty rates, our profit
margins will be negatively affected.
  31
  WE
OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT AND OUR OPERATING RESULTS MAY BE
ADVERSELY AFFECTED IF WE CANNOT COMPETE EFFECTIVELY.
  Our
ability to compete successfully depends on factors both within and outside our
control, including: the end-product pricing of our partners and its impact on
our licensing royalty rates, the performance and reliability of our technology
and the products of our partners which incorporate our technology, our
successful and timely investment in technology development, the success or
failure of our partners in marketing their brands and the products into which
our technology is incorporated, component and raw material supply costs for our
prototypes and our partners’ products, market acceptance of alternative
technologies and general economic and industry conditions. Some prospective
customers for our partners’ products may perceive the quality of certain
products utilizing our competitors’ technologies to be equivalent or superior to
MLD-based products. Our competitors from time to time may have greater
financial, sales and marketing, manufacturing, research and development or
technological resources than us. In particular, competitors with greater
resources may be able to license or manufacture competitive products on a larger
scale or with greater cost efficiencies than us. Alternatively, because
innovation in our industry often creates wide scale change in technologies and
resulting products, our competitors may develop superior technologies and obtain
exclusive rights to those technologies. The number of our competitors may
increase in the future. If any technology that is competing with ours is or
becomes more reliable, higher performing, less expensive or has other advantages
over our technology, then the demand for our technology and related products and
services would decrease.  Any of the foregoing factors could harm our
business
 
 OUR
BUSINESS MAY BE ADVERSELY AFFECTED IF ALTERNATIVE VISUAL DISPLAY PANEL
TECHNOLOGIES ERODE FUTURE SALES OF PRODUCTS BASED ON OUR MLD TECHNOLOGY .
  The
successful marketing and sale of currently available alternative visual display
panel technologies, or the introduction of new alternative visual display panel
technologies, including those that may be currently under development by our
competitors and us, may erode future sales of MLD technology and may have a
material adverse effect on our business.
 
 GOVERNMENTAL REGULATION MAY LIMIT OUR
ACTIVITIES OR INCREASE OUR COST OF OPERATIONS .
  Our
business and operations are subject to various forms of government regulation in
the various countries in which we do business, including required
business/investment approvals, export regulations based on national security or
other reasons, and other export/import regulations such as tariffs. Currently,
we design our technology and products to meet rigid governmental requirements.
However, because the final product will generally be produced and manufactured
by our partners, the actual approval process is the responsibility of the
partner for the specific market. Many of the products manufactured by our
licensees and the prototypes we manufacture are subject to certain environmental
and recycling laws and regulations relating to the disposal of electronics.
These laws are constantly subject to revision and amendment. If we or our
partners cannot comply with these regulations without great cost, our financial
performance may suffer.
 
