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
      1934


For the
quarterly period ended April 30,
2008


or





[  ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934


For 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.)




230 Twin
Dolphin Drive, Suite 230D, Redwood City, California 94065


(Address
      of principal executive offices) (Zip
Code)





(650)
      632-0800


(Registrant’s
telephone number, including area code)





255
Shoreline Drive, Suite 610, 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act.





[   ]
Large accelerated
filer          [   ]
Accelerated
filer          [   ]
Non-accelerated filer        [X] Smaller reporting
company








Indicate
by check mark whether the registrant is a shell
company:      Yes
[  ]     No [X]




As of
June 13, 2008, 68,483,979 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
(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
            
            15Item
      3
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            24Item
      4T
            Controls
      and Procedures
            
            24PART II - OTHER
      INFORMATIONItem
      1
            Legal
      Proceedings
            
            25Item
      1A
            Risk
      Factors
            
            25Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            34Item
      3.
            Defaults
      Upon Senior Securities
            
            34Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            34Item
      5.
            Other
      Information
            
            34Item
      6.
            Exhibits
            
            35Signatures
            
            38








2




PART
I – FINANCIAL INFORMATION





Item
1 - Financial Statements





PUREDEPTH,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





April
      30,
              2008
            
            
            January
      31,
              2008ASSETSCurrent AssetsCash and cash equivalents
            
            $
            1,275,388
            
            
            $
            429,726Restricted
      cash
            
            
            79,058
            
            
            
            78,499Accounts
      receivable, net
            
            
            110,052
            
            
            
            12,000Inventory
            
            
            53,330
            
            
            
            -Other current assets
            
            
            163,909
            
            
            
            152,276Total current assets
            
            
            1,681,737
            
            
            
            672,501Property and Equipment,
      net
            
            
            338,486
            
            
            
            382,300Other AssetsIntellectual
      property, net
            
            
            2,589,818
            
            
            
            2,564,260Other
      assets
            
            
            40,000
            
            
            
            40,000Total Assets
            
            $
            4,650,041
            
            
            $
            3,659,061





LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent LiabilitiesAccounts
      payable
            
            $
            229,432
            
            
            $
            379,556Accrued expenses
            
            
            608,593
            
            
            
            865,641Accrued interest
            
            
            38,133
            
            
            
            7,253Notes
      payable – current portion
            
            
            131,480
            
            
            
            135,870Deferred revenue – current portion
            
            
            750,000
            
            
            
            750,000Convertible
      debt, net of discount
            
            
            2,870,300
            
            
            
            -Total current liabilities
            
            
            4,627,938
            
            
            
            2,138,320Long Term LiabilitiesNotes
      payable
            
            
            303,720
            
            
            
            312,309Long
      term debt
            
            
            -
            
            
            
            100,000Deferred
      revenue
            
            
            1,846,154
            
            
            
            2,033,654Total
      Liabilities
            
            
            6,777,812
            
            
            
            4,584,283Commitments
      and contingenciesStockholders' DeficitPreferred
      stock, $0.001 par value, 10,000,000 authorized and nooutstanding
      shares
            
            
            -
            
            
            
            -Common stock, $0.001 par value, 190,000,000 sharesauthorized,
      68,483,979 and 68,483,979 issued and outstanding
            
            
            68,484
            
            
            
            68,484Additional
      paid in capital
            
            
            34,503,652
            
            
            
            34,155,297Accumulated
      other comprehensive loss
            
            
            (713,256
            )
            
            
            (706,421
            )Accumulated
      deficit
            
            
            (35,986,651
            )
            
            
            (34,442,582
            )Total
      stockholders' deficit
            
            
            (2,127,771
            )
            
            
            (925,222
            )Total
      Liabilities and Stockholders' Deficit
            
            $
            4,650,041
            
            
            $
            3,659,061





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)





For
      Three Months EndedApril
      30, 2008
            
            
            April
      30, 2007RevenueLicensing
            
            $
            187,500
            
            
            $
            187,500Services
            
            
            110,052
            
            
            
            -Product
      sales
            
            
            -
            
            
            
            44,098Total
      revenue
            
            
            297,552
            
            
            
            231,598Cost
      of licensing
            
            
            79,810
            
            
            
            76,371Cost
      of services
            
            
            87,475
            
            
            
            -Cost
      of product sales
            
            
            -
            
            
            
            38,323Total
      cost of revenue
            
            
            167,285
            
            
            
            114,694Gross
      margin
            
            
            130,267
            
            
            
            116,904Operating ExpensesDepreciation
            
            
            32,211
            
            
            
            17,621Research and development
            
            
            466,036
            
            
            
            516,230Sales and marketing
            
            
            153,373
            
            
            
            375,235General and administrative
            
            
            955,253
            
            
            
            1,250,837Total operating expenses
            
            
            1,606,873
            
            
            
            2,159,923Loss from operations
            
            
            (1,476,606
            )
            
            
            (2,043,019
            )Other Income
      (Expense)Interest income
            
            
            6,660
            
            
            
            92,809Interest expense
            
            
            (59,582
            )
            
            
            (12,945
            )Foreign exchange loss
            
            
            (14,541
            )
            
            
            (15,029
            )Other expense
            
            
            -
            
            
            
            (59
            )Total other income (expense)
            
            
            (67,463
            )
            
            
            64,776Loss before income taxes
            
            
            (1,544,069
            )
            
            
            (1,978,243
            )Income tax provision
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (1,544,069
            )
            
            $
            (1,978,243
            )Net
      loss per share, basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.03
            )Weighted
      average shares outstanding
            
            
            68,483,979
            
            
            
            66,296,747Comprehensive
      LossNet
      loss, per statement of operations
            
            $
            (1,544,069
            )
            
            $
            (1,978,243
            )Foreign
      exchange gain
            
            
            6,835
            
            
            
            -Comprehensive
      net loss
            
            $
            (1,537,234
            )
            
            $
            (1,978,243
            )





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
      Three Months EndedApril
      30, 2008
            
            
            April
      30, 2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (1,544,069
            )
            
            $
            (1,978,243
            )Adjustments
      to reconcile net loss to net cash flows from operating
      activities:Depreciation
      and amortization
            
            
            112,021
            
            
            
            93,993Loss
      on disposal of assets
            
            
            16,263
            
            
            
            -Stock-based
      compensation expense
            
            
            190,460
            
            
            
            196,783Marketable
      securities
            
            
            -
            
            
            
            (31,265
            )Amortization
      of debt discount
            
            
            28,195
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (98,052
            )
            
            
            (14,746
            )Restricted
      cash
            
            
            (559
            )
            
            
            (15,544
            )Inventory
            
            
            (53,330
            )
            
            
            -Other
      current assets
            
            
            (11,633
            )
            
            
            (59,047
            )Accounts
      payable
            
            
            (150,124
            )
            
            
            124,185Deferred
      revenue
            
            
            (187,500
            )
            
