**UNITED
      STATES**


**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
 
 **FORM
        10-QSB**
 
 [X]
              QUARTERLY
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934
 For
        the
        quarterly period ended October 31, 2006
 
 OR
 
 [ 
                  ]
              TRANSITION
                  REPORT UNDER 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.)
  255
        Shoreline Drive, Suite 610, Redwood City, California 94065
 (Address
        of principal executive offices)
 
 (650)
        632-0800
 (Issuer’s
        telephone number)
  (Former
        name, former address and former fiscal year, if changed since last
        report)
  Check
          whether the issuer: (1) 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 issuer 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 shell company (as defined by
          Rule
          12b-2 of the Exchange Act). Yes [  ] No [X]
 
 As
          of
          December 11, 2006 there were 65,681,099 shares of the issuer’s common stock,
          $.001 par value, outstanding.
 
 Traditional
          Small Business Disclosure Format (check one): Yes [  ] No [X]
 
 
  **INDEX**
  Page**PART
                    I**
                **FINANCIAL
                    INFORMATION**Item
                    1.
                Unaudited
                    Condensed Consolidated Balance Sheet
                
                3Unaudited
                    Condensed Consolidated Statements of Operations and Comprehensive
                    Income
                    (Loss)
                
                4Unaudited
                    Condensed Consolidated Statements of Cash Flows
                
                5Notes
                    to Unaudited Condensed Consolidated Financial Statements
                
                6Item
                    2.
                Management’s
                    Discussion and Analysis of Plan of Operations
                
                10Item
                    3.
                Controls
                    and Procedures
                
                23**PART
                    II**
                **OTHER
                    INFORMATION**Item
                    1.
                Legal
                    Proceedings
                
                24Item
                    2
                Unregistered
                    Sales of Equity Securities
                
                24Item
                    3
                Defaults
                    on Senior Securities
                
                24Item
                    4
                Submission
                    of Matters to a Vote of Security Holders
                
                24Item
                    5.
                Other
                    Information
                
                24Item
                    6.
                Exhibits
                
                24Signatures
                
                25
 
  2
 **PART
          I - FINANCIAL INFORMATION**
 
 **Item
          1. Unaudited Condensed Consolidated Financial Statements**
 
 **PUREDEPTH,
          INC. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED BALANCE SHEET**
 **(unaudited)**
 
 **October
                    31,**
                  **2006****Unaudited****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                9,877,476Restricted
                    cash
                
                
                60,298Accounts
                    receivable
                
                
                52,700Prepaid
                    expenses
                
                
                209,056**Total
                    current assets**
                
                
                **10,199,530****Property
                    & Equipment (net)**
                
                
                **294,049**Other
                    Assets:Intellectual
                    property (net)
                
                
                2,561,630Other
                    assets held for sale
                
                
                796**Total
                    intangible assets**
                
                
                **2,562,426****Total
                    assets**
                
                **$**
                **13,056,005****LIABILITIES
                    AND SHAREHOLDERS' EQUITY**Current
                    liabilities:Current
                    portion - notes payable
                
                
                108,661Accrued
                    interest
                
                
                60,811Accounts
                    payable
                
                
                201,690Accrued
                    expenses
                
                
                310,886Accrued
                    payroll
                
                
                97,283Deferred
                    revenue
                
                
                750,000**Total
                    current liabilities**
                
                
                **1,529,331**Note
                    payable
                
                
                554,726Deferred
                    revenue - non-current portion
                
                
                2,971,154**Total
                    liabilities**
                
                
                **5,055,211**Shareholders'
                    equityCommon
                    stock, $0.001 par value, 190,000,000 shares authorized, 65,681,099
                    shares
                    issued and outstanding
                
                
                65,681Additional
                    paid-in-capital
                
                
                26,270,743Additional
                    paid-in-capital options & warrants
                
                
                6,081,841Accumulated
                    deficit
                
                
                (23,706,570
                )Accumulated
                    other comprehensive loss
                
                
                (710,901
                )**Total
                    shareholders' equity**
                
                
                **8,000,794****Total
                    liabilities and shareholders' equity**
                
                **$**
                **13,056,005**
  The
          accompanying notes are an integral part of these unaudited financial
          statements
 3
 **PUREDEPTH,
          INC. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE
          (LOSS)**
 **(Unaudited)**
  **Three
                    Months Ended October 31,**
                
                **Nine
                    Months Ended October 31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Net
                    sales
                
                $
                81,496
                
                $
                -
                
                $
                81,496
                
                $
                -Cost
                    of goods sold
                
                
                55,178
                
                
                -
                
                
                55,178
                
                
                -Gross
                    profit
                
                
                26,318
                
                
                -
                
                
                26,318
                
                
                -**Operating
                    expenses**Depreciation
                    and amortization
                
                
                114,749
                
                
                83,782
                
                
                338,090
                
                
                286,526Sales
                    and marketing
                
                
                446,639
                
                
                196,856
                
                
                1,513,408
                
                
                550,337Professional
                    fees
                
                
                184,124
                
                
                22,582
                
                
                559,668
                
                
                154,105Loss
                    on fixed asset disposal
                
                
                18,092
                
                
                -
                
                
                18,092
                
                
                5,444General
                    and administrative
                
                
                1,666,988
                
                
                843,197
                
                
                4,734,781
                
                
                1,771,924Research
                    and development
                
                
                296,112
                
                
                367,100
                
                
                1,927,405
                
                
                1,255,658**Total
                    operating expenses**
                
                
                **2,726,704**
                
                
                **1,513,517**
                
                
                **9,091,444**
                
                
                **4,023,994****Operating
                    loss**
                
                
                **(2,700,386**
                **)**
                
                **(1,513,517**
                **)**
                
                **(9,065,126**
                **)**
                
                **(4,023,994**
                **)****Other
                    income (expense)**Interest,
                    net
                
                
                59,827
                
                
                (51,759
                )
                
                69,901
                
                
                (101,644
                )Grant
                    receipts
                
                
                -
                
                
                -
                
                
                1,850
                
                
                7,324Foreign
                    exchange gain (loss)
                
                
                (14,305
                )
                
                (7,850
                )
                
                34,922
                
                
                72,051Other
                    income
                
                
                2,039
                
                
                66,654
                
                
                86,269
                
                
                157,450**Total
                    other net income (loss)**
                
                
                **47,561**
                
                
                **7,045**
                
                
                **192,942**
                
                
                **135,181****Loss
                    before income tax**
                
                
                **(2,652,825**
                **)**
                
                **(1,506,472**
                **)**
                
                **(8,872,184**
                **)**
                
                **(3,888,813**
                **)**Income
                    tax provision
                
                
                -
                
                
                -
                
                
                -
                
                
                -**Loss
                    from continuing operations**
                
                
                **(2,652,825**
                **)**
                
                **(1,506,472**
                **)**
                
                **(8,872,184**
                **)**
                
                **(3,888,813**
                **)**Income
                    (loss) from discontinued operations, net of income tax
                
                
                
                
                
                -
                
                
                15,279
                
                
                -**Net loss**
                
                **$**
                **(2,652,825**
                **)**
                **$**
                **(1,506,472**
                **)**
                **$**
                **(8,856,905**
                **)**
                **$**
                **(3,888,813**
                **)**Other
                    comprehensive income gain/lossNet
                    loss per statement of operations
                
                $
                (2,652,825
                )
                $
                (1,506,472
                )
                $
                (8,856,905
                )
                $
                (3,888,813
                )Foreign
                    currency gain (loss) adjustments
                
                
                -
                
                
                
                
                
                33,132
                
                
                (138,206
                )Total
                    comprehensive loss
                
                $
                (2,652,825
                )
                $
                (1,506,472
                )
                $
                (8,823,773
                )
                $
                (4,027,019
                )**Basic
                    and diluted loss per share**Loss
                    from continuing operations
                
                $
                (0.05
                )
                $
                (0.06
                )
                $
                (0.14
                )
                $
                (0.14
                )Income
                    from discontinued operations, net of income tax
                
                
                -
                
                
                -
                
                
                0.00
                
                
                -Net loss
                
                $
                (0.05
                )
                $
                (0.06
                )
                $
                (0.14
                )
                $
                (0.14
                )Weighted
                    average shares outstanding basic & diluted
                
                
                57,261,454
                
                
                27,177,371
                
                
                57,182,066
                
                
                27,089,894
  The
          accompanying notes are an integral part of these unaudited financial
          statements
 4
 **PUREDEPTH,
          INC. AND SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  **Nine
                    months ended October 31,****2006**
                
                **2005****Cash
                    flows from operating activities:**Net loss
                
                $
                (8,856,905
                )
                $
                (3,888,813
                )Adjustments
                    to reconcile net loss to net cash provided by
                  operating
                    activities:Depreciation
                    and amortization
                
                
                338,090
                
                
                286,526Non-cash
                    compensation expense
                
                
                4,094,789
                
                
                1,209,618Non-cash
                    interest expense
                
                
                -
                
                
                68,978Loss
                    on disposal of fixed assets
                
                
                18,092
                
                
                5,444Foreign
                    exchange (gain)
                
                
                (34,922
                )
                
                (72,051
                )Changes
                    in operating assets and liabilities:(Increase)
                    decrease in accounts receivable, trade
                
                
                19,295
                
                
                (54,642
                )(Increase)
                    in prepayments
                
                
                (155,572
                )
                
                (241,680
                )Increase (decrease)
                    in accounts payable
                
                
                (90,686
                )
                