 GENERAL ECONOMIC CONDITIONS MAY
ADVERSELY AFFECT OUR SALES AND PROFITABILITY .
  For the
most part, purchases of the products into which our technology is incorporated
are discretionary. As a result, demand for consumer electronics products, which
we believe will account for a significant proportion of our worldwide operating
revenue will likely be affected by general economic trends in the countries or
regions in which the products into which our technology is incorporated are
sold. Similarly, demand for business use products and for components we may
manufacture that go into products of third parties will also likely be affected
by general economic trends in the various markets in which we sell our products.
In sum, economic downturns and resulting declines of demand in our major markets
and those of our product and LCD manufacturing partners, including North
America, Asia, and Europe, may adversely affect our sales and operating
results.
  AS
WE MATERIALLY RELY ON A LIMITED NUMBER OF THIRD-PARTY SUPPLIERS FOR KEY RAW
MATERIALS AND COMPONENTS, AND ANY DISRUPTION IN THEIR SUPPLY WILL NEGATIVELY
AFFECT OUR BUSINESS .
  Our
development and sale of MLD prototype products depend in part on obtaining
adequate supplies of quality raw materials and components, which are in many
cases with non-standard or customized specifications, on a timely basis.
Similarly, our third party licensees also depend on adequate supplies of quality
raw materials and components to manufacture MLD products, including without
limitation, polarized and/or laminated film.  In general, most of the
raw materials as well as key components of these MLD products are sourced from
two or three suppliers for each key component. The high volume, lower cost
manufacturers of these materials generally will not sell in smaller quantities,
nor will they generally build non-standard or customized materials. We, and our
third-party licensors, may experience shortages in the supply of these and other
components or raw materials as a result of, among other things, anticipated
capacity expansion in the MLD and competitive industries. If we or our
third-party licensors are unable to obtain adequate supplies of high quality raw
materials or components at a reasonable cost or in a timely manner, or are
unable to make alternative arrangements for such supplies, our operating results
could be negatively impacted.
  32
  OUR
BUSINESS MATERIALLY RELIES ON PATENT RIGHTS THAT MAY BE NARROWED IN SCOPE OR
FOUND TO BE INVALID OR OTHERWISE UNENFORCEABLE.
  Our
success will materially depend on our ability to obtain, defend and enforce our
patent rights worldwide. The coverage claimed in a patent application can be
significantly reduced before a patent is issued. Consequently, our pending or
future patent applications may not result in the issuance of patents. Patents
issued to us may be subjected to further proceedings limiting their scope and
may not provide significant proprietary protection or a competitive advantage.
Our patents also may be challenged, circumvented, invalidated or deemed
unenforceable. In addition, because, patent applications in various countries
publish at different times,  it is difficult to monitor patent
applications that may be filed in other countries by third parties, and the
publication of discoveries in scientific or patent literature often lags behind
actual discoveries, we generally cannot be certain that we were the first
creator of inventions covered by our pending patent
applications,  that we or any of our licensors will be entitled to any
rights in purported inventions claimed in pending or future patent applications,
or that we were the first to file patent applications on such
inventions.
 
 FAILURE
TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR COMPETITIVENESS AND
HARM OUR BUSINESS AND FUTURE PROSPECTS .
  We
believe that developing new products and technologies that can be differentiated
from those of our competitors is critical to the success of our business. We
intend to take active measures to obtain international protection of our
intellectual property by obtaining patents and undertaking monitoring activities
in our major markets. Nevertheless, we may not be able to effectively deter
competitors from improper use of our proprietary technologies. For instance, our
competitors may misappropriate our intellectual property, disputes as to
ownership of intellectual property may arise, and our intellectual property may
otherwise become known or independently developed by our competitors. Our
technology may be accessible in markets, such as Asia, where the practical legal
protections for intellectual property may be considerably less than in North
America or Europe. As a result, we may have to litigate to enforce and protect
our intellectual-property rights to determine their scope, validity or
enforceability. Intellectual property litigation is particularly expensive,
could cause a diversion of financial resources and the time and attention of our
management, and may not prove successful. The loss of intellectual property
protection, or the inability to secure or enforce intellectual property
protection, could materially harm our business and ability to
compete.
 
 IF
WE INFRINGE THE RIGHTS OF THIRD PARTIES, WE COULD BE PREVENTED FROM SELLING
PRODUCTS, FORCED TO PAY DAMAGES, OR FORCED TO DEFEND AGAINST LITIGATION, WHICH
WOULD ADVERSELY AFFECT OUR BUSINESS.
  If our
products, methods, processes or other technologies infringe the proprietary
rights of other parties, we could incur substantial costs and we may have
to:
  ▪
                obtain
      licenses, which may not be available on commercially reasonable terms, if
      at all;
  ▪
                abandon
      an infringing implementation or
product;
 