            
            (187,500
            )Accrued
      expenses
            
            
            (257,048
            )
            
            
            256,238Accrued
      interest
            
            
            30,880
            
            
            
            13,869Net
      cash used in operating activities
            
            
            (1,924,496
            )
            
            
            (1,601,277
            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of securities
            
            
            -
            
            
            
            (999,631
            )Proceeds
      from the maturity of securities
            
            
            -
            
            
            
            3,000,000Purchases
      of fixed assets
            
            
            (4,660
            )
            
            
            (29,636
            )Expenditures
      for intellectual property
            
            
            (105,368
            )
            
            
            (114,584
            )Net
      cash provided by (used in) investing activities
            
            
            (110,028
            )
            
            
            1,856,149CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock (net)
            
            
            -
            
            
            
            241,902Proceeds
      from convertible debt
            
            
            2,900,000
            
            
            
            -Principal
      payments on notes payable
            
            
            (12,979
            )
            
            
            -Net
      cash provided by financing activities
            
            
            2,887,021
            
            
            
            241,902Effect
      of exchange rate on cash
            
            
            (6,835
            )
            
            
            -Net
      increase in cash and cash equivalents
            
            
            845,662
            
            
            
            496,774Cash
      and cash equivalents at beginning of period
            
            
            429,726
            
            
            
            5,279,878Cash
      and cash equivalents at end of period
            
            $
            1,275,388
            
            
            $
            5,776,652





NON
      CASH DISCLOSURES:Advance
      on convertible debt
            
            $
            100,000
            
            
            $
            -





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. (“the Company") are presented in accordance with the requirements for Form
10-Q and Article 10 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, 2008, which has been
derived from the audited consolidated financial statements 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, 2008 included in the Company's Annual Report on Form 10-KSB
filed with the Commission on April 30, 2008.  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 generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Consolidated Financial Statements for the years ended
January 31, 2008 and 2007.  Operating results for the three months
ended April 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending January 31, 2009.





Certain
balances in the prior periods have been reclassified to conform to the
presentation adopted in the current period.





Going
Concern





The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going
concern.




The
Company’s operations have incurred operating losses to date and are expected to
continue to have operating losses in the year ending 2009. Management
continues to address the going concern issue by securing sources of funding
through equity financing and focusing their efforts on fulfilling the immediate
requirements of and supporting existing customer agreements with Sanyo Electric
Corporation (Sanyo),  International Game Technology (IGT) and Samsung
Electronics Company, Ltd (Samsung) and reducing operating costs throughout the
organization.





In the
first quarter of year ending 2009, the Company raised $3.0 million in secured
convertible debt agreements from its majority shareholder, and is undertaking
efforts to raise 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 our affiliates, or a credit
facility.  In January 2008, the Company executed a cost reduction plan
at both our operating locations.   At the same time, Management
continues to seek to increase and diversify its sources of licensing
revenue.





While the
Company believes its plans ultimately will resolve the going concern issue,
there is no assurance that the intended results will occur. In the event the
Company is unsuccessful in its plans to finance operations through the above
means, or in amounts sufficient to maintain current operations, it will be
forced to again reduce, or significantly reduce its level of
operations, including slowing growth, delaying hiring, abandoning certain
product development including product development on which we may have already
spent considerable resources and could eventually be forced, if necessary to
cease operations altogether..  The Company may eventually, if
necessary, seek other business opportunities through strategic alliances,
acquisitions or other arrangements that may dilute the interests of existing
stockholders or cease operations altogether.  If the Company is
successful in its plans to finance operations through the above means, these
plans ultimately may not resolve the going concern issue and additional
financings may also be necessary thereafter until the Company is able to
attain and sustain profitable operations.  These uncertainties
continue to raise substantial doubt about the Company’s ability to continue as a
going concern.





6


The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.





Recently
Issued Accounting Pronouncements




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
SFAS No. 159 will be effective at the beginning of 2008. The Company had no
significant impact on their financial condition, results of operations, or
liquidity from adopting this statement.




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which
changes the accounting for business combinations and their effects on the
financial statements. SFAS No. 141(R) will be effective at the beginning of
2009. The adoption of this statement is not expected to have a material impact
on our financial condition, results of operations, or liquidity.




In
December 2007, the FASB issued SFAS No. 160, Accounting and Reporting of
Noncontrolling Interests in Consolidated Financial Statements, and amendment of
ARB No. 51. SFAS No. 160 requires entities to report non-controlling
interests in subsidiaries as equity in their consolidated financial statements.
SFAS No. 160 will be effective at the beginning of 2009. The adoption of this
statement is not expected to have a material impact on the Company’s financial
condition, results of operations, or liquidity.





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.





Note
2 - Description of Business





PureDepth,
Inc., (PDI) along with its two wholly owned subsidiaries, PureDepth Limited
(PDL) and PureDepth Incorporated Limited (PDIL) develops, markets, licenses, and
supports multi-layer display (MLD) technology.  Unlike other
display-based technologies, the MLD technology was created and designed based on
how humans visualize the world.  Depth is a key component of everyday
visualization and interaction, yet in the world today most of our information is
displayed on technology that can, at best, only provide the visual perception of
depth. Unlike standard two-dimensional (2D) display technologies that utilize
only a single-layer liquid crystal display (LCD), the MLD technology utilizes
two or more LCD panels that are stacked and separated by actual
depth.





The
Company’s technology has application in industries and markets where flat panel
monitors and displays are utilized.  The Company’s goal is to have
their MLD technology become a standard technology for incorporation into these
LCD-based products, which include location-based entertainment devices, computer
monitors, flat panel televisions, mobile devices and other mass market display
devices.





The
accompanying condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP).  The condensed consolidated financial statements
include all of the accounts of PureDepth, Inc., a U.S. corporation based in
California, and its wholly-owned subsidiaries, based in Auckland, New
Zealand.