                393,271Increase
                    in deferred revenue
                
                
                3,721,154
                
                
                -Increase
                    (decrease) in payable in accrued expenses
                
                
                323,399
                
                
                (75,165
                )Increase in
                    accrued interest
                
                
                55,674
                
                
                1,546**Net
                    cash used in operating activities**
                
                
                **(567,591**
                **)**
                
                **(2,366,968**
                **)****Cash
                    flows from investing activities:**Payments
                    for purchases of fixed assets
                
                
                (270,613
                )
                
                (178,352
                )Expenditures
                    - intellectual property
                
                
                (223,260
                )
                
                (222,581
                )**Net
                    cash used in investing activities**
                
                
                **(493,873**
                **)**
                
                **(400,933**
                **)****Cash
                    flows from financing activities:**Proceeds
                    from issuance of common stock, net
                
                
                10,123,845Proceeds
                    from short-term borrowing
                
                
                -
                
                
                65,873Increase (decrease)
                    in short-term borrowings
                
                
                (29,585
                )
                
                -Principal
                    payments on related party note payable
                
                
                -
                
                
                -Issuance
                    of related party note payable
                
                
                -
                
                
                2,555,377Stock
                    subscriptions received
                
                
                
                
                
                307,490Principal
                    payments on note payable
                
                
                -
                
                
                -**Net
                    cash provided by financing activities**
                
                
                **10,094,260**
                
                
                **2,928,740**Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                46,982
                
                
                76,727**Net
                    increase in cash and cash equivalents**
                
                
                **9,079,776**
                
                
                **237,566**Cash
                    and cash equivalents at beginning of period
                
                
                857,998
                
                
                114,817**Cash
                    and cash equivalents at end of period**
                
                **$**
                **9,937,774**
                
                **$**
                **352,383****Supplemental
                    cash information:**Notes
                    and accrued interest converted to stock
                
                $
                774,330
                
                $
                4,824,890Cash
                    paid for interest
                
                $
                19,215
                
                $
                801Cash
                    paid for income taxes
                
                $
                -
                
                $
                -Purchase
                    of intellectual property via issuance of note
                    payable
                
                $
                -
                
                $
                -
 
 The
          accompanying notes are an integral part of these unaudited financial
          statements
 5
 **PUREDEPTH,
          INC. AND SUBSIDIARIES**
 **NOTES
          TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
 
 **Note
          1 - Basis of Presentation**
 
 The
          accompanying unaudited financial statements of PureDepth, Inc. (“the Company")
          are presented in accordance with the requirements for Form 10-QSB and Article
          10
          of Regulation S-X and Regulation S-B. Accordingly, they do not include
          all of
          the disclosures required by generally accepted accounting principles. 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 Financial Statements for the ten months ended January
          31, 2006 and year ended March 31, 2005. Operating results for the nine
          months
          ended October 31, 2006 are not necessarily indicative of the results that
          may be
          expected for the fiscal year ending January 31, 2007.
 
 The
          accompanying condensed financial statements for the interim period should
          be
          read in conjunction with the audited financial statements contained in
          the Form
          SB-2A filed with the Commission on December 1, 2006.  Those statements
          contain a summary of significant accounting policies.
 
 **Note
          2 -Description of Business**
 
 *The
          Company - Description of Business*
  PureDepth,
          Inc., along with our wholly owned subsidiaries, PureDepth Limited (PDL)
          and
          PureDepth Incorporated Limited (PDIL) develops, manufactures, markets and
          supports multi-layer display technology. We believe our technology has
          gaming,
          military, automotive and handheld video display applications.
 
 Prior
          to
          our entry into a significant licensing revenue contract during the quarter
          ended
          October 31, 2006, we were considered a development stage enterprise and
          reported
          our financial information in accordance with Statement of Financial Accounting
          Standards (SFAS) No. 7 *Accounting
          and Reporting by Development Stage Enterprises.* The
          contract resulted in the Company no longer being considered development
          stage
          under SFAS No. 7.
 
 **Note
          3 - Reorganization**
 
 On
          March
          31, 2006 and pursuant to an Agreement and Plan of Merger and Reorganization
          dated March 16, 2006, the Company entered into a forward triangular merger
          with
          PureDepth Technologies, Inc., a Delaware corporation and wholly owned subsidiary
          of Diamond One, Inc., a Colorado corporation quoted on the Over the Counter
          Bulletin Board. As a result of the merger, PureDepth Technologies, Inc.
          succeeded to the business of PureDepth, Inc. (California) and survived
          as a
          wholly owned operating subsidiary of Diamond One, Inc. The merger was effected
          by the filing of a certificate of merger with the Delaware Secretary of
          State on
          March 31, 2006. Following the reorganization, the surviving entity was
          named
          PureDepth, Inc., a Delaware corporation.
  At
          the
          effective time of the merger, the legal existence of the PureDepth, Inc.
          (California) ceased and all of the approximately 23,311,855 shares of the
          Company’s common stock that were outstanding immediately prior to the merger
          were cancelled. Simultaneously, the PureDepth, Inc. (California) former
          shareholders received an aggregate of 233,118.55 shares of Diamond One,
          Inc’s
          Series "A" Preferred Stock, representing approximately 89% of the registrant’s
          outstanding voting power after the merger. In addition, all securities
          convertible into and exercisable for shares of the PureDepth, Inc. (California)
          common stock (e.g., options and warrants) that were outstanding immediately
          prior to the merger were cancelled, and their holders received similar
          securities for the purchase of Diamond One, Inc. common stock. In total,
          immediately following the merger, former holders of PureDepth, Inc. (California)
          securities held approximately 93% of the outstanding common stock of Diamond
          One, Inc. on a fully diluted basis.
  Prior
          to
          the merger and pursuant to authority granted to it by the registrant’s articles
          of incorporation, as amended, Diamond One, Inc.’s board of directors approved
          and adopted a Certificate of Designation relating to a new class of preferred
          stock denominated *“Series
          A Preferred Stock.”* On
          May 9,
          2006, upon the effectiveness of the amended Diamond One, Inc.’s articles of
          incorporation increasing the number of shares of authorized common stock,
          all
          outstanding shares of Series "A" Preferred Stock automatically converted
          into
          shares of common stock on a 229.021-for-1 basis.
  6
 The
          merger represented a change in control of Diamond One, Inc. inasmuch as
          greater
          than 50% of the issued and outstanding voting stock of the registrant on
          a
          post-merger basis was held by the former holders of the Company‘s capital stock.
          In addition, and simultaneously with the effectiveness of the merger, the
          board
          of directors of Diamond One appointed Messrs. David Hancock, Fred Angelopoulos
          and Mark Kalow to its board of directors, and directors Troy Fullmer and
          Robert
          Chramosta thereupon resigned. Moreover, Messrs. Fullmer and Chramosta resigned
          their positions as officers of Diamond One, Inc. In their place, Fred
          Angelopoulos was appointed as its Chief Executive Officer and President,
          and
          Kristin Bowman was appointed as Chief Operating Officer, Secretary and
          Acting
          Chief Financial Officer, subsequently replaced as Chief Financial Officer
          by
          Robert O’Callahan on June 30, 2006.
 
 For
          a
          full description of the forward triangular merger transaction refer to
          the Form
          8-K and Form 8-K/A filed with the Securities and Exchange Commission on
          April 6,
          2006 and June 16, 2006, respectively.
 
 The
          following is pro-forma condensed operating data which portrays the results
          of
          operations as if the transaction had occurred at the beginning of each
          period
          presented:
  Nine months
                    ended October 31,2006
                
                2005Net
                    Sales
                
                $
                81,496
                
                $
                --Operating
                    loss
                
                
                (9,065,126
                )
                
                (4,023,994
                )Other
                    income (expense)
                
                
                192,942
                
                
                135,181Income/(loss)
                    from discontinued operations
                
                
                15,279
                
                
                (45,447
                )Pro-forma
                    net loss
                
                
                (8,856,905
                )
                
                (3,934,260
                )Pro-forma
                    net loss per share *
                
                $
                (0.15
                )
                $
                (0.12
                )Pro-forma
                    weighted average shares outstanding
                
                
                57,182,066
                
                
                32,345,294
  *
                Pro-forma
                    net loss per share is computed as if all preferred shares are
                    converted as
                    of the beginning of the period.
  *Reincorporation
          Merger*
 
 On
          May 5,
          2006, Diamond One, Inc., (the parent of the Company after completion of
          the
          forward triangular merger) held a special meeting of the shareholders to
          consider and act upon the following corporate actions:
 
 (a)
                a
                    proposal to adopt amended and restated articles of incorporation
                    for
                    Diamond One, Inc.; and
 
 (b)
                a
                    proposal to reincorporate Diamond One, Inc. in the State of Delaware
                    by
                    merging Diamond One, Inc. with and into PureDepth Technologies,
                    Inc., the
                    wholly owned subsidiary of Diamond One, Inc. with PureDepth Technologies,
                    Inc. surviving the merger.
 
 On
          May 8,
          2006 the name of PureDepth Technologies, Inc., and (Delaware) was changed
          to
          PureDepth, Inc. On May 9, 2006, Diamond One, Inc. filed its Amended and
          Restated
          Articles of Incorporation with the Secretary of State of Colorado, changing
          its
          name to “PureDepth, Inc.”
 
 The
          short-form merger and reincorporation was consummated on May 30, 2006,
          with
          PureDepth, Inc. (formerly known as PureDepth Technologies, Inc.) surviving
          the
          merger. The charter documents of PureDepth, Inc. (formerly known as PureDepth
          Technologies, Inc.) became the effective charter documents of the Company.
          These
          proposals were both approved at the meeting by approximately 72% of the
          shareholders entitled to vote on the proposals.
 