 ▪
                redesign
      our products or processes to avoid
infringement;
  ▪
                stop
      using the subject matter claimed in the patents held by
      others;
  ▪
                pay
      damages; or
  ▪
                defend
      litigation or administrative proceedings which may be costly whether we
      win or lose, and which could result in a substantial diversion of our
      valuable management resources.
  WE RELY UPON TRADE SECRETS AND OTHER
UNPATENTED PROPRIETARY KNOW-HOW TO MAINTAIN OUR COMPETITIVE POSITION IN OUR
INDUSTRY, AND ANY LOSS OF OUR RIGHTS TO, OR UNAUTHORIZED DISCLOSURE OF, OUR
TRADE SECRETS OR OTHER UNPATENTED PROPRIETARY KNOW-HOW COULD NEGATIVELY AFFECT
OUR BUSINESS .
  We also
rely upon trade secrets, unpatented proprietary know-how and continuing
technological innovation in our business. We typically enter into
confidentiality agreements with each of our employees and consultants upon the
commencement of an employment or consulting relationship, whereby each employee
or consultant agrees to maintain the confidentiality of our trade secrets and
certain other proprietary information on a perpetual basis. However, these
agreements may be breached and in certain circumstances we may not be able to
enforce them. Moreover, even if we can enforce such an agreement, we may not
have an adequate remedy for any such breach. The mere disclosure of our trade
secrets or other know-how as a result of such a breach could adversely and
irreparably affect our business.
  33
  OUR
BUSINESS WILL SUBJECT US TO POTENTIAL PRODUCT-LIABILITY CLAIMS THAT COULD
ADVERSELY AFFECT OUR OPERATING RESULTS, FINANCIAL CONDITION AND BUSINESS
REPUTATION.
  We
currently manufacture only prototype MLD visual display products for sale to and
use by our partners.  We may in the future
manufacture various products or components for incorporation into our partners’
products. We cannot be certain, however, that our prototypes, components we may
manufacture and products incorporating our technology will be defect-free and
will not be recalled at some later date. Furthermore, although we maintain
insurance against product-liability claims, we cannot be certain that such
insurance can adequately satisfy the liabilities that may ultimately be
incurred. In addition, insurance may not continue to be available on terms
acceptable to us. A large-scale product recall or a successful product-liability
claim against us could result in significant costs or have a negative impact on
our reputation, which may in turn lead to a decrease in sales, adversely
affecting our results of operations.
 
  WE
RELY ON KEY ENGINEERS, SENIOR MANAGEMENT AND OTHER PERSONNEL, AND THE LOSS OF
THE SERVICES OF ANY SUCH PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN
SUITABLE REPLACEMENTS MAY NEGATIVELY AFFECT OUR BUSINESS.
  Our
success depends to a significant extent upon the continued service of our
research and development and engineering personnel, and on our ability to
continue to attract, retain and motivate qualified researchers and engineers,
especially during periods of rapid growth. The loss of the services of any of
our key research and development and engineering personnel or senior management,
without adequate and timely replacement, could result in delays in product
development, loss of customers, partners and sales, and a diversion of
management resources, each of which could have a material adverse effect on our
business.  The current cash position of the Company, and our publicly
identified need for funding, may increase the risk of loss of employees,
including without limitation, loss resulting from employee concerns about their
job security or loss resulting from other companies identifying the employees as
suitable and susceptible hire candidates.
  IF
WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, OUR ABILITY TO GROW OUR
BUSINESS MAY BE HARMED.
  As we
attempt to grow our business, we will need to hire additional qualified
personnel with expertise in software development, testing, research, technology
development and manufacturing, as well as sales and marketing. We believe that
attracting and retaining qualified personnel will be critical to our success. In
this regard, we compete for qualified individuals with numerous other
enterprises. Competition for individuals with the expertise we require in
Redwood City, California and in Auckland, New Zealand is intense, and we may not
be able to attract and retain qualified personnel.
  WE
EXPECT TO HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WHICH WILL POSE UNIQUE
RISKS TO OUR BUSINESS.
  We expect
that a substantial portion of our operational activity and the operational
activity of our partners will be conducted outside of the United States and
particularly in Asia. There are a number of risks inherent for us and our LCD
product and LCD manufacturing partners in doing business in overseas markets,
including the following:
  ▪
                unexpected
      legal or regulatory changes;
  ▪
                unfavorable
      political or economic factors;
  ▪
                difficulties
      in recruiting and retaining personnel;▪
                labor
      disputes, including strikes;▪
                less
      developed technological infrastructure, which can affect our production or
      other activities or result in lower customer acceptance of our products
      and services;
  ▪
                potentially
      adverse tax consequences; or
  ▪
                social,
      political or economic turmoil due to terrorism, war, or other
      factors.
  Our
failure to adequately address these risks may harm our business.
  34
  WE
MAY BE UNABLE TO SUCCESSFULLY MANAGE AND SUSTAIN OUR GROWTH, WHICH COULD HARM
OUR BUSINESS.
  Since the
founding of DVIL, we have experienced, and expect to continue to experience,
growth in the scope and complexity of our operations. This growth may strain our
managerial, financial, manufacturing and other resources, impairing our ability
to effectively execute our business plans. The materialization of these risks
could adversely affect our operating results.
  OUR
MAJORITY STOCKHOLDER POSSESSES A CONTROLLING PORTION OF THE VOTING POWER OF OUR
COMMON STOCK, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
  As
of July 31, 2009, K1W1, our majority stockholder, possessed beneficial
ownership of 35,780,006 shares of our common stock, or approximately 52% of our
outstanding common stock.  This represents a significant and controlling
portion of the outstanding voting power of our securities, and enables K1W1 to
control our management and affairs through the election and removal of our
entire Board of Directors, and all other matters requiring stockholder approval,
including any future merger, consolidation or sale of all or substantially all
of our assets. This concentrated control could discourage others from initiating
any potential merger, takeover or other change-of-control transaction that may
otherwise be beneficial to our stockholders. As a result, the return on an
investment in our common stock through the market price of our common stock or
ultimate sale of our business could be adversely affected.
 