7


Note
3 - Intellectual Property





Intellectual
property consists of the following:




April
      30,
              2008
            
            
            January
      31,
              2008Patent
      registration costs
            
            $
            2,505,250
            
            
            $
            2,399,880Software
      development costs
            
            
            70,456
            
            
            
            70,456Acquired
      patent rights
            
            
            2,299,509
            
            
            
            2,299,509Less:
      accumulated amortization
            
            
            (2,285,397
            )
            
            
            (2,205,585
            )Intellectual
      property, net
            
            $
            2,589,818
            
            
            $
            2,564,260





Amortization
for three months ended April 30, 2008 and 2007 totaled $79,810 and $76,371,
respectively and is included in licensing cost of sales.  Amortization
expense for the next five years is summarized in the following
table:




Years
      ending January 31,2009
            $
            236,7952010
            
            321,8732011
            
            321,8732012
            
            158,0312013
            
            125,263Thereafter
            
            1,425,983




Note
4 - Notes Payable and Convertible Notes




Notes
Payable





The
Company had the following obligations outstanding:




April
      30,
              2008
            
            
            January
      31,
              2008Notes
      payable excluding imputed interest to date at 10%,payable
      in equal annual installments of $175,000 through January31,
      2011 and secured by intellectual property
            
            $
            435,200
            
            
            $
            435,200Other
            
            
            -
            
            
            
            12,979Less:
      current portion
            
            
            (131,480
            )
            
            
            (135,870
            )Total
      long term notes payable
            
            $
            303,720
            
            
            $
            312,309





Future
maturities of long term debt excluding imputed interest are as
follows:




Years
      ending January 31,2009
            
            $
            131,4802010
            
            
            144,6282011
            
            
            159,092








8




Secured
Convertible Debt and Related Instruments





On
February 4, 2008, the Company executed a Convertible Note Purchase Agreement
(“Note Purchase Agreement”), agreement with K One W One Ltd., a majority
shareholder and accredited investor,  whereby the Company issued an
aggregate of $3 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 mature on February 4, 2009. The Company
intends to use the proceeds for general corporate purposes, including working
capital. 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 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. The principal and interest due on
the Notes are payable on the maturity date, subject to earlier conversion due to
a Qualified Financing event. At the option of the Holder, principal and interest
due on the 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 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 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.  Pursuant to the terms of the Notes, the conversion price will
be reset (the “Reset Provision”) in the event the Company (i) effects a
reverse/forward stock split, (ii) pays a dividend, (iii) issues shares,
convertible securities or options entitling the recipient to subscribe for or
purchase shares at a price per share less than the conversion price then in
effect.





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 April 30, 2008, the Company is not in
default.





Additionally,
The Convertible Notes are 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 Purchaser 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.





9




Warrants





The
Company would grant the note holder a warrant convertible into shares of its
common stock if and only if a Qualified Financing takes place prior to maturity
date of the Convertible Notes. If issued 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 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.
The Warrants would expire on February 4, 2011.





As the
qualified financing has not yet taken place and the warrants have not been
granted, the warrants have not been measured.  If and when the
qualified financing does occur, the warrants will be measured and recognized at
that time.





The value
assigned to the Convertible Notes and the related debt features on issuance is
the following:





Date
      of Note
            
            Amount
      of
              Notes
            
            
            Debt
      Features
              Value
      at Issuance
            
            
            Initial
              Carrying
      ValueFebruary
      4, 2008
            
            $
            1,000,000
            
            
            $
            52,632
            
            
            $
            947,368March
      14, 2008
            
            
            2,000,000
            
            
            
            105,263
            
            
            
            1,894,737Total
            
            $
            3,000,000
            
            
            $
            157,895
            
            
            $
            2,842,105





The
amortized debt discount associated with the embedded conversion feature was
recorded to interest expense in the amount of $28,195 for three months ended
April 30, 2008.





If the
aggregate principal amount owing under the Convertible Notes is converted, the
Company will issue 9,852,540 shares of Common Stock, which may be adjusted
pursuant to the reset provisions in the Notes. If the Notes are not converted,
the principal and accrued but unpaid interest will be due on February 4,
2009.




Note
5 - Stockholders’ Equity




Stock
warrants





The
following table summarizes common stock warrant activity for:




Three
      months ended
              April
      30, 2008
            
            
            Twelve
      months ended
              January
      31, 2008Warrants
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Warrants
            
            
            Weighted
      Average
              Exercise
      PriceOutstanding
      at beginning of period
            
            
            17,290,468
            
            
            
            $1.15
            
            
            
            
            19,404,660
            
            
            
            $1.12Issued
            
            
            -
            
            
            
            -
            
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            
            (205,202
            )
            
            
            $0.87Expired
            
            
            -
            
            
            
            -
            
            
            
            
            (1,908,990
            )
            
            
            $0.87Outstanding
      at end of period
            
            
            17,290,468
            
            
            
            $1.15
            
            
            
            
            17,290,468
            
            
            
            $1.15Exercisable
      at end of period
            
            
            17,290,468
            
            
            
            $1.15
            
            
            
            
            17,290,468
            
            
            
            $1.15





Included
in the total outstanding warrants at the three months ended April 30, 2008 and
twelve months ended January 31, 2008 are A-warrants to purchase 9,147,613 shares
of common stock at $1.20 per share, C-warrants to purchase 1,082,811 shares of
common stock at $0.44 per share, and D-warrants to purchase 7,060,044 shares of
common stock at $1.20 per share.





The
Company values warrants issued as compensation at the fair value determined on
the date of grant using the same Black-Scholes valuation model and 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.




10





Stock
option plan





At April
30, 2008, 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 Number 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 1,185,022 of
shares of common stock (post merger adjusted additional shares were 2,713,945)
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 April 30, 2008 is the
simplified approach as defined by SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB
107). This approach resulted in expected terms of 4.5 to 5.0 years for stock
options and 1.5 years for stock warrants.  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





Significant
      Assumptions
            Three
      Months Ended
              April
      30, 2008
            Twelve
      Months Ended
              January
      31, 2008Expected
      volatility
            70%
            70%Expected
      forfeiture rate
            30%
            30%Expected
      dividend yield
            0%
            0%Expected
      term (in years)
            4.5
      to 5.0
            3.5
      to 5.0Risk-free
      rate
            2.66%
            2.94%
      to 5.03%








11




The
following table summarizes common stock option activity under the plan
for:




Three
      months ended
              April
      30, 2008
            
            
            Twelve
      months ended
              January
      31, 2008Option
      Shares
            
            Shares
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Shares
            
            
            Weighted
      Average
              Exercise
      PriceOutstanding
      at beginning of period
            
            
            12,002,429
            
            
            
            $0.74
            
            
            
            
            12,815,411
            
            
            
            $0.68Granted
            
            
            3,385,000
            
            
            
            $0.27
            
            
            
            
            4,177,501
            
            
            
            $1.21Exercised
            
            
            -
            
            
            
            -
            
            
            
            
            (2,121,395
            )
            
            
            $0.28Forfeited
      and cancelled
            
            
            (1,109,166
            )
            
            
            $1.68
            
            
            
            
            (2,869,088
            )
            
            
            $1.48Outstanding
      at end of period
            
            
            14,278,263
            
            
            
            $0.56
            
            
            
            
            12,002,429
            
            
            
            $0.74Exercisable
      at end of period
            
            
            8,601,156
            
            
            
            $0.46
            
            
            
            
            8,684,732
            
            
            
            $0.53




The
following table summarizes significant ranges of outstanding and exercisable
options as of April 30, 2008:




Outstanding
            
            ExercisableExercise
      Price Range
            Shares
            Weighted
              Average
              Life*
            Weighted
      Average
              Exercise
              Price
            Aggregate
              Intrinsic
              Value
            
            Shares
            Weighted
              Average
              Exercise
              Price
            Aggregate
              Intrinsic
              Value$0.27
      to $0.44
            11,050,364
            5.29
            $0.28
            $472,206
            
            7,565,364
            $0.28
            $297,956$0.85
      to $2.07
            2,384,233
            6.36
            $1.09
            -
            
            637,817
            $1.20
            -$2.20
      to $2.95
            553,400
            5.61
            $2.27
            -
            
            237,817
            $2.29
            -$3.03
      to $3.51
            290,266
            5.41
            $3.37
            -
            
            160,158
            $3.37
            -Total
            14,278,263
            5.48
            $0.56
            $472,206
            
            8,601,156
            $0.46
            $297,956


*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 $0.32 as of April 30, 2008, which would have
been received by the option holders had those option holders exercised their
options as of that date.  The total of in-the-money stock options
exercisable as of April 30, 2008 was 7,448,898.  At April 30, 2008,
8,601,156 options were exercisable with a weighted-average exercise price of
these options was $0.46.  Options available for grant were 5,252,432
at April 30, 2008.