 *Conversion
          of Preferred Stock*
 
 On
          May 9,
          2006 all 233,118.55 shares of the registrant’s Series A Preferred Stock issued
          in the acquisition of Diamond One were converted into an aggregate of 53,389,045
          shares of common stock, giving the registrant a total of 58,644,445 shares
          of
          common stock and no shares of preferred stock (also taking into account
          a
          transfer to the Company of 1,000,000 shares of its outstanding common stock
          on
          the same date as disclosed below under "Divestiture of Former Business").
  7
 The
          conversion was effected pursuant to the terms of the Certificate of Designation
          for the registrant’s Series A Preferred Stock, which provided that each
          outstanding Series A Preferred Share would automatically convert into shares
          of
          common stock, on 1-for 229.021 basis, upon an increase in the number of
          shares
          of common stock authorized for issuance under the registrant’s articles of
          incorporation.
  *Divestiture
          of Former Business*
 
 On
          May 9,
          2006, pursuant to the exercise of an option (the “Option”) pursuant to an Option
          Agreement dated March 16, 2006 by and among Diamond One, Inc. and Robert
          Chramosta and Troy Fullmer, the former officers and directors of the Company,
          the Company transferred all of the outstanding membership interests in
          its
          wholly owned subsidiary, Numismatic Capital Group, LLC (a Colorado limited
          liability company) to Messrs. Chramosta and Fullmer in consideration of
          their
          transfer to the Company of 1,000,000 shares of our common stock held by
          them. We
          have retired and cancelled these shares.
 
 Prior
          to
          the forward triangular merger, Diamond One had assigned all of its assets
          and
          liabilities, specifically including the coin and exchange business owned
          operated by Diamond One, to Numismatic Capital Group. On May 9, 2006 the
          exercise of the Option effectively divested the Company of the entire coin
          and
          exchange business.
 
 **Note
          4 - Stockholder’s Equity**
 
 On
          January 31, 2006, PureDepth, Inc. (California) had 16,712,769 shares
          outstanding, including 1,371,158 shares issued in a private placement offering.
          In March 2006, it issued 31,800 shares pursuant to the exercise of an
          option and 6,567,286 shares as a continuation of the private placement
          offering. PureDepth, Inc. (CA) thus had 23,311,855 common shares outstanding
          immediately prior to the merger on March 31, 2006.
  On
          March
          31, 2006, all then-existing PureDepth, Inc. (CA) shares were converted
          into
          233,118.55 Preferred A shares in PureDepth, Inc. (Delaware).
  Diamond
          One, Inc. had 6,255,400 common shares outstanding immediately prior to
          the
          merger, which became 6,255,400 common shares in the surviving entity PureDepth,
          Inc. (Delaware).
  Following
          the balance sheet date, on May 9, 2006, the 233,118.55 Preferred A shares
          converted into 53,389,045 PureDepth, Inc. (Delaware) common shares. Considering
          the return of 1 million shares pursuant to the divestiture of the coin
          and
          exchange business, the Company then had 58,644,445 shares outstanding.
 
 On
          July
          11, 2006, the Company accepted an in-process stock subscription relating
          to the
          March private placement and issued 114,510 shares and 114,510 warrants
          to
          purchase shares of the Company’s common stock to the purchaser.
 
 On
          July
          31, 2006, the Company closed an offering to existing investors to exchange
          outstanding warrants to purchase the Company’s common stock that it issued in a
          private placement earlier in 2006 (the “B Warrants”) for 6,716,044 shares of the
          Company’s common stock and warrants to purchase shares of the Company’s common
          stock (the “D Warrants”).
 
 On
          September 6, 2006 we issued 344,000 “D Warrants” to an advisor as compensation
          for services rendered.
 
 On
          September 29 and October 5, 2006, the Company issued an aggregate of 206,100
          shares of common stock pursuant to the exercise of options.
 
 **Note
          5 - Stock Option Plan**
 
 Prior
          to
          the merger, and effective March 31, 2006, the Board of Directors of PureDepth,
          Inc. (California) approved and authorized an amendment and restatement
          of its
          Second Amended and Restated Executive Share Option Plan No. 3 (the “Prior Plan”)
          into the 2006 Stock Incentive Plan (the “Plan”) and entered into agreements with
          each of the existing option holders whereby such option holders agreed
          that the
          Plan would thereafter govern their respective options. The amendment had
          no
          effect upon the number of options or the strike prices.
 
 8
 As
          a
          result of the forward triangular merger, all unvested stock options issued
          under
          the Plan vested upon the effective date of the merger, March 31, 2006.
          The
          option shares are not currently registered under Form S-8 but, when registered,
          they would be available for sale into the market.
  Options
            issued under the Company’s Prior Plan, except those issued to David Hancock and
            Keith Phillips, carried certain anti-dilution rights with respect of
            company
            securities issued prior to the merger transaction. Upon closing of the
            private
            placement offering of PureDepth, Inc. (California) on March 1, 2006,
            further
            options were deemed to be issued to various holders under the Plan holding
            anti-dilution rights with subsequent vesting of those options occurring
            under
            the accelerated vesting provisions on the reverse acquisition date, being
            March
            31, 2006. These anti-dilution rights terminated at the effective time
            of the
            merger, and were not carried forward under the Plan.
 A
          summary
          of option activity under the Prior Plan (on or prior to March 31, 2006)
          and the
          Plan (after March 31, 2006) as of October 31, 2006, and changes during
          the
          quarter then ended is presented below.
  **Options**
                
                **Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Weighted-**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Term
                    (months)**
                
                **Aggregate**
                  **Intrinsic**
                  **Value**
                  **($000)**Outstanding
                    at July 31, 2006
                
                
                12,450,569
                
                $
                0.29
                
                
                6
                
                $
                23,246Granted
                
                
                975,200
                
                $
                3.04
                
                
                84
                
                $
                2,964Exercised
                
                
                (206,100
                )
                $
                0.28
                
                
                -
                
                $
                (676
                )Forfeited
                    or expired
                
                
                (682,043
                )
                $
                0.28
                
                
                -
                
                $
                (1,867
                )Outstanding
                    at October 31, 2006
                
                
                12,537,626
                
                $
                0.28
                
                
                9
                
                $
                42,753Exercisable
                    at October 31, 2006
                
                
                12,450,570
                
                $
                0.28
                
                
                3
                
                $
                42,456
  *Stock
          Compensation*
  We
          currently use the Black-Scholes option pricing model to determine the fair
          value
          of stock options. The determination of the fair value of stock-based payment
          awards on the date of grant using an option-pricing model is affected by
          our
          stock price as well as assumptions regarding a number of complex and subjective
          variables. These variables include our expected stock price volatility
          over the
          term of the awards, actual and projected employee stock option exercise
          behaviors, risk-free interest rate and expected dividends.
  We
          estimate the volatility of our common stock by using our limited historical
          data
          and similar entities. Our current volatility assumption of 88% is higher
          than
          the estimate of 52% used in the prior annual financial report, primarily
          due to
          the changed nature of the reorganized business. We base the risk-free interest
          rate that we use in the option valuation model on U.S. Treasury issues
          with
          remaining terms similar to the expected term on the options. We do not
          anticipate paying any cash dividends in the foreseeable future and therefore
          use
          an expected dividend yield of zero in the option valuation model. We are
          required to estimate forfeitures at the time of grant and revise those
          estimates
          in subsequent periods if actual forfeitures differ from those estimates.
          We
          estimate option forfeitures. All stock-based payment awards are amortized
          on a
          straight-line basis over the requisite service periods of the awards, which
          are
          generally the vesting periods. We estimate the expected term of options
          granted
          by assuming the term equals the grant term, since we lack significant historical
          stock option exercise experience.
  **Note
          6 - Income Taxes**
 
 For
          the
          three months and nine months ended October 31, 2006, we incurred operating
          losses of approximately $2.7 million and $8.9 million, respectively, and
          accordingly we made no provision for income taxes has been recorded. In
          addition, we recorded no benefit for income taxes due to the uncertainty
          of the
          realization of any tax assets.
 
 At
          January 31, 2006, PureDepth, Inc. (California) had both a federal and state
          net
          operating loss carry-forward of $1,016,582. Further, there were foreign
          net
          operating loss carry-forwards of $3,102,917 in respect of PureDepth, Inc’s.
          foreign subsidiaries.
 
 In
          addition, at January 31, 2006, Diamond One, Inc. reported approximately
          $43,000
          of federal and state net operating losses, but has not assessed the current
          status of net operating loss carry-forwards following reorganization.
 
 9
 Net
          operating loss carry-forwards, if not utilized, will begin to expire within
          twenty years for federal purposes and within ten years for California purposes.
          The foreign net operating tax loss carry-forward can be carried forward
          indefinitely unless a change in ultimate control of the loss companies
          results.
 
 For
          financial reporting purposes, we have incurred a loss in each period since
          its
          inception. Based on the available objective evidence, including the our
          history
          of losses, management believes it is currently more likely than not that
          the net
          deferred tax assets will not be fully realizable. Accordingly, we provided
          a
          full valuation allowance against its net deferred tax assets.
 
 **Note
          7 - Related Parties**
 
 On
          August
          4, 2006, the Board of Directors of PureDepth, Inc. issued Robert O’Callahan,
          Chief Financial Officer, and Mark Kalow, Director, each the first tranche
          of a
          stock option to purchase shares of PureDepth common stock. The total stock
          options involved represent 500,000 and 167,067 shares for Messrs. O’Callahan and
          Kalow, respectively. The option grants have an exercise price of market
          price as
          of grant date per share and are otherwise subject to the PureDepth, Inc.
          stock
          option plan. The grant issuance will occur in five tranches with 1/5 (or
          approximately 1/5) of the total stock options involved issuing at the closing
          price on five dates: August 4, September 5, October 5, November 6, and
          December
          5, 2006. Mr. Kalow did not participate in the Board action regarding his
          grants.
 