 SINCE
TRANSFER RESTRICTIONS HAVE ELAPSED ON CERTAIN SHARES OF OUR OUTSTANDING COMMON
STOCK, AND AS OUR SECURITY REGISTRATIONS HAVE BECOME EFFECTIVE, THE AVAILABILITY
OF SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
 
 Pursuant
to and in accordance with the limitations of Rule 144 of the Securities Act, all
of the shares of our common stock that were issued pursuant to our private
placements are eligible for resale on the OTC Bulletin Board. Certain of these
shares, were also registered for resale under our currently effective
registration statement on Form S-1/A.   Additionally, we have
registered on Form S-8 approximately 22 million shares of our common stock for
issuance upon exercise of options granted under our 2006 Stock Incentive Plan,
including most recently 8.5 million shares pursuant to a Form S-8 filed in
September, 2007. The increase in the number of shares available on the market
resulting from the above factors may have an adverse effect on the trading price
of our common stock.
 
 LIMITEDTRADING
OF OUR COMMON STOCK ON AN ILLIQUID MARKET MAY RESULT IN LOWER MARKET
PRICES.
  Trading
of our common stock is conducted on the OTC Bulletin Board.  Our
common stock is not listed on any national exchange, and we have no current
plans to seek listing on a national securities exchange.  Accordingly,
there is a limited public market for our common stock.  These factors
have an adverse effect on the liquidity of our common stock, not only in terms
of the number of shares that can be bought and sold at a given price, but also
through delays in the timing of transactions and reductions in security
analysts’ and the media’s coverage of our operations and our common
stock.  In general, there has not been substantial trading activity in
shares of our common stock.  Low trading volumes generally depress
market prices and could also result in a larger spread between the bid and asked
prices for our common stock.  As a result, our stockholders may not
always be able to resell shares of our common stock publicly at times and prices
that they feel are fair or appropriate.
 
 THERE
IS CURRENTLY LITTLE TRADING VOLUME IN OUR COMMON STOCK, WHICH WILL MAKE IT
DIFFICULT TO SELL SHARES OF OUR COMMON STOCK.
  In general, there has
not been substantial trading activity in shares of our common stock. The small
trading volume will likely make it difficult for our stockholders to sell their
shares as and when they choose. Furthermore, small trading volumes generally
depress market prices. As a result, our stockholders may not always be able to
resell shares of our common stock publicly at times and prices that they feel
are fair or appropriate.
 