The
stock-based compensation cost for options issued in the three months ended April
30, 2008 and 2007 was $190,460 and $196,783, 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 April 30, 2008 associated with employee and director stock options was
approximately $1.7 million and is expected to be recognized over a
weighted-average period of 2.8 years.





Note
6 – Major Customer





One
customer accounted for 100% of the Company’s licensing revenues in the three
months ended April 30, 2008 and 2007.  The same customer accounted for
the entire ending balance of deferred revenue at April 30, 2008 and January 31,
2008.





12




Note
7 – 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 ended April 30, 2008 and 2007 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:





For
      Three Months EndedApril
      30, 2008
            
            
            April
      30, 2007Numerator:Net
      loss per share, basic and diluted
            
            $
            (1,544,069
            )
            
            $
            (1,978,243
            )Denominator:Weighted
      average shares outstanding, basic and diluted
            
            
            68,483,979
            
            
            
            66,296,747Net
      loss per share, basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.03
            )





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:




For
      Three Months EndedApril
      30, 2008
            
            
            April
      30, 2007Convertible
      notes
            
            
            9,852,540Warrants
            
            
            17,290,468
            
            
            
            17,290,468Employee
      stock options
            
            
            14,278,263
            
            
            
            12,890,411




Note
8 - Related Party Transactions




On
February 4, 2008, the Company entered into a convertible note purchase agreement
(“Note Purchase Agreement”) with K One W One (“K1W1”) providing for the
purchase by K1W1 of convertible notes (“Notes”) up to of an aggregate principal
amount of $3,000,000.  Under the Note Purchase Agreement, upon the
closing, on February 4, 2008, K1W1 purchased an initial note of $1,000,000
($100,000 of which was previously funded to the Company on January 30, 2008) and
on March 14, 2008 K1W1 purchased another note of $2,000,000.  The
Notes are secured by the assets of the Company pursuant to a security
agreement.  The Notes are convertible at a discount of five percent
(5%) into investment instruments issued by the Company pursuant to and upon a
qualified financing.  If such qualified financing does not occur, upon
maturity one year from the date of issuance the Notes may, at K1W1’s option,
convert into common stock of the Company at a five percent (5%) discount from a
formula-derived market price.  The Notes accrue interest at the annual
rate of 8%, commencing October 4, 2008.  In addition, pursuant to the
Note Purchase Agreement, K1W1 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 Notes, and at a
discount of five percent (5%) of the purchase price of the investment
instruments issued in such qualified financing.





13




On April
10, 2008, the Board of Directors approved stock option grants to employees,
directors and to its recently appointed President, Mr. Jonathan McCaman,
totaling an aggregate of 3,385,000 shares of the Company's common
stock.  The directors as a group were granted options to purchase
1,025,000 shares of Company common stock and the employees as a group were
granted options to purchase 1,610,000 shares of Company common
stock.  The director and employees’ shares vest 1/6 of their
underlying shares on October 10, 2008 and 1/12 of the remaining underlying
shares on a quarterly basis thereafter over a period of two and a half
years.  Mr. McCaman, was granted an option to purchase 750,000 shares
of Company common stock, vesting on a quarterly basis over a period of two
years.  All granted options were issued with an exercise price equal
to the closing price of the Company’s common stock on April 10, 2008 as reported
by the OTC Bulletin Board, $0.27 per share.  Each option will also be
subject to the terms and conditions of the Company’s 2006 Stock Incentive Plan
and form of stock option agreement, which each individual will be required to
sign as a condition of receiving the option.





On April
29, 2008 the Company and Mr. McCaman entered into an amendment to Mr. McCaman’s
employment agreement in connection with his appointment as President of the
Company.  The amendment provides that Mr. McCaman’s base salary
increased to $210,000 effective as of March 1, 2008 and that he shall be
eligible for an executive incentive bonus, in an amount up to $50,000 per
quarter, to be based upon key performance indicators (“KPI’s”) to be mutually
determined by Mr. McCaman and the Board’s Compensation Committee, for the first
two quarters, within 30 days of signing of this Amendment, and thereafter on a
schedule determined by the parties.  In addition, the amendment
provides for the grant of a stock option to purchase 750,000 shares of the
Company’s common stock, vesting over two years.  The Board of
Directors previously approved Mr. McCaman’s 750,000 stock option grant as part
of the stock options granted on April 10, 2008.  Pursuant to the
amendment and subject to the approval of the Board, each quarter Mr. McCaman
will also be eligible for additional grants of stock options to purchase up to
150,000 shares of the Company’s common stock, to be based upon KPI’s to be
mutually determined by Mr. McCaman and the Board’s Compensation Committee, for
the first two quarters, within 30 days of signing of this Amendment, and
thereafter on a schedule determined by the parties.  The exercise
price of each of the foregoing options was or will be equal to the closing price
of the Company’s common stock on the option grant date as reported by the OTC
Bulletin Board.  Options in the additional grants will vest quarterly
over three (3) years, and will be subject to the terms and conditions of the
Company’s 2006 Stock Incentive Plan and form of stock option
agreement.  The amendment further provides that In the event of a
“Change of Control,” as defined in the amendment, all of Mr. McCaman’s
then-unvested options shall immediately vest.





Note
9 - Subsequent Events





On May
27, 2008 the Company entered into a new office lease agreement for its U.S.
corporate headquarters in Redwood City, California.  The new office
lease has a two year term, commencing June 1, 2008, and covers approximately
1,983 square feet at a rate of $5,949 per month.  The Company has
relocated its entire U.S. corporate headquarters to the new location and does
not intend to renew its existing lease agreement which expired on May 31,
2008.