 On
          September 7, 2006 the Board of Directors appointed Mr. John Floisand and
          Mr.
          Thomas L. Marcus as directors to fill vacancies on the Board. Each of Mr.
          Floisand and Mr. Marcus will receive an annual fee of $20,000 as director
          payable in semi-annual installments and at the beginning of each semi annual
          period. The Board granted each director an option (the “Initial Option”) to
          purchase an aggregate of 100,000 shares of the Company’s common stock pursuant
          to the Company’s 2006 Stock Incentive Plan ("Plan"). The Initial Option will be
          issued in five equal tranches of 20,000 shares on the following dates:
          September
          7, October 5, November 6, December 5 and January 5.
 
 **Note
          8 - Revenue**
 
 In
          October 2006, we entered into a contract licensing our technology to IGT
          exclusively for certain markets. A minimum fee was paid and further license
          fees
          will be paid once a minimum threshold is exceeded. We expect to recognize
          this
          revenue according to the following section of our revenue recognition policy.
          Royalties derived from the licensing of our intellectual property are recognized
          when persuasive evidence of an arrangement exists, delivery of the product
          or
          performance of the service has occurred, no significant company obligations
          with
          regard to implementation or integration exist, the fee is fixed or determinable
          and collectibility is probable. Arrangements for which the fees are not
          deemed
          probable for collection are recognized upon cash collection. Payments from
          customers received in advance of revenue recognition are recorded as deferred
          revenue.  In this quarter we show $53,000 revenue and $55,000 cost of
          revenue related to assisting a licensee in implementing our technology. 
Our license revenue does not have a cost of revenue.
  **Note
          9 - Restricted Cash**
  Restricted
          cash at October 31, 2006 represents time deposits held at financial institutions
          as collateral for our potential use of credit limits on credit cards
          issued.
 
 **Item
          2. Management’s Discussion and Analysis of Financial Condition and Results of
          Operations**
 
 The
          following discussion and analysis of our financial condition and results
          of
          operations should be read in conjunction with the condensed consolidated
          financial statements and related notes contained herein and the information
          included in our financial reports and in our other filings with the Securities
          and Exchange Commission. This discussion includes “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended
          (the
“Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as
          amended (the “Exchange Act”).
 
 All
          statements in this Quarterly Report on Form 10-QSB, 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 comparable terminology are forward-looking statements.
 
 All
          forward-looking statements and risk factors included in this document are
          made
          as of the date of this report, based on information available to us as
          of such
          date. We assume no obligation to update any forward-looking statement or
          risk
          factor.
 
 10
 ***Overview
          of business***
  Currently,
          we are a technology licensing company whose business is the commercialization
          of
          innovative technology incorporating a third dimension of actual “depth” into a
          smart, compact video display device.
 
 We
          have
          entered into a development and sales agreement with Sanyo that involves
          the
          manufacture and distribution of products to be manufactured by Sanyo,
          incorporating PureDepth technology, for sale in the retail entertainment
          market.
          The Sanyo agreement grants Sanyo certain rights of exclusivity for the
          development and sale of products in the amusement and gaming industry.
          We
          anticipate that revenue under this contract will be generated within the
          fiscal
          year ending January 31, 2008.
 
 On
          October 13, 2006, we entered into a development and sales agreement with
          International Game Technology (IGT) that involves the manufacture and
          distribution of products to be manufactured by IGT, incorporating PureDepth
          proprietary technology, for sale in the gaming and amusement markets. The
          IGT
          agreement grants IGT certain rights of exclusivity for the development
          and sale
          of products. Certain license fees under this contract have been received
          and
          recognized during the quarter ended October 31, 2006.
 
 We
          have
          also entered into a development and sales agreement with the DRS Electronic
          Systems, Inc. and DRS Laurel Technologies for the development and distribution
          of derivative PureDepth technology in products to be manufactured for the
          US
          Army and US Navy. We have received certain proceeds, classified as other
          income,
          in respect of the development of a prototype 30-inch monitor incorporating
          PureDepth technology for DRS. Due to the longer development and sales cycle
          typical with sales to the United States Department of Defense and government
          agencies, we do not anticipate significant revenue from this agreement
          in the
          fiscal year ending January 31, 2007.
  Our
          technology was originally invented and developed in New Zealand. As part
          of our
          program to commercialize our technology, PureDepth, Inc. was formed as
          a
          California corporation as the successor-in-interest to a New Zealand
          corporation, Deep Video Imaging Limited (founded in 1999), as part of an
          effort
          to reorganize Deep Video Imaging Limited and its affiliates “PureDepth Ltd.” and
“PureDepth Incorporated Limited.” Through two merger transactions completed on
          March 31, 2006 and May 30, 2006, respectively, this California company and
          subsidiaries reorganized in a transaction with a Colorado corporation formerly
          known as Diamond One, Inc. The company surviving the merger transactions
          was
          PureDepth, Inc. (Delaware).
 
 We
          have
          two wholly-owned subsidiaries incorporated in New Zealand. Our direct
          subsidiary, PureDepth Ltd., is the holding entity for the our intellectual
          property portfolio, which is subject to an exclusive license with us for
          its
          use, exploitation and future development. Our indirect subsidiary (subsidiary
          of
          PureDepth, Ltd.) is PureDepth Incorporated Ltd., which undertakes the operations
          in respect of any future research and development of the intellectual property
          portfolio on our behalf.
 
 Company
          Background
 
 PureDepth,
          Inc. (the California corporation) began business in May 1999 through our
          predecessor entity DVIL, by acquiring and researching and developing certain
          innovative technology protected by patents and trademarks. PureDepth, Inc.
          (the
          California corporation) was incorporated in April 2005, as part of a corporate
          restructuring that continued over both the fiscal year ended on March 31,
          2005
          and the ten month period ended January 31, 2006. Our fiscal year ends on
          January 31.
 
 On
          March
          31, 2006 and pursuant to an Agreement and Plan of Merger and Reorganization
          dated March 16, 2006, the Company entered into a forward triangular merger
          with
          PureDepth Technologies, Inc., a Delaware corporation and wholly owned subsidiary
          of Diamond One, Inc., a Colorado corporation quoted on the Over the Counter
          (OTC) Bulletin Board. As a result of the merger, PureDepth Technologies,
          Inc.
          succeeded to the business of PureDepth, Inc. (the California corporation)
          and
          survived as a wholly owned operating subsidiary of Diamond One, Inc. The
          merger
          was effected by the filing of a certificate of merger with the Delaware
          Secretary of State on March 31, 2006.
  The
          merger represented a change in control of Diamond One, Inc. inasmuch as
          greater
          than 50% of the issued and outstanding voting stock of the registrant on
          a
          post-merger basis was held by the former shareholders of PureDepth, Inc.
          (the
          California corporation). In addition, and simultaneously with the effectiveness
          of the merger, the board of directors of Diamond One appointed Messrs.
          David
          Hancock, Fred Angelopoulos and Mark Kalow to its Board of Directors, and
          directors Troy Fullmer and Robert Chramosta resigned from the Board. In
          addition, Messrs. Fullmer and Chramosta resigned their positions as officers
          of
          Diamond One, Inc. Fred Angelopoulos was appointed as its Chief Executive
          Officer
          and President, and Kristin Bowman was appointed as Chief Operating Officer,
          Secretary and Acting Chief Financial Officer, subsequently replaced by
          Robert
          O’Callahan as Chief Financial Officer on June 30, 2006.
 
 11
 For
          a
          full description of the forward triangular merger transaction you may refer
          to
          the Form 8-K and Form 8-K/A filed with the Securities and Exchange Commission
          on
          April 6, 2006 and June 16, 2006, respectively.
 
 On
          May 5,
          2006, Diamond One, Inc. held a special meeting of the shareholders to consider
          and act upon the following corporate actions:
 
 (a)
                a
                    proposal to adopt amended and restated articles of incorporation
                    for
                    Diamond One, Inc.; and
 
 (b)
                a
                    proposal to reincorporate Diamond One, Inc. in the State of Delaware
                    by
                    merging Diamond One, Inc. with and into PureDepth Technologies,
                    Inc., the
                    wholly owned subsidiary of Diamond One, Inc. with PureDepth Technologies,
                    Inc. surviving the merger.
 
 On
          May 8,
          2006 the name of PureDepth Technologies, Inc. was changed to PureDepth,
          Inc. On
          May 9, 2006, Diamond One, Inc. filed its Amended and Restated Articles
          of
          Incorporation with the Secretary of State of Colorado, changing its name
          to
“PureDepth, Inc.”
 
 The
          short-form merger and reincorporation was consummated on May 30, 2006,
          with
          PureDepth, Inc. (formerly known as PureDepth Technologies, Inc.) surviving
          the
          merger. The charter documents of PureDepth, Inc. (formerly known as PureDepth
          Technologies, Inc.) became the effective charter documents of the Company.
          These
          proposals were both approved at the meeting by approximately 72% of the
          shareholders entitled to vote on the proposals.
 