 
 THERE
HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK TO DATE.
  To date,
there has been only a limited public market for our common stock on the OTC
Bulletin Board. Our common stock is currently not listed on any national
exchange. If an active trading market for our common stock does not develop, the
market price and liquidity of our common stock will be materially and adversely
affected.
  35
  BECAUSE
WE BECAME PUBLIC BY MEANS OF A REVERSE MERGER, WE MAY NOT BE ABLE TO ATTRACT THE
ATTENTION OF MAJOR BROKERAGE FIRMS .
  Additional
risks may exist as a result of our becoming a public reporting company through a
reverse merger transaction, as opposed to a traditional initial public offering.
Because we did not engage in a more traditional and publicized initial public
offering, security analysts of major brokerage firms may not provide us research
coverage. In addition, there is no incentive to brokerage firms to recommend the
purchase of our common stock. The failure of brokerage firms to provide analyst
coverage will be likely to slow the dissemination of awareness and knowledge of
our business. As a result, the trading price of our common stock may be
adversely affected.
  OUR
CERTIFICATE OF INCORPORATION GRANTS OUR BOARD OF DIRECTORS WITH THE POWER TO
DESIGNATE AND ISSUE ADDITIONAL SHARES OF COMMON AND/OR PREFERRED
STOCK.
  Our
authorized capital consists of 200,000,000 shares, of which 190,000,000 shares
are designated as common stock, par value $0.001 per share, and 10,000,000
shares are designated as preferred stock, par value $0.001 per share. Pursuant
to authority granted by our certificate of incorporation, our Board of
Directors, without any action by the stockholders, may designate and issue
shares in such classes or series (including classes or series of common stock
and/or preferred stock) as it deems appropriate and establish the rights,
preferences, and privileges of such shares, including dividends, liquidation and
voting rights. The rights of holders of classes or series of common stock or
preferred stock that may be issued could be superior to the rights of the common
stock offered hereby. Our Board of Directors’ ability to designate and issue
shares could impede or deter an unsolicited tender offer or takeover proposal.
Further, the issuance of additional shares having preferential rights could
adversely affect other rights appurtenant to the shares of common stock offered
hereby. Any such issuances will dilute the percentage of ownership interest of
our stockholders and may dilute our book value.
  WE
ARE SUBJECT TO THE SARBANES-OXLEY ACT AND THE REPORTING REQUIREMENTS OF FEDERAL
SECURITIES LAWS, WHICH CAN BE EXPENSIVE.
  As a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as
well as the information and reporting requirements of the Securities Exchange
Act of 1934 and other federal securities laws. The costs of compliance with the
Sarbanes-Oxley Act and of preparing and filing annual, quarterly and current
reports and other information with the SEC, cause our expenses to be higher than
they would be had we remained privately held.  We estimate the current
annual cost for compliance with Sarbanes-Oxley is approximately $100,000,
including internal resources to maintain documentation and testing of our
financial controls, but excluding other costs of being a public
company.
 
 WE
HAVE NEVER PAID DIVIDENDS ON OUR CAPITAL STOCK AND DO NOT INTEND TO DO SO FOR
THE FORESEEABLE FUTURE.
  We have
never paid dividends on our capital stock and we do not anticipate that we will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in us will be realized, if at all, only when an investor sells shares
of our common stock.
 
 Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
 None
 
 Item
3 - Defaults upon Senior Securities
 
 None
 
 Item
4 - Submission of Matters to a Vote of Security Holders
 
 None
 
 Item
5 - Other Information
  None.
  36
  Item
6 - Exhibits
  EXHIBIT
INDEX
  Exhibit
                            No.
                          