On June 9, 2008, PureDepth,
Inc. (the “Company”) entered into a variation to employment agreement and a
consultancy agreement with Ms. Kristin Bowman, Senior Vice President, Customer
and Business Development of PureDepth Incorporated Limited, the Company’s New
Zealand subsidiary (“PDIL”), and a director of the Company, relating to her
separation from employment with the Company.  The terms of the
variation to employment agreement, which amend her Employment Agreement dated
March 31, 2005, are generally effective as of April 17, 2008 and provide for a
reduction in Ms. Bowman’s work hours to 8 hours per week, with a corresponding
reduction in her salary, and the remainder of her previously scheduled weekly
work hours taken as vacation pay until her accrued vacation pay is
exhausted.  The agreement also provides for the resignation of Ms.
Bowman’s position with,PDIL effective June 14,
2008.  Ms. Bowman has not resigned as a director of the
Company.   The terms of the consultancy agreement are effective
after the effective date of Ms. Bowman’s resignation on June 14, 2008 and call
for Ms. Bowman to consult with PureDepth’s executive management team without
charge for up to 20 hours per calendar quarter with any additional hours to be
charged at a rate of USD$150 per hour until January 31, 2009, after which she
will be entitled to $150 per hour for all consultancy to the Company or it
subsidiaries. The agreement may be terminated by either party with six months
notice.  Pursuant to the consultancy agreement, Ms. Bowman’s option
agreement was also amended to provide thatin the event Ms. Bowman ceases
to serve as a director, officer, employee or consultant of the Company, she will
have until the earlier of (i) 365 days from the date of such
termination or (ii) March 31, 2011 to exercise all or any part of
her vested options.





14


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-KSB, our Quarterly
Reports on Form 10-QSB and 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, are referred to in this Quarterly Report on Form 10-Q as the “Company,”
“we,” “us” and “our.” References herein to year ending 2009, and years ended
2008 and 2007 mean the fiscal year ending January 31, 2009, and the fiscal years
ended January 31, 2008 and January 31, 2007, respectively.





15




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, and expect to continue to 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 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.





Our
efforts in the immediate future are primarily focused on fulfilling the
requirements of and supporting existing customer agreements with Sanyo Electric
Corporation (Sanyo),  International Game Technology (IGT) and Samsung
Electronics Company, Ltd (Samsung).  At the same time, we will
continue to seek to diversify our sources of licensing revenue. We have
identified the following target markets in North America, Asia and Europe that
we believe are appropriate for our MLD technology: location-based entertainment
devices, computer monitors, public information display systems, mobile devices,
flat-panel televisions and other mass market display devices.  Our
existing license agreements pertain to products for the location-based
entertainment devices, mass market display devices and mobile
devices.  Our goal is to expand our business by working with partner
companies to develop MLD-based products and developing demand and a presence for
such devices in our identified target markets.





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 both Redwood City, CA and
Auckland, New Zealand. Other than our research and development expenses, no
significant capital equipment purchases are expected during the year ending
2009.





Our
critical research and development activities include: further enhancing our
existing MLD technology and related software; developing, manufacturing and
testing prototype MLD-enabled display devices for our existing licensee partners
and potential licensee partners; designing and customizing features to the
specification of potential licensee partners; and patent defense and 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.





We
maintain two facilities, our U.S. corporate headquarters in Redwood City,
California and our research and development center in Auckland, New
Zealand.  Our facility lease in New Zealand expires in October 2008
and we expect to exercise our renewal option for this facility. We signed a four
year lease in a new location in Redwood City, California which started in
February 2008.  Due to our reduction in headcount and our const
reduction efforts, we subsequently subleased the new office space to a sub
lessee for a two year term commencing in June 2008 at terms similar to our
obligations.  In May 2008 we signed a new two year lease in a new
location in Redwood City, California and we relocated our U.S. corporate
headquarters to this new location.





We have
reduced the number of worldwide employees from a high of 46 employees during the
year ending 2008 to a current level of 28 full time employees.  Four
of our employees are located at our U.S, corporate headquarters in Redwood City,
California and the remaining 24 employees are located at our research and
development facility in Auckland, New Zealand.  We believe the current
level of employees is adequate to run our operations and support our existing
customer agreements.  We do not anticipate hiring additional employees
in the year ending 2009 until we resolve our funding needs and we may be
required to reduce our worldwide headcount further depending on the amount, type
and terms of any funding we may attain.





The
report from our independent auditors on our financial statements for the year
ending 2008 includes an explanatory paragraph indicating there is substantial
doubt about our ability to continue as a going concern. Our operations have
incurred operating losses to date and are expected to continue to have operating
losses in the year ending 2009.  Because our cash balance and cash
flow is not likely to be sufficient to fund our future long term operating
expenses and the growth of our business, we are undertaking efforts to obtain
additional financing in order to finance our future losses during the current
fiscal year and thereafter.





16


During
the three months ended April 30, 2008 we raised $3.0 million in secured
convertible debt agreements from our majority shareholder.  Additional
financing could be sought 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 our affiliates, or a credit
facility.  In January 2008, we executed a cost reduction plan at both
our operating locations.   At the same time, we continue to seek
to increase and diversify our sources of licensing revenue.





While we
believe our plans ultimately will resolve the going concern issue, there is no
assurance that the intended results will occur. In the event we are unsuccessful
in our plans to finance operations through the above means, or in amounts
sufficient to maintain current operations, we will be forced to again reduce, or
significantly reduce our level of operations, including slowing growth,
delaying hiring, abandoning certain product development including product
development on which we may have already spent considerable resources and could
eventually be forced, if necessary to cease operations altogether.  We
may eventually, if necessary, seek other business opportunities through
strategic alliances, merger or acquisition transactions or other arrangements
that may dilute the interests of existing stockholders or cease
operations altogether.  If we are successful in our plans to
finance operations through the above means, these plans ultimately may not
resolve the going concern issue and additional financings may also be
necessary thereafter until we are able to attain and sustain profitable
operations.  These uncertainties continue to raise substantial doubt
about our ability to continue as a going concern.





The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.





Results
of Operations





We
reported net losses of $1.5 million in the three months ended April 30, 2008 and
$2.0 million in the three months ended April 30, 2007.  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 2009.





Licensing
Revenue and Cost of Licensing




Three
      Months Ended
            
            
            Change($
      in thousands)
            
            April
      30, 2008
            
            
            April
      30, 2007
            
            
            $
            
            
            
            %Licensing
      revenue
            
            $
            188
            
            
            $
            188
            
            
            $
            -
            
            
            
            -Cost
      of licensing
            
            
            80
            
            
            
            76
            
            
            
            4
            
            
            
            5%Gross
      margin - $
            
            $
            108
            
            
            $
            112
            
            
            $
            4
            
            
            
            4%Gross
      margin - %
            
            
            57%
            
            
            
            60%





We are a
party to a patent and technology license and technology transfer agreement (the
“IGT 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. We received an advance, non-refundable payment of
license fees of $3.75 million under the terms of the agreement during the year
ended 2007.  Our licensing revenue consists entirely of the
amortization of this advance non-refundable payment which began in October
2006.  The amount of licensing revenue in the three months ended April
30, 2008 is consistent with the prior year.  The balance of the
advance on licensing revenues is recorded as deferred revenue and will continue
to be earned over 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 recognize licensing revenue from our
customers’ sales in the remainder of year ending 2009; however, we have no
control over the timing or success of our customers’ sales or marketing
programs.