 Divestiture
          of Former Business
 
 On
          May 9,
          2006, pursuant to the exercise of an option (the “Option”) pursuant to an
          Agreement dated March 16, 2006 by and among Diamond One, Inc. and Robert
          Chramosta and Troy Fullmer, the former officers and directors of the Company,
          the Company transferred all of the outstanding membership interests in
          its
          wholly owned subsidiary, Numismatic Capital Group, LLC (a Colorado limited
          liability company) to Messrs. Chramosta and Fullmer in consideration of
          their
          transfer to the Company of 1,000,000 shares of our common stock held by
          them. We
          have retired and cancelled these shares. Prior to the forward triangular
          merger,
          Diamond One had assigned all of its assets and liabilities, specifically
          including the coin and exchange business owned and operated by Diamond One,
          to Numismatic Capital Group. The exercise of the Option effectively divested
          PureDepth of the entire coin and exchange business.
 
 Summary
          of Capitalization
 
 As
          of
          October 31, 2006 there were 65,681,099 shares of the PureDepth common stock,
          $.001 par value, outstanding. The common stock is quoted for trading on
          the OTC
          Bulletin Board under the symbol “PDEP.” No preferred shares are outstanding. As
          of October 31, 2006 there were outstanding securities convertible into
          or
          exercisable for an aggregate of 32,259,663 shares of common stock. This
          is
          comprised of 12,537,626 options and 19,722,037 warrants.
 
 Significant
          Shareholder
 
 The
          principal shareholder is K One W One Limited (known as "K1W1") who owns
          35,780,006 shares or approximately 55% of our outstanding common stock
          and 1,768,698
          warrants to purchase the Company’s common stock as
          of
          October 31, 2006. K1W1 is a private venture capital investment company
          wholly
          owned by Mr. Stephen Tindall. K1W1 is an investor in emerging innovative
          New
          Zealand technologies. K1W1 first invested in PureDepth, Inc.'s predecessor
          company, Deep Video Imaging Limited, in 2000 and continued to invest in
          the
          technology and acquired the interests of other shareholders over the next
          five
          years. PureDepth, Inc. (the California corporation) was wholly owned by
          both
          K1W1 and its employees through their interests in the stock option plan
          until
          the private placements of January-March 2006 and the reverse merger which
          created the public entity in March 2006.
 
 Private
          Placements
 
 On
          January 27 and March 1, 2006, the Company (then PureDepth, Inc., the California
          corporation) completed a private placement offering of an aggregate of
          3,583,079
          units, each unit consisting of two shares of common stock, one three-year
          warrant to purchase an additional share of common stock at an exercise
          price of
          $2.75 per share (the “A-Warrants”), and one warrant to purchase an additional
          share of common stock at an exercise price of $2.00 per share (the
“B-Warrants”). The offering raised proceeds to the Company of approximately
          $6,000,000, net of legal, accounting, consulting and finder fees relating
          to the
          offering. Additionally, as part of the offering, we converted approximately
          $770,000 of loans from our majority stockholder, K1W1, on the same terms
          and
          conditions as provided in the offering, thereby issuing an additional 386,143
          units. The offering totaled 3,969,222 units. Adjusted to reflect the March
          31,
          2006 merger transaction (and the subsequent automatic conversion of Series
          A
          Preferred Stock), investors in the offering received an aggregate of 18,180,704
          shares of our common stock, A-Warrants to purchase an aggregate of 9,090,358
          shares of our common stock at an exercise price of approximately $1.20
          per share
          and B-Warrants to purchase an aggregate of 9,090,358 shares of our common
          stock
          at an exercise price of approximately $0.87 per share. In connection with
          the
          offering, we issued to a finder (adjusted to reflect the March 31, 2006
          merger
          transaction) “C-Warrants” to purchase an aggregate of 1,082,811 shares of our
          common stock at an exercise price of $0.44 per share. We accepted an in-process
          stock subscription relating to the March private placement and issued 114,510
          shares and 114,510 warrants to the purchaser on July 11, 2006
 
 12
 On
          June
          30 and July 30, 2006, we closed a transaction with existing investors who
          were holders of the B Warrants which raised proceeds of approximately $5.6
          million. The transaction involved issuance of a D Warrant to all B Warrant
          holders who would exercise their outstanding B Warrants to purchase PureDepth
          common stock during the offering period ended July 30, 2006.  We issued
          approximately 6,700,000 shares of common stock and D-Warrants to purchase
          approximately 6,700,000 shares of common stock and as a result cancelled
          approximately 6,700,000 B-Warrants pursuant to the private offering. The
          D-Warrants entitle the holder thereof to purchase shares of our common
          stock at
          an exercise price of approximately $1.20 per share.
 
 On
          September 6, 2006, we issued “D-Warrants” to purchase 344,000 shares of common
          stock to an advisor as compensation for services rendered.
 
 ***Plan
          of Operations***
 
 *Overview*
 
 Plan
          of
          Operations
 
 We
          are a
          technology licensing company whose business is the commercialization of
          innovative technology incorporating a third dimension of actual “depth” into a
          smart, compact video display device. Accordingly, our primary operations
          are the
          research and development of products and software, and the marketing and
          licensing of such products and software. Licensees are and will be responsible
          for the manufacture and sales of products incorporating PureDepth technology
          and
          related software.
 
 Our
          critical research and development activities include: further enhancing
          our
          existing PureDepth display and software technology; developing and testing
          prototypes 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. Enhancement of our existing technology will include research
          in
          optics, LCD technology, backlighting, and component technologies. We anticipate
          that our research and development expenses will increase significantly
          in
          absolute dollars in future periods, primarily because of the enhancement
          of our
          core technology, and, to a lesser extent, the design and development of
          prototypes for future customers.
 
 We
          intend
          to increase our sales and marketing efforts to identify, contact and negotiate
          licensing agreements with identified and yet to be identified potential
          partner
          companies. We have identified six applications/markets that we feel are
          appropriate for our core technology, two of which, the amusement and defense
          applications, are represented by our existing agreements. Our efforts in
          the
          immediate future are to identify relatively few high-profile manufacturers
          in
          identified application markets, and concentrate its sales and marketing
          resources on them. This expanded effort will necessitate hiring additional
          personnel. Accordingly, we anticipate that our sales and marketing costs
          will
          increase in absolute dollars in the next twelve months.
 
 The
          sales
          cycle for the evaluation and incorporation of our PureDepth technology
          can range
          from six months or more, plus an additional six months before our licensee
          partners commence volume production of products incorporating our technology.
          We
          anticipate that this sales cycle will be shortened over time as more of
          our
          technology becomes accepted and resident on commercially available products.
 
 Our
          primary operating costs are compensation for employees, including stock
          options,
          warrants and other incentives; ongoing research and development of our
          technology; legal costs including future patent applications and defense
          of
          currently-held patents; and rental for premises in both Redwood City, CA
          and
          Auckland, New Zealand. No significant capital equipment purchases are expected
          during the next 12 months.
  Other
          than our research and development expenditures, no significant capital
          equipment
          purchases are expected during the next 12 months.
 
 13
 Although
          we do not believe that we will need to raise cash to operate through the
          fiscal
          year ending January 31, 2007, we may consider undertaking further capital
          raising within such period, possibly in the form of either debt or equity,
          or a
          strategic partnership. In addition, we may consider utilizing currently
          outstanding derivative securities, such as warrants or options, as a means
          for
          providing cost-efficient financing in the future.
  ***Financial
          Results***
 
 During
          the three months ended October 31, 2006 we had a net loss of $2,652,825
          compared
          to a net loss of $1,506,472 in the corresponding period of the prior fiscal
          year. During the nine months ended October 31, 2006 we had a net loss of
          $8,856,905 compared to a net loss of $3,888,813 in the corresponding period
          of
          the prior fiscal year. There was $81,496 in revenue recorded for licensing
          of
          the intellectual property and licensee support. We expect revenue to increase
          due to our licensing contracts in place. Deferred revenue related to contracts
          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.
 
 For
          the
          three months ended October 31, 2006, our sales and marketing expenses increased
          $249,783 to $446,639 from $196,856 recorded in the corresponding period
          of the
          preceding fiscal year, primarily due to increased staff compensation and
          agent
          fees. Our sales and marketing expenses consist primarily of staff compensation
          including commissions and non-cash compensation expense from the grant
          of stock
          options. These expenses also include items such as agent or consulting
          fees,
          outside support for marketing programs, marketing programs, travel and
          entertainment, tradeshows and related facilities expense. We expect these
          expenses to increase in absolute dollars as we attempt to secure additional
          licensees for our technology. For the nine months ended October 31, 2006,
          our
          sales and marketing expenses increased $963,071 to $1,513,408 from $550,337
          recorded in the corresponding period of the preceding fiscal year, primarily
          due
          to increased staff compensation and agent fees.
 
 For
          the
          three months ended October 31, 2006, our professional fees expenses increased
          $161,542 to $184,124 from $22,582 recorded in the corresponding period
          of the
          preceding fiscal year primarily due to increased activity related to securities
          registration and public company compliance. Our professional fees expenses
          include legal and accounting fees to support required filings and audits
          and
          stock registrations. Although we expect these expenses related to filings
          to
          decrease in absolute dollars, the future cost of Sarbanes-Oxley compliance
          is
          currently unknown and these expenses may create a net increase in absolute
          dollars. For the nine months ended October 31, 2006, our professional fees
          expenses increased $405,563 to $559,668 from $154,105 recorded in the
          corresponding period of the preceding fiscal year primarily due to securities
          registration and public company compliance.
 