                          Description
                          
                          Filed
      with this
                            Quarterly
      Report2.1
                          
                          Agreement
      and Plan of Merger dated March 16, 2006 by and among PureDepth, Inc.,
      PureDepth Technologies, Inc. and Diamond One, Inc.* (1)3.1
                          
                          Certificate
      of Incorporation* (1)3.2
                          
                          Certificate
      of Merger relating to the merger of PureDepth, Inc. (California) with and
      into PureDepth Technologies, Inc. * (1)3.3
                          
                          Certificate
      of Merger relating to short-form merger of PureDepth, Inc. (f/k/a Diamond
      One, Inc.) with and into PureDepth, Inc. (f/k/a PureDepth Technologies,
      Inc.)* (1)3.4
                          
                          Certificate
      of Designation of Series A Convertible Preferred Stock * (1)3.5
                          
                          Bylaws
      of the Company * (1)4.1
                          
                          Form
      of A-Warrant * (1)4.2
                          
                          Form
      of B-Warrant * (1)4.3
                          
                          Form
      of Agent/C-Warrant* (1)4.4
                          
                          Form
      of D-Warrant * (2)10.1
                          
                          Employment
      Agreement with Fred Angelopoulos dated March 31, 2005 * (1)10.2
                          
                          Employment
      Agreement with Kristin Bowman dated March 31, 2005* (1)10.3
                          
                          Letter
      Offer Agreement with David Hancock dated May 30, 2006* (1)10.4
                          
                          Master
      License Agreement between PureDepth Limited and PureDepth, Inc. * (1)10.5
                          
                          Agreement
      dated May 16, 2005 by and among the Company, DRS Electronic Systems, Inc.
      and DRS Laurel Technologies (++)* (1)10.6
                          
                          Exclusive
      Sales and Distribution License Agreement by and among the Company, Sanyo
      Sales and Marketing Corporation and SANYO Electric System Solutions Co.,
      Ltd. (++)* (1)10.7
                          
                          2006
      Stock Option Plan (as amended) (13)10.8
                          
                          Form
      of Stock Option Agreement * (4)10.9
                          
                          Director
      Contract - John Floisand * (4)10.10
                          
                          Director
      Contract - Tom Marcus * (4)
  10.11
                    
                    Executive
      Employment Agreement - O’Callahan * (5)10.12
                    
                    Executive
      Employment Agreement - Angelopoulos * (6)10.13
                    
                    Form
      of Directors and Officers Indemnity Agreement* (7)10.14
                    
                    Amendment
      of Stock Option Agreement – David Hancock * (7)10.15
                    
                    Amendment
      of Stock Option Agreement – Fred Angelopoulos * (7)
  37
 10.16
                          
                          Amendment
      of Stock Option Agreement – Mark Yahiro * (7)10.17
                          
                          Patent
      and Technology License and Technology Transfer Agreement (++) * (8)10.17
                          
                          Patent
      and Technology License and Technology Transfer Agreement (++) * (8)10.18
                          
                          Executive
      Employment Agreement – McCaman * (9)10.19
                          
                          Separation
      Agreement – Angelopoulos * (10)10.20
                          
                          Waiver
      Agreement with K1W1 * (11)10.21
                          
                          Executive
      Employment Agreement – Credelle * (13)10.22
                          
                          Executive
      Employment Agreement – Marcus * (14)10.23
                          
                          Samsung
      License Agreement (++)* (15)10.24
                          
                          Office
      Lease – Twin Dolphin Drive, California* (16)10.25
                          
                          Amendment
      No. 2 of Stock Option Agreement – Yahiro * (17)10.27
                          
                          Secured
      Note Purchase Agreement* (18)10.28
                          
                          Security
      Agreement* (18)10.29
                          
                          IGT
      Patent and Technology License and Technology Transfer Agreement(++)* (19)10.30
                          
                          Amendment
      to Executive Employment Agreement – McCaman* (18)10.31
                          
                          Sublease
      Agreement – Twin Dolphin Drive, California* (18)10.32
                          
                          Office
      Lease – 230 D Twin Dolphin Drive, Redwood City, California* (20)10.33
                          
                          Variation
      to Employment Agreement – Bowman * (21)10.34
                          
                          Consultancy
      Agreement - Bowman* (21)10.35
                          
                          Amendment
      no. 1 to Convertible Note Purchase Agreement and Security Agreement* (22)10.36
                          
                          Amendment
      no. 2 to Convertible Note Purchase Agreement and Security Agreement* (23)10.37
                          
                          Amendment
      no 1. to Exclusive Sales and Distribution License Agreement by and among
      the Company, Sanyo Sales and Marketing Corporation and SANYO Electric
      System Solutions Co., Ltd. (++) * (26)10.38
                          