17


Cost of
licensing is primarily the amortization of capitalized costs related to our
patents.  The increase in cost of licensing is the result of
additional capitalized patent costs being amortized.  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.





Services
Revenue and Cost of Services


Three
      Months Ended
            
            
            Change($
      in thousands)
            
            April
      30, 2008
            
            
            April
      30, 2007
            
            
            $
            
            
            
            %Services
      revenue
            
            $
            110
            
            
            $
            -
            
            
            $
            110
            
            
            
            100%Cost
      of services
            
            
            87
            
            
            
            -
            
            
            
            87
            
            
            
            100%Gross
      margin - $
            
            $
            23
            
            
            $
            -
            
            
            $
            23
            
            
            
            100%Gross
      margin - %
            
            
            21%
            
            
            
            -





We had no
services revenue in the three months ended April 30, 2007.  Our
services revenue consists 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.  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 represents direct labor and overhead costs of providing the respective
services.   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
            
            
            Change($
      in thousands)
            
            April
      30, 2008
            
            
            April
      30, 2007
            
            
            $
            
            
            
            %Product
      sales revenue
            
            $
            -
            
            
            $
            44
            
            
            $
            (44
            )
            
            
            (100%
            )Cost
      of product sales
            
            
            -
            
            
            
            38
            
            
            
            (38
            )
            
            
            (100%
            )Gross
      margin - $
            
            $
            -
            
            
            $
            6
            
            
            $
            (6
            )
            
            
            (100%
            )Gross
      margin - %
            
            
            -
            
            
            
            14%





We had no
product sales revenue in the three months ended April 30,
2008.  Product sales represent sales of prototype MLD-enabled display
devices to existing and potential licensing customers. We design and manufacture
these prototypes specifically for sale to these customers, who use them to
develop, test and promote MLD applications in their products.  The
decrease in product sales revenue is due to our efforts to focus on our existing
primary customers whom have already purchased prototypes in the past and are now
moving towards manufacturing and marketing their own  product
lines.  We expect product revenues of our prototype MLD-enabled
display devices will fluctuate and may increase as relationships with new and
existing partners evolve, but will continue to represent a small portion of our
overall revenues in the year ending 2009.





Cost of
product sales represents material, overhead and labor costs of assembling the
prototypes at our research and development facility in Auckland, New
Zealand.  We have minimal 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
assembly.  As the engineering and material standards for form factors
are finalized, we expect the cost of materials and associated labor to decline.
In addition, we intend to outsource the assembly of many prototypes with the
expectation of further reducing our costs. As a result of these factors, we
expect to see our cost of product sales as a percentage of product revenues
decline in the year ending 2009.





18




Operating
Expenses




Three
      Months EndedApril
      30, 2008
            
            
            April
      30, 2007
            
            
            Change($
      in thousands)
            
            
            $
            
            
            %
      of Total
            
            
            
            $
            
            
            %
      of Total
            
            
            $
            
            
            
            %Depreciation
            
            $
            32
            
            
            
            2%
            
            
            $
            18
            
            
            
            1%
            
            
            $
            14
            
            
            
            78%Research
      and development
            
            
            466
            
            
            
            29%
            
            
            
            516
            
            
            
            24%
            
            
            
            (50
            )
            
            
            (10%
            )Sales
      and marketing
            
            
            153
            
            
            
            10%
            
            
            
            375
            
            
            
            17%
            
            
            
            (222
            )
            
            
            (59%
            )General
      and administrative
            
            
            955
            
            
            
            59%
            
            
            
            1,251
            
            
            
            58%
            
            
            
            (296
            )
            
            
            (24%
            )Total
      operating expenses
            
            $
            1,606
            
            
            
            100%
            
            
            $
            2,160
            
            
            
            100%
            
            
            
            (554
            )
            
            
            (26%
            )





Included
in our operating expenses are stock-based compensation costs related to the
granting of options to employees and directors.  Stock-based
compensation totaled $0.2 million for the three months ended April 30, 2008 and
$0.2 million for the three months ended April 30, 2007.  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 three months
ended April 30, 2008, we expensed stock-based compensation of $33,000 in
research and development, $11,000 in sales and marketing, and $146,000 in
general and administrative operating expense categories.





Depreciation.The
increase in depreciation is primarily the result of depreciation on capitalized
purchases of fixed assets of approximately $175,000 in the prior twelve
months.  Depreciation expense is not expected to increase
proportionately with revenue or total operating expenses as it is unlikely we
will need to make significant purchases of fixed assets in the foreseeable
future.





Research and
development.Research and development expenses consist
primarily of personnel salary and benefits, travel, materials, consultant fees
and stock based compensation.  The decrease in research and
development expenses is primarily due to cost cutting measures taken at the end
of the year ended 2008 for travel, materials and general operating
costs.  Other fluctuations in research and development expenses were
consistent or slightly lower in the three months ended April 30,
2008.





We expect
research and development expenses to be maintained at approximately this level
for the remainder of the year ending 2009 as we are focused on meeting the
immediate needs of our existing customers and maintaining our
technology.  We expect that our long term research and development
activities beyond these two objectives will be postponed until adequate funding
or a sustainable revenue stream is realized.





Sales and
marketing.Sales and marketing expenses consist primarily of
personnel salary and benefits, travel, tradeshows, consultant fees and stock
based compensation.  The decrease in sales and marketing expenses is
primarily due to cost cutting measures implemented at the end of the year ended
2008.  The net decrease of $222,000 from the corresponding period of
the prior year resulted from a decrease in personnel salary, travel, stock-based
compensation and consultant fees of $275,000 offset by severance and termination
expenses during the three month period of $53,000.





We expect
sales and marketing expenses to be further reduced in the remainder of year
ending 2009 due to the reductions in headcount and the cost savings measures
implemented at the end of the year ended 2008 and the three months ended April
30, 2008.  We expect that sales and marketing activities will be
narrowly focused on opportunities with our current customers or identified
potential customers with near term revenue opportunities.  We also
expect that all sales and marketing costs will be minimized until adequate
funding or until sustainable revenue stream is realized.





General and
administrative. General and administrative expenses
consist primarily of personnel salary and benefits, travel, capital raising
costs, merger related expenses, insurance, stock based compensation, and
professional fees related to our public company filing
requirements.  The decrease in general and administrative expenses is
primarily due to cost cutting measures and the resolution of public filing
requirements at the end of the year ended 2008.  Legal, personnel
salary, public filing costs, accounting and consultant fees decreased at total
of $320,000 due to the increase of in-house handling of legal and accounting
matters, the vacancy in our CEO position and reduction of the reliance on
outside professional consultants.  Offsetting the decrease was an
increase in our rent and office expenses of $25,000 related to additional rent
paid on our new office lease prior to signing the sublease
agreement.  Fluctuations in other general and administrative expenses
were consistent with the three months ended April 30, 2007 of the prior
year.