 For
          the
          three months ended October 31, 2006, our general and administrative expenses
          increased $823,791 to $1,666,988 from $843,197 recorded in the corresponding
          period of the preceding fiscal year primarily due to advisory fees relating
          to
          financing and increased staff compensation. Our general and administrative
          expenses consist primarily of staff compensation including non-cash compensation
          expense from the grant of stock options. These expenses also include items
          such
          as consulting and advisory fees, public company filing, reporting and
          registration expenses, insurance, travel and entertainment, director’s
          compensation and related facilities expense. We expect these expenses to
          increase in absolute dollars as we expands operations and also engages
          in
          Sarbanes-Oxley compliance. For the nine months ended October 31, 2006,
          our
          general and administrative expenses increased $2,962,857 to $4,734,781
          from
          $1,771,924 recorded in the corresponding period of the preceding fiscal
          year
          primarily due to advisory fees relating to financing and increased staff
          compensation.
 
 For
          the
          three months ended October 31, 2006, our research and development expenses
          decreased $70,988 to $296,112 from $367,100 recorded in the corresponding
          period
          of the preceding fiscal year primarily due to decreased non-cash compensation
          in
          the quarter. Our research and development consist primarily of staff
          compensation including non-cash compensation expense from the grant of
          stock
          options. These expenses also include items such as consulting and advisory
          fees,
          operating supplies and specialty parts or fabrication, travel and related
          facilities expense. We expect these expenses to increase in absolute dollars
          as
          the company expands its research and development operations generally and
          for
          specific markets. For the nine months ended October 31, 2006, our research
          and
          development expenses increased $671,747 to $1,927,405 from $1,255,658 recorded
          in the corresponding period of the preceding fiscal year primarily due
          to
          increased staff compensation.
 
 Our
          depreciation and amortization expense of $114,749 for the three months
          ended
          October 31, 2006 consists primarily of amortization of our patent assets.
          This
          expense is $30,967 higher than the $83,782 recorded in the comparable prior
          period and primarily reflects the additional patent assets, compared to
          last
          year, which are being amortized. We expect these expenses to increase in
          absolute dollars as we add to our patent base. For the nine months ended
          October
          31, 2006, our depreciation and amortization expenses increased $51,564
          to
          $338,090 from $286,526 recorded in the corresponding period of the preceding
          fiscal year primarily due to additional patent assets, compared to last
          year,
          which are being amortized.
 
 14
 The
          Company had $953,251 in non-cash compensation expense within the three
          months
          ended October 31, 2006 and $4,094,789 within the nine months ended October
          31,
          2006.  We expect to continue to recognize non-cash compensation expense to
          reflect the costs of existing grants.
 
 ***Liquidity
          and Capital Resources***
 
 During
          the three months ended October 31, 2006, we spent $35,634 on fixed assets,
          and
          paid $90,902 toward developing our intellectual property. For the nine
          months
          ended October 31, 2006, our operations used $567,591 in cash, reported
          $4,094,789 in non-cash compensation expense and added $3,721,154 in cash
          supporting deferred revenue. During those nine months, we spent $270,613
          on
          fixed assets, and paid $223,260 toward developing our intellectual property.
          Our
          financing activities over the nine months ended October 31, 2006 generated
          $10,123,845 from the issuance of stock.
 
 During
          the quarter we have continued to develop our technology in support of
          three contracts executed with Sanyo, IGT and DRS Electronic Systems, Inc.
          The
          IGT licensing contract was secured during the quarter ended October 31,
          2006.
 
 Our
          cash
          requirements and potential capital raises are discussed above under the
          heading *Plan
          of Operations* **.**
 
 We
          have
          issued options to employees and consultants pursuant to our stock option
          plans.
          As of October 2006 we had 12,537,626 options outstanding under our 2006
          Stock
          Incentive Plan.
 
 Subject
          to approval of our Board of Directors, the 2006 Stock Incentive Plan allows
          option holders to exercise options using a “cashless exercise,” whereby the
          Company uses vested shares as payment for the exercised options. While
          the
          exercise of stock options 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 October 31, 2006, 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, 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. We have recorded
          a
          full valuation allowance as the realize ability of our net operating loss
          carry-forwards is not determinable.
  ***Critical
          Accounting Policies***
 
 Those
          material accounting policies that we believe are the most critical to an
          investor’s understanding of our financial results and condition are discussed
          below. Our significant accounting policies are more fully described in
          the notes
          to our consolidated financial statements. Certain of these policies are
          particularly important to the portrayal of our financial position and results
          of
          operations and require the application of significant judgment by our management
          to determine the appropriate assumptions to be used in the determination
          of
          certain estimates.
 
 *Revenue
          Recognition*
  Revenue
          is derived from the sale of computer hardware products; software licenses
          and
          related services; and royalties related to licensed use of our intellectual
          property which includes technical transfer, implementation and integration
          of
          both hardware and software solutions, post contract support, training,
          and
          consulting.
  Revenue
          from the sale of computer hardware is recognized on a contractual basis
          when
          final products are dispatched to the customer.
 
 15
 Royalties
          derived from the licensing of our intellectual property are recognized
          when
          persuasive evidence of an arrangement exists, delivery of the product or
          performance of the service has occurred, no significant Company obligations
          with
          regard to implementation or integration exist, the fee is fixed or determinable
          and collectibility is probable. Arrangements for which the fees are not
          deemed
          probable for collection are recognized upon cash collection. Payments from
          customers received in advance of revenue recognition are recorded as deferred
          revenue.
 
 Deferred
          revenue related to contracts 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.
  Service
          revenue from consulting, technical transfer, and training is recognized
          as the
          service is performed.
  *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.
 
 *Intellectual
          Property*
  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.
  *Income
          Taxes*
 
 We
          provide for income taxes under the provisions of SFAS No. 109 Accounting
          for
          Income Taxes. The standard requires an asset and liability based approach
          in
          accounting for income taxes.
 
 Deferred
          income tax assets and liabilities are recorded to reflect the tax consequences
          in future years of temporary differences between revenue and expense items
          for
          financial statement and income tax purposes. Valuation allowances are provided
          against assets that are not likely to be realized. Deferred tax assets
          and
          liabilities for each jurisdiction are measured using the enacted tax rates
          expected to apply to taxable income in the years in which those temporary
          differences are expected to be recovered or settled. The effect on deferred
          tax
          assets and liabilities of a change in tax rates is recognized in income
          in the
          period that includes the enactment date.
  *Stock
          Based Compensation Expense*
  We
          account for grants under our 2006 Stock Incentive Plan in accordance with
          SFAS
          No. 123(R), Share-Based Payment. We record the cost of employee services
          received in exchange for an award of equity instruments based on the grant-date
          fair value of the award. That cost is recognized over the period during
          which an
          employee is required to provide service in exchange for the award—the requisite
          service period (usually the vesting period). No compensation cost is recognized
          for equity instruments for which employees do not render the requisite
          service.
          The grant-date fair value of employee share options and similar instruments
          is
          estimated using option-pricing models. If an equity award is modified after
          the
          grant date, incremental compensation cost will be recognized in an amount
          equal
          to the excess of the fair value of the modified award, if any, over the
          fair
          value of the original award.
 
 ***Foreign
          Operations & 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 upon which an annual
          development fee of $1,000,000, calculated at the end of each quarter, is
          paid.
          Income and expenditure relating to the license and future development of
          the
          intellectual property is an inter-company transaction eliminated on
          consolidation. Therefore, these amounts are not shown in the financial
          statements. We (including our subsidiaries) use the US dollar as our functional
          currency. We determined that the cash flow, sales price, sales market,
          expense,
          financing and intercompany transaction indicators on balance had by July
          31,
          2006 reached a significant level where under SFAS 52 each of the entities
          would
          be best represented by the US dollar as the functional currency.
 
 16
 ***Market
          Risk Disclosure***
 
 We
          record
          the majority of our foreign operating transactions in the US dollar. We
          also
          record all of our US operating transactions, including cash inflows and
          outflows, in the local currency, the US dollar. We expect that international
          activity will continue to represent a significant portion of our operations.
          Transactions with our New Zealand research and development facility and
          with any
          potential contract manufacturers in Asia will be directly affected by
          fluctuations in various currency rates. The New Zealand operation makes
          us
          vulnerable to future fluctuations in the exchange rate.  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.
 
 ***Off-Balance-Sheet
          Arrangements***
 
 As
          of
          October 31, 2006, there were no off-balance-sheet arrangements.
 
 ***Recently
          Issued Accounting Pronouncements***
 
 In
          December 2004, the Financial Accounting Standards Board (FASB) issued Statement
          of Financial Accounting Standards No. 123 (R) (“SFAS 123(R)), *Share-Based
          Payment* ,
          which
          replaced SFAS No. 123, *Accounting
          for Stock-Based Compensation* ,
          and
          superseded Accounting Principles Board Opinion No. 25, *Accounting
          for Stock Issued to Employees* .
          The
          Statement requires all share-based payments to employees, including grants
          of
          employee stock options, to be recognized in the financial statements based
          on
          their fair values. Under SFAS No. 123(R), the Company must determine the
          appropriate fair value method to be used for valuing share-based payments
          and
          the amortization method of compensation cost. The financial statements
          presented
          reflect the adoption of SFAS No. 123(R) for all periods.
 