                          Executive
      Employment Agreement – Andrew L. Wood * (24)10.39
                          
                          Amendment
      No. 2 to Executive Employment Agreement – Jonathan J. McCaman * (24)10.40
                          
                          Amendment
      No 1. to the IGT Patent and Technology License Transfer Agreement
      (++)10.41
                          
                          Deed
      of Variation of Leases and Rent Reviews dated November 10, 2008 (amending
      Deeds of Lease dated May 31, 2006) * (25)10.42
                          
                          Amendment
      no 2. to Exclusive Sales and Distribution License Agreement by and among
      the Company, Sanyo Sales and Marketing Corporation and SANYO Electric
      System Solutions Co., Ltd. (++)10.43
                          
                          Amendment
      No. 2 to Convertible Promissory Notes * (27)
 38
  14.1
                    
                    Code
      of Business Conduct and Ethics * (18)16.1
                    
                    Letter
      of Comiskey & Company P.C. dated April 13, 2006 * (3)16.2
                    
                    Letter
      of Mark Bailey & Company * (12)31.1
                    
                    Section
      302 Certification of Chief Executive Officer dated September 14,
      2009
                    
                    X31.2
                    
                    Section
      302 Certification of Chief Financial Officer dated September 14,
      2009
                    
                    X32.1
                    
                    Section
      906 Certification of Chief Executive Officer and Chief Financial Officer
      dated September 14, 2009
                    
                    X
 39
  (++)
                Confidential
      treatment has been obtained as to certain portions of this exhibit
      pursuant to Rule 406 of the Securities Exchange Act of 1933, as
      amended.*
      (1)
                Previously
      filed with the Commission in the Company’s SB-2 filed on May 30,
      2006*
      (2)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on August 3, 2006*
      (3)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on April 14, 2006*
      (4)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on September 12, 2006*
      (5)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on November 7, 2006*
      (6)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on November 16, 2006*
      (7)
                Previously
      filed with the Commission in the Company’s Annual Report on Form 10-KSB
      filed on May 31, 2007*
      (8)
                Previously
      filed with the Commission in the Company’s Quarterly Report on Form 10-QSB
      filed on December 15, 2006*
      (9)
                Previously
      filed with the Commission in the Company’s Quarterly Report on Form 10-QSB
      filed on June 14, 2007*
      (10)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on October 26, 2007*
      (11)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on August 8, 2007*
      (12)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K/A
      filed on June 20, 2007*
      (13)
                Previously
      filed with the Commission in the Company’s SB-2/A filed on August 28,
      2007*
      (14)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K/A
      filed on September 19, 2007*
      (15)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K/A
      filed on October 15, 2007*
      (16)
                Previously
      filed with the Commission in the Company’s Quarterly Report on Form 10-QSB
      filed on December 14, 2007*
      (17)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on December 27, 2007*
      (18)
                Previously
      filed with the Commission in the Company’s Annual Report on Form 10-KSB
      filed on April 30, 2008*
      (19)
                Previously
      filed with the Commission in the Company’s Quarterly Report on Form
      10-QSB/A filed on December 5, 2007*
      (20)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on May 27, 2008*
      (21)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on June 11, 2008*
      (22)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on October 7, 2008*
      (23)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on August 15, 2008*
      (24)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on September 15, 2008*
      (25)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on November 10, 2008*
      (26)
                Previously
      filed with the Commission in the Company’s Quarterly Report on Form 10-Q
      filed on September 15, 2008*
      (27)
                Previously
      filed with the Commission in the Company’s Current Report on Form 8-K
      filed on August 28, 2009
 40
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  PUREDEPTH,
      INC.Date: September
      14, 2009
                  By:
                  /s/ Andrew
      L. WoodMr.
      Andrew L. Wood
                    Chief
      Executive Officer and
Director
  By:
                    /s/ Joseph
      A. MoranMr.
      Joseph A. Moran
                      Chief
      Financial Officer
                      (Principal
      Accounting and Financial
Officer)
   41