19


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 depending on
our need to rely upon external professionals for related services.  We
may also experience increased legal and capital raising cost associated with any
capital raising activities we may undertake in the year ending
2009.  We anticipate that the overall cost savings measures introduced
during the year ended 2008 will help us maintain or offset increases in our
general and administrative expenses in the year ending 2009.





Other
Income and Expense






Three
      Months Ended
            
            
            Change($
      in thousands)
            
            April
      30, 2008
            
            
            April
      30, 2007
            
            
            $
            
            
            
            %Interest
      income
            
            $
            7
            
            
            $
            93
            
            
            $
            (86
            )
            
            
            (92%
            )Interest
      expense
            
            
            (60
            )
            
            
            (13
            )
            
            
            (47
            )
            
            
            (362%
            )Foreign
      exchange loss
            
            
            (15
            )
            
            
            (15
            )
            
            
            -
            
            
            
            -Other
      expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      other income(expense), net
            
            $
            (68
            )
            
            $
            65
            
            
            $
            (133
            )
            
            
            (205%
            )





Other
income and expense consists of interest income, interest expense, foreign
exchange gain or loss and other miscellaneous items.  Interest income
is earned on our cash balances.  Interest income was significantly
lower in the three months ended April 30, 2008 due to the decrease in our cash
resources resulting from our ongoing operating expenses. We expect interest
income to fluctuate in the year ending 2009 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 is incurred on our notes payable and
convertible debt.  Included in interest expense is the amortization of
the debt discount associated with the embedded conversion feature of our
convertible notes and is amortized over the life of the Debenture or upon
earlier conversion of the Debenture using the effective yield
method.  The increase in interest expense relates to our issuance of
secured convertible notes in the three months ended April 30, 2008 in the
aggregate principal amount of $3.0 million.  We expect interest
expense to increase in the year ending 2009 as a result of interest due on the
secured convertible notes and the amortization of the debt discount associated
with the embedded conversion feature.  Our foreign exchange gains and
losses result from transactions with our New Zealand subsidiaries, with our
overseas customers and translation of our New Zealand subsidiaries into U.S.
dollars.   Foreign exchange loss is consistent with the prior
year and is expected to be immaterial in the year ending 2009.  Other
income (expense) was immaterial for the three months ended April 30, 2008 and
2007 and is expected to be immaterial in the year ending 2009.




Liquidity
and Capital Resources





We have
funded our operations from inception through April 30, 2008 primarily through
the sale and exercise of common stock and warrants, the use of an advance,
non-refundable payment of licensing fees and the issuance of secured convertible
notes.  In the three months ended April 30, 2008, net cash used in
operating activities was $1.9 million and an additional $110,000 was used for
investment in fixed assets and intellectual property.  Our operating
activities and asset purchasing activity were primarily funded by available cash
of $0.4 million and the issuance of $2.9 million in secured notes during the
three months ended April 30, 2008.    Our ending cash
balance at April 30, 2008 was $1.3 million.





In
January 2008, we executed a cost reduction plan including a reduction in
headcount at both our operating locations.  We are undertaking efforts
to obtain additional financing.  At the same time, we continue to seek
to increase and diversify our sources of licensing revenue with our existing
customer base and potential new customers.





We expect
the cash balance of $1.3 million will allow us to fund operations through at
least July 2008.  We expect that it will be necessary for us to obtain
additional financing in order to fund our operations beyond July
2008.  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. Ultimately, if no
additional financing is obtained as and when needed, we may be required
to significantly reduce our level of operations, including by
slowing our growth, delaying  hiring, abandoning certain product
development including product development on which we may have already spent
considerable resources and otherwise reducing expenses, or eventually, if
necessary, cease operations altogether.  Further, if we do not
enter into a qualified financing resulting in the conversion of the notes issued
to K1W1, K1W1 may elect to exercise its remedies with respect to its security
interest, which could result in the seizure or forced sale of our
assets.





20


We have
issued options to purchase 3,385,000 shares of our commons stock to employees
and directors during the three months ended April 30, 2008 pursuant to our 2006
Stock Incentive Plan. As of April 30, 2008, we had options to purchase
14,278,263 shares of our common stock outstanding under our 2006 Stock Incentive
Plan with a weighted exercise price of $0.56.  A total of 7,448,898 of
the shares underlying such outstanding options are exerciseable and in-the-money
with a weighted exercise price of $0.28.  We also have outstanding
warrants to purchase 17,290,468 shares of common stock at a weighted average
exercise price of $1.15.





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 April 30, 2008, 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 foreign 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 April 30, 2008 and 2007.




As a
result of the adoption of FIN 48, there was no impact to our consolidated
financial position, results of operations or cash flows for the three months
ended April 30, 2008.  In accordance with FIN 48, we recognize
interest and penalties related to unrecognized tax benefits as a component of
income taxes.  At April 30, 2008 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 ended April 30,
2008.





We are
subject to taxation in the U.S. and California. Our subsidiaries are subject to
taxation in New Zealand.  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.





Obligations





Our
obligations as of April 30, 2008 consisted of operating leases for facilities, a
settlement agreement obligation accounted for as a note payable and secured
convertible notes.  At April 30, 2008, minimum lease payments required
under the operating leases amounted to $0.7 million and are payable through
2012. The note payable has a balance, including future interest, of
approximately $0.5 million and is payable in equal annual installments of
$175,000 through 2010. The aggregate principal amount of the secured convertible
notes totals $3.0 million and such notes are 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, upon
maturity one year from the date of issuance the notes may, at the holder’s
option, convert into our common stock at a five percent (5%) discount from a
formula-derived market price.  The notes will accrue interest at the
annual rate of 8%, commencing October 4, 2008.  In addition, pursuant
to the note purchase agreement, each note holder will receive 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 notes, and at a discount of five percent (5%) of the purchase price of the
investment instruments issued in such qualified financing.  The notes
are secured by our assets.





21


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 on significant changes in our critical accounting policies included in
our Annual Report on Form 10-KSB for the year ended 2008.




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-KSB under Item 7
of  Part II entitled “Financial Statements”.  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 collectibility 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 collectibility can be reasonably assured based
on the licensee’s recent payment history and credit worthiness.





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, collectibility 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.





22


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
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.  There was no impact to
our consolidated financial position, results of operations or cash flows for the
year ended 2008.




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.




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.




23


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.
Such fluctuations have not been significant historically. 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 April 30, 2008.  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, 2008, relating to
ineffective control environment for inadequate segregation of duties and
information technology access as described in the our Annual Report on Form
10-KSB, our principal executive officer and our principal financial officer have
concluded that our disclosure controls and procedures were not effective as of
April 30, 2008.