 In
          May
          2005, the FASB issued Statement of Financial Accounting Standards No. 154
          (“SFAS
          154”), *Accounting
          Changes and Error Corrections,* which
          requires retrospective application to prior periods’ financial statements of
          changes in accounting principle, unless it is impracticable to determine
          either
          the period-specific effects or the cumulative effect of the change. When
          it is
          impracticable to determine the period-specific effects of an accounting
          change
          on one or more individual prior periods presented, this Statement requires
          that
          the new accounting principle be applied to the balances of assets and
          liabilities as of the beginning of the earliest period for which retrospective
          application is practicable and that a corresponding adjustment be made
          to the
          opening balance of retained earnings for that period rather than being
          reported
          in an income statement. When it is impracticable to determine the cumulative
          effect of applying a change in accounting principle to all prior periods,
          this
          Statement requires that the new accounting principle be applied as if it
          were
          adopted prospectively from the earliest date practicable. All periods are
          presented in accordance with SFAS No. 154. **
 
 In
          June
          2005, the FASB issued FSP FAS 143-1, *“Accounting
          for Electronic Equipment Waste Obligations”* ( *“FSP
          143-1”* ),
          which
          provides guidance on the accounting for certain obligations associated
          with the
          Waste Electrical and Electronic Equipment Directive (the *“Directive”* ),
          adopted by the European Union ( *“EU”* ).
          Under
          the Directive, the waste management obligation for historical equipment
          (products put on the market on or prior to August 13, 2005) remains with
          the
          commercial user until the customer replaces the equipment. FSP 143-1 is
          required
          to be applied to the later of the first reporting period ending after June
          8,
          2005 or the date of the Directive’s adoption into law by the applicable EU
          member countries in which the manufacturers have significant operations.
          To
          date, FSP 143-1 has not had a material impact on its consolidated results
          of
          operations and financial condition.
 
 In
          June
          2006, the FASB issued FIN No. 48, *Accounting
          for Uncertainty in Income Taxes* - an
          interpretation of FASB Statement No. 109, which clarifies the accounting
          for
          uncertainty in income taxes recognized in an enterprise’s financial statements
          in accordance with FASB Statement No. 109, Accounting for Income Taxes.
          The
          interpretation prescribes a recognition threshold and measurement attribute
          for
          the financial statement recognition and measurement of a tax position taken
          or
          expected to be taken in a tax return. FIN No. 48 requires recognition of
          tax
          benefits that satisfy a greater than 50% probability threshold. FIN No.
          48 also
          provides guidance on derecognition, classification, interest and penalties,
          accounting in interim periods, disclosure, and transition. FIN No. 48 is
          effective for us beginning February 1, 2007. We are assessing the potential
          impact that the adoption of FIN No. 48 will have on our financial
          statements.
 
 17
 In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          157 (“SFAS 157”), No. 157 (“SFAS 157”), *Fair
          Value Measurements* which
          defines fair value, establishes guidelines for measuring fair value and
          expands
          disclosures regarding fair value measurements. SFAS 157 does not require
          any new
          fair value measurements but rather eliminates inconsistencies in guidance
          found
          in various prior accounting pronouncements. SFAS 157 is effective for fiscal
          years beginning after November 15, 2007. Earlier adoption is permitted,
          provided
          the company has not yet issued financial statements, including for interim
          periods, for that fiscal year. We are currently evaluating the impact of
          SFAS
          157, but do not expect the adoption of SFAS 157 to have a material impact
          on our
          consolidated financial position, results of operations or cash
          flows.
 
 ***Factors
          affecting future results***
 
 ***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 substantially in the near future. As a result, we
          will
          need to generate significant revenue in order to achieve and maintain
          profitability. Currently, we have limited sources of revenue. Even if we
          succeed
          in developing and commercializing additional products, we expect that we
          will
          thereafter incur substantial losses for the foreseeable future. In sum,
          we may
          never achieve or maintain profitability. Our failure to achieve or maintain
          profitability will be likely to 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 risk, 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
          we are unable to innovate and develop attractive new products, our business
          will
          be likely to be adversely affected.*** We
          expect to derive a substantial portion of our estimated revenues from the
          incorporation of the PureDepth Multi-Layer Display (“MLD”) technology into
          innovative new products for sale. The process of developing and marketing
          new
          products is generally complex and uncertain, and involves a number of risks
          including, without limitation, the following:
  ·
                we
                    may be unable to obtain adequate funding and resources necessary
                    for
                    investments in new products and
                    technologies;
  ·
                our
                    investment and commitment of significant resources may not result
                    in
                    successful new products or
                    technologies;
  ·
                we
                    may misunderstand our customers’ product needs and
                    desires;
  ·
                we
                    may not be able to successfully anticipate the new products and
                    technologies which will gain market acceptance, especially since
                    the
                    industry in which we operate is characterized by rapid changes,
                    including
                    technological changes;
  ·
                we
                    may not be able to protect the proprietary intellectual-property
                    rights
                    associated with the technologies we may use in any newly developed
                    products;
  ·
                our
                    technology may become obsolete earlier than expected due to rapid
                    advancements in technology and changes in consumer preferences,
                    and
  ·
                delays
                    in being first to market with new technologies and products may
                    prevent us
                    from successfully competing with our
                    rivals.
  If
          we
          fail to develop and market innovative new products, or if any of the risks
          described above materialize, our business may be negatively and adversely
          affected.
  18
 ***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 rapid declines 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 develop or acquire new technologies, including alternative
          display panel technologies that may cause our MLD technology to obsolesce.
          We
          may not be able to successfully develop new products 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 in pursuit of a particular technology.
          Furthermore, even if we are successful in developing or acquiring any particular
          technology, we may not be able to effectively commercialize or market the
          resulting product.
  ***Our
          need to spend significant amounts of capital in developing new technologies
          and
          products may require us to seek additional financing that could dilute
          shareholdings or restrict our operations.*** Expenses
          for research and development activities for new products, especially those
          that
          involve innovative technology, are generally extremely difficult to forecast.
          If
          our actual expenditures far exceed our forecasted expenditures, or in the
          event
          of adverse market conditions, we may need to seek additional
          financing.
  Additional
          financing could be sought from a number of sources, including, but not
          limited
          to, additional sales of equity or debt securities, or loans from banks,
          other
          financial institutions or affiliates of the Company. We cannot, however,
          be
          certain that any such financing will be available on terms favorable to
          us, if
          available 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 likely be 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 slow
          our growth, abandon certain product candidates (including candidates on
          which we
          have already spent considerable resources), or cease operations
          altogether.
  ***Our
          business may be adversely affected if alternative display panel technologies
          erode future sales of products based on our proprietary MLD
          technology.*** The
          introduction of alternative display panel technologies, including those
          that may
          be currently under development by our competitors and us, may erode future
          sales
          of MLD technology, which may have a material adverse effect on our
          business.
  ***The
          average selling prices of our displays using our technology may decline
          over
          time and negatively affect our operating results.*** The
          average selling prices of our displays ***using our technology*** are
          expected to continually decline over time as a result of, among other factors,
          technology advances, cost reductions and increased competition. Although
          we may
          be able to take advantage of the higher selling prices typically associated
          with
          new products and technologies we may bring to market, we cannot provide
          assurance that we can maintain licensing royalty prices in the face of
          market
          competition. If we are unable to effectively anticipate and counter the
          price
          erosion that accompanies our products, our profit margins will be negatively
          affected.
  ***Our
          business model has changed and may be forced to change in the
          future*** . We currently focus our efforts on developing and licensing technology. Our
          licensing revenues depend on the success of our licensees in launching
          products
          in volume that incorporate our technology. We may be required to expand
          our
          efforts further into manufacturing, production startup, customer product
          development support, assisting in establishment of contract manufacturing
          and
          other services. To facilitate business, we may be required to manufacture
          and
          supply specialized physical components. These business model changes may
          be
          difficult or impossible and may be unprofitable.
 
 ***We
          operate in a highly competitive environment and we may not be able to sustain
          our current market position.*** Our
          ability to compete successfully depends on factors both within and outside
          our
          control, including product pricing, performance and reliability, successful
          and
          timely investment and product development, success or failure of our end-brand
          customers in marketing their brands and products, component and raw material
          supply costs, and general economic and industry conditions. Currently,
          we
          believe that our MLD technology has a number of competitive advantages
          over
          competing technologies. Nevertheless, 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. In sum, we may not be able to sustain
          our perceived current market advantages.
  19
 ***Governmental
          regulation may limit our activities or increase our costs of
          operations.*** Our
          business and operations are subject to various forms of government regulation
          in
          the 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. In addition, environment
          and
          recycling laws and regulations relating to the disposal of electronics
          are
          likely to be revised and tightened in the near future. If we 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 our products 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 be likely to be affected
          by
          general economic trends in the countries or regions in which our products
          are
          sold. Similarly, demand for business use products and for components we
          may
          manufacture that go into products of third parties will be likely to 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, including North America, Europe, Australia and Asia, may adversely
          affect our sales and operating results.
  ***As
          we materially rely on a limited number of third-party suppliers for key
          raw
          materials, components and manufacturing equipment, and any disruption in
          their
          supply will negatively affect our business.*** Our
          development, marketing prototype and production support operations depend
          on
          obtaining adequate supplies of quality raw materials and components on
          a timely
          basis. In general, we source most of our raw materials as well as key components
          of MLD products from two or three suppliers for each key component. We
          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 are unable to obtain adequate
          supplies
          of high quality raw materials or components in a timely manner or make
          alternative arrangements for such supplies, this would contribute to slower
          production and negatively impact license fees.
  ***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 resources, 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.*** 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;
  20
 ·
                redesign
                    our products or processes to avoid
                    infringement;
  ·
                stop
                    using the subject matter claimed in the patents held by others;
  ·
                pay
                    damages; or
  ·
                defend
                    litigation or administrative proceedings which may be costly
                    whether we
                    win or lose, and which could result in a substantial diversion
                    of our
                    valuable management resources.
  ***We
          rely upon trade secrets and other unpatented proprietary know-how to maintain
          our competitive position in our industry, and any loss of our rights to,
          or
          unauthorized disclosure of, our trade secrets or other unpatented proprietary
          know-how could negatively affect our business.*** We also
          rely upon trade secrets, unpatented proprietary know-how and continuing
          technological innovation in our business. We typically enter into
          confidentiality agreements with each of our employees and consultants upon
          the
          commencement of an employment or consulting relationship, whereby each
          employee
          or consultant agrees to maintain the confidentiality of trade secrets and
          certain other Company 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 may
          in the future manufacture various products or components in accordance
          with
          internationally accepted quality-control standards. We cannot be certain,
          however, that all of the products using 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.
  ***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 such individuals is intense, and we may not
          be able
          to attract and retain qualified personnel.
  ***We
          expect to have significant international operations, which will pose unique
          risks to our business.*** We
          expect that a substantial portion of our operational activity will be conducted
          outside of the United States and New Zealand (particularly in Asia). There
          are a
          number of risks inherent 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;
  21
 ·
                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 hurt 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,
          rapid 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. In addition, we
          may
          experience manufacturing difficulties with our partners in starting production
          that uses our technology. The materialization of these risks could adversely
          affect our operating results.
  ***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 been very little 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.
 
 ***When
          additional registrations occur and transfer restrictions lapse, the availability
          of shares may depress the price.*** In
          a
          private placement in January and March 2006, we issued approximately 18,200,000
          shares of our common stock, A Warrants to purchase approximately 9,100,000
          shares of our common stock and B Warrants to purchase approximately 9,100,000
          shares of our common stock. In July 2006, we cancelled B Warrants to purchase
          approximately 6,700,000 shares of our common stock and issued D Warrants
          to
          purchase approximately 6,700,000 shares of our common stock. We are obligated
          to
          register for resale some of these shares which will significantly increase
          the
          shares and shares underlying the warrants freely tradable following resale
          from
          the current 5,200,000 freely tradable shares. Holders may also have an
          ability
          to sell under Rule 144 as time elapses, regardless of registration rights.
          Additionally, there are options to purchase approximately 12,500,000 shares
          of
          our common stock which may be registered under Form S-8 in the near term.
          Any
          one of these factors or a combination of them will substantially increase
          the
          number of shares available on the market and may have an effect on the
          trading
          price of the stock.
 
 ***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
          Over-the-Counter Bulletin Board. Our common stock is currently not listed
          on any
          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 forward triangular 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
          forward triangular 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.
  22
 ***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
          October 31, 2006, K1W1, our majority stockholder, possessed beneficial
          ownership
          of 35,780,006 shares of our common stock or approximately 55% of our outstanding
          common stock plus 1,768,698 shares issuable upon exercise of warrants. 
This represents a significant and controlling portion of the outstanding
          voting
          power, 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.
  ***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 $.001 per share, and 10,000,000
          shares
          are designated as preferred stock, par value $.001 per share. Pursuant
          to
          authority granted by our certificate of incorporation, our Board of Directors,
          without any action by the stockholders, may designate and issue shares
          in such
          classes or series (including classes or series of common stock and/or preferred
          stock) as it deems appropriate and establish the rights, preferences, and
          privileges of such shares, including dividends, liquidation and voting
          rights.
          The rights of holders of classes or series of common stock or preferred
          stock
          that may be issued could be superior to the rights of the common stock
          offered
          hereby. Our Board of Directors’ ability to designate and issue shares could
          impede or deter an unsolicited tender offer or takeover proposal. Further,
          the
          issuance of additional shares having preferential rights could adversely
          affect
          other rights appurtenant to the shares of common stock offered hereby.
          Any such
          issuances will dilute the percentage of ownership interest of our stockholders
          and may dilute our book value.
  ***We
          are subject to the Sarbanes-Oxley Act and the reporting requirements of
          federal
          securities laws, which can be expensive.*** As
          a
          public reporting company, we are subject to the Sarbanes-Oxley Act of 2002,
          as
          well as the information and reporting requirements of the Securities Exchange
          Act of 1934 and other federal securities laws. The costs of compliance
          with the
          Sarbanes-Oxley Act and of preparing and filing annual and quarterly 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
          cause the Company to pay any dividends for the foreseeable future. Accordingly,
          any return on an investment in us will be realized, if at all, only when
          an
          investor sells shares of our common stock.
 
 
 **Item
          3. Controls and Procedures**
 
 As
          of
          October 31, 2006, we carried out an evaluation, under the supervision and
          with
          the participation of our Chief Executive Officer and Chief Financial Officer,
          of
          the effectiveness of the design and operation 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). Based upon that evaluation, our Chief
          Executive Officer and Chief Financial Officer concluded that our disclosure
          controls and procedures as of that date are effective to ensure that information
          required to be disclosed in the reports we file under the Securities and
          Exchange Act is recorded, processed, summarized and reported on an accurate
          and
          timely basis. Additionally, the Chief Executive Officer and Chief Financial
          Officer concluded that our disclosure controls and procedures are effective
          to
          ensure that information required to be disclosed by us in the reports that
          we
          file or submit under the Exchange Act is communicated to the Chief Executive
          Officer and Chief Financial Officer, as appropriate to allow timely decisions
          regarding disclosure.  During the third quarter of fiscal 2006, there
          were no changes in our internal controls over financial reporting that
          have
          materially affected or are reasonably likely to materially affect our internal
          controls over financial reporting subsequent to the date of such
          evaluation.
 
  23
 **PART
          II**
 **OTHER
          INFORMATION**
 
 **Item
          1. Legal Proceedings**
 
 None
  **Item
          2. Unregistered Sales of Equity Securities**
 
 On
          August
          4, 2006, Robert O’Callahan, Chief Financial Officer, and Mark Kalow, Director
          were each granted options to purchase 100,000 and 33,400 shares of our
          common
          stock, respectively. The option grants have an exercise price of market
          price as
          of grant date per share with seven year term and otherwise subject to the
          2006
          Stock Incentive Plan. The shares subject to the options will vest with
          1/6 of
          such shares vesting on December 30, 2006, and 1/12 at quarterly intervals
          thereafter over three years concluding June 30, 2009. On August 4, 2006,
          an
          advisory board member was granted an option to purchase 40,000 shares of
          our
          common stock on these terms. On each of September 5 and October 5, each
          of the
          foregoing individuals were granted options to purchase an additional 100,000,
          33,400, and 40,000 shares of our common stock respectively, in each case
          on the
          same terms as the initial grants.
 
 On
          September 6, 2006 we issued 344,000 “D Warrants” to an advisor as compensation
          for services rendered.
 
 On
          September 7, 2006, John Floisand and Thomas L. Marcus were each granted
          options
          to purchase 20,000 shares of our common stock in connection with their
          appointment as directors to fill vacancies on the Board. The option grants
          have
          an exercise price per share equal to the per share market price of our
          common
          stock on the grant date with a seven year term and otherwise subject to
          the 2006
          Stock Incentive Plan. The shares subject to the options will vest over
          three
          years, with the first 1/6 vesting at six months. On October 5 each of the
          foregoing individuals was granted an option to purchase an additional 20,000
          shares of our common stock, in each case on the same terms as the initial
          grants.
 
 On
          September 29 and October 5, 2006, we issued 206,100 shares of common stock
          pursuant to the exercise of options.
  On
          October 26, 2006, at a duly convened Board Meeting we granted 375,000 stock
          options at the closing price that day.
 
 The
          sales
          of the securities identified above were made pursuant to privately negotiated
          transactions that did not involve a public offering of securities and,
          accordingly, PureDepth believes that these transactions were exempt from
          the
          registration requirements of the Securities Act pursuant to Section 4(2)
          thereof
          and/or Rule 506 promulgated thereunder. Each of the above-referenced investors
          in PureDepth’s stock private placements represented to PureDepth in connection
          with their investment that they were “accredited investors” (as defined by Rule
          501 under the Securities Act) and were acquiring the shares for investment
          and
          not distribution, that they could bear the risks of the investment and
          could
          hold the securities for an indefinite period of time. The investors received
          written disclosures that the securities had not been registered under the
          Securities Act and that any resale must be made pursuant to a registration
          or an
          available exemption from such registration. All of the foregoing securities
          are
          deemed restricted securities for purposes of the Securities Act.
 
 **Item
          3. Defaults on Senior Securities**
 
 None
 
 **Item
          4. Submission of Matters to a Vote of Security Holders**
 
 None.
 
 **Item
          5. Other Information**
 
 None.
  **Item
          6.**  **Exhibits**
 
 (a)
                    ExhibitsExhibit
                    No.
                Description10.10
                Executive
                    Employment Agreement - O’Callahan (1)10.11
                Executive
                    Employment Agreement - Angelopoulos (2)10.12
                License
                    Agreement - IGT++
  24
 31.1
                Certification
                    of Chief Executive Officer31.2
                Certification
                    of Chief Financial Officer32.1
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to Section
                    906 of the Sarbanes-Oxley Act of
                    2002.
 
 (1)
                Incorporated
                    by reference from our Form 8-K filed November 7,
                    2006.
 (2)
                Incorporated
                    by reference from our Form 8-K filed November 16,
                    2006.
 ++
                  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.
  **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: December
                    15, 2006
                By:
                /s/ Fred
                    AngelopoulosFred
                    Angelopoulos
                  *Chief
                    Executive Officer*
 
 By:
                /s/ Robert
                    O’ CallahanRobert
                    O’ Callahan
                  *Chief
                    Financial Officer*
  
 
 25
  **Index
          to Exhibits Filed with this Report**
 
 (a)
                    ExhibitsExhibit
                    No.
                Description10.12
                License
                    Agreement - IGT++31.1
                Certification
                    of Chief Executive Officer31.2
                Certification
                    of Chief Financial Officer32.1
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to Section
                    906 of the Sarbanes-Oxley Act of
                    2002.
 
  ++
                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.
 
   26