Changes
in Internal Control over Financial Reporting





We
continue to improve our internal control over financial reporting and disclosure
controls and procedures related to our financial reporting.  One of
the two material weaknesses identified by management in our Annual Report on
Form 10-KSB for the year ended 2008 relating to inadequate controls to monitor
management override has been remediated as of April 30, 2008 with the
implementation of a formal whistle blower policy and an employee notification
and acknowledgment process.  Other than the foregoing, there has been
no change in our internal control over financial reporting that occurred during
the three months ended April 30, 2008 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.





24




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-KSB for the year ended 2008
have not materially changed.





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.




WE
HAVE OBTAINED FINANCING, AND ARE SEEKING ADDITIONAL FINANCING, THAT WILL DILUTE
SHAREHOLDINGS, AND OUR FAILURE TO OBTAIN ADDITIONAL FINANCING WILL RESTRICT OUR
OPERATIONS AND MAY CAUSE US TO CEASE OPERATIONS ALTOGETHER.




Because
our cash balance and cash flow is not likely to be sufficient to fund our future
long-term operating expenses and the growth of our business, we are undertaking
efforts to obtain additional financing or funding in order to finance our future
losses during the current fiscal year and thereafter.  Additional financing
could be sought 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 our affiliates, or a credit facility; in
addition, additional funding could be sought from new or existing license
partners in the form of royalty advances or other prepayment. In the three
months ended April 30, 2008, we entered into a Note Purchase Agreement with
K1W1, our majority stockholder, pursuant to which we issued K1W1 notes in the
aggregate principal amount of $3,000,000.  The notes will be
convertible at a discount of five percent into the investment instruments we
would issue pursuant to and upon any subsequent qualified
financing.  If such qualified financing does not occur, upon maturity
one year from the date of issuance the notes may, at K1W1’s option, convert into
our common stock at a five percent discount from a formula-derived market price,
which will dilute existing shareholders.  In addition, pursuant to the
Note Purchase Agreement, K1W1 received a three-year warrant to purchase a number
of the instruments that are issued in the qualified financing equal to 10% of
the aggregate principal under the Notes divided by the discounted price at which
such Notes convert.  If this warrant is exercised, the resulting issuance
of instruments would also dilute the existing shareholders, including those
investors which participated in the qualified financing.





We expect that it will be necessary for
us to obtain additional financing or other funding in order to fund our
operations beyond July 2008.  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.





Ultimately, if no additional financing
or funding is obtained as and when needed, we may be required
to significantly reduce our level of operations, including by
slowing our growth, delaying  hiring, abandoning certain product
development including product development on which we may have already spent
considerable resources and otherwise reducing expenses, or eventually, if
necessary, 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.”





25




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 the Company raised
$3,000,000, 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 “Note 4 – Notes Payable –
Convertible Notes” of the Notes to the condensed consolidated financial
statements included with this Quarterly Report.





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. In fact, we expect that our expenses will
increase significantly in absolute dollars in future periods.  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.




WE
HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE AN INVESTMENT
DECISION.




We are an
early-stage company with a limited operating history upon which to evaluate the
viability of our business and long-term prospects for success. Accordingly,
potential investors should carefully consider the risks, expenses and unforeseen
difficulties generally encountered in the operation and development of an
early-stage business, including the risks and uncertainties frequently
encountered by companies whose business and viability is dependent upon new
technologies.





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




26





▪
            delays
      in being first to market with new technologies and products may prevent
      our partners from successfully competing with their
  rivals.




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. 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, Sanyo, Samsung, and DRS,
and expect to derive a majority of our revenues for the year ending 2009 in the
form of deferred revenue resulting from prepaid royalties under our licensing
agreement with IGT.  We are not expecting significant additional
revenue from Samsung, Sanyo or DRS, or revenues resulting in cash, during the
year ending 2009 as we cannot control our other partner’s product development or
commercialization efforts.  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 displaysusing
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.





27


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.




28




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 licensors 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.





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 (i) patent applications in various countries publish at
different times, (ii) it is difficult to monitor patent applications that may be
filed in other countries by third parties, and (iii) the publication of
discoveries in scientific or patent literature often lags behind actual
discoveries, we generally cannot be certain that (i) we were the first creator
of inventions covered by our pending patent applications, (ii) that we or any of
our licensors will be entitled to any rights in purported inventions claimed in
pending or future patent applications, or (iii) 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;




29


▪
            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.




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.




30


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.





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 June 1, 2008, K1W1, our majority stockholder, possessed beneficial
ownership of 36,664,355 shares of our common stock, or approximately 53% of our
outstanding common stock, including 884,349 shares of common stock issuable
upon exercise of warrants.  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.





In the year ending 2008, the
number of shares available for resale on the OTC Bulletin Board increased and
may continue to increase in the future.  Shares of our outstanding
common stock totaling 68,483,979 are now eligible for resale without
registration under Rule 144 of the Securities Act, subject to the limitations of
that rule.  Additionally, we have registered on Form S-8 22,241,260
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 on September 5, 2007.  In connection with
our prior private placements and other arrangements with certain of our security
holders, we have registered on Form SB-2/A, 21,463,423 shares of our outstanding
common stock and 16,406,119 shares underlying outstanding warrants to purchase
our common stock.  Any 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 the stock.





31


TRADING
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. This has 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. This may result in lower prices
for our common stock than might otherwise be obtained and could also result in a
larger spread between the bid and asked prices for our common
stock.





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.





WE
MAY NOT SUCCEED IN EFFORTS TO HAVE OUR COMMON STOCK LISTED ON THE NASDAQ GLOBAL
MARKET OR A SECURITIES EXCHANGE.




We plan
to seek listing of our common stock on a national securities exchange. However,
we cannot assure you that we will be able to meet the initial listing standards
of any stock exchange.





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.





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 THE COMPANY’S 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.




32


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, will cause our expenses to be higher
than they would be had we remained privately held. In addition, because we only
recently became subject to these laws and regulations, we cannot accurately
estimate their cost to us from a general and administrative
standpoint.




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.











33




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









34




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)




35


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)10.16
            
            Amendment
      of Stock Option Agreement – Mark Yahiro *(7)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)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
            X31.2
            
            Section
      302 Certification of Chief Financial Officer
            X32.1
            
            Section
      906 Certification of Chief Executive Officer and Chief Financial
      Officer
            X





36







++
            Confidential
      treatment has been requested 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 Reports 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 July 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 Current Report on Form 10-KSB
      filed on April 30, 2008*(19)
            Previously
      filed with the Commission in the Company’s Current 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








37




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: June
      13, 2008
            By:
            /s/ Jonathan
      J. McCamanJonathan
      J. McCaman
              President(Principal
      Executive Officer) and Chief Financial
Officer










38