Particle Drilling 10-Q 2008 Q3 Quarterly report

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

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                       

Commission File Number 000-30819

Particle Drilling Technologies, Inc.

(Exact name of registrant as specified in its charter)

Nevada	20-1563395
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

5611 Baird Court
Houston, Texas 77041
(Address of principal executive offices)
(Zip Code)

713-223-3031
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o
(Do not check if smaller reporting company) Smaller reporting company o

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

The number of shares of the registrant’s common stock, $.001 par value, outstanding as of August 1, 2008 was 35,763,932.

PARTICLE DRILLING TECHNOLOGIES, INC.
(a development stage enterprise)

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008

INDEX

Part I - Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2008 (Unaudited) and September 30, 2007	3
	Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended June 30, 2008 and 2007, and from June 9, 2003 (date of inception) to June 30, 2008	4
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the period from September 30, 2007 to June 30, 2008	5
	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended June 30, 2008 and 2007, and from June 9, 2003 (date of inception) to June 30, 2008	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
Part II - Other Information		16
Item 6.	Exhibits	17
	Signatures	18

2

PARTICLE DRILLING TECHNOLOGIES, INC.

(a development stage enterprise)

CONSOLIDATED BALANCE SHEETS

	June 30, 2008			September 30, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,562,386		$	4,461,929
Assets held for sale	—			900,000
Prepaid expenses	101,627			233,174
Total current assets	4,664,013			5,595,103
Property, plant & equipment, net	1,313,850			867,168
Intangibles, net	1,437,482			1,312,246
Other assets	41,144			52,562
Total assets	$	7,456,489		$	7,827,079
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	874,816		$	1,028,999
Short-term notes payable	—			88,258
Current portion of long-term debt	13,205			13,511
Accrued liabilities	854,251			134,988
Total current liabilities	1,742,272			1,265,756
Long-term debt	14,478			24,537
Deferred rent	127,033			45,539
Commitments and contingencies - Note 7
Stockholders’ equity:
Common stock, $.001 par value, 100,000,000 shares authorized, 38,767,018 shares issued and 35,763,932 shares outstanding at June 30, 2008, and 34,632,987 shares issued and 31,629,901 shares outstanding at September 30, 2007	38,768			34,634
Additional paid-in capital	45,662,012			38,510,488
Treasury stock at cost, 3,003,086 shares	(1,511,817		)	(1,511,817		)
Deficit accumulated during the development stage	(38,616,257		)	(30,542,058		)
Total stockholders’ equity	5,572,706			6,491,247
Total liabilities and stockholders’ equity	$	7,456,489		$	7,827,079

The accompanying notes are an integral part of these consolidated financial statements.

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PARTICLE DRILLING TECHNOLOGIES, INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

													Period from June 9, 2003 (date of inception) to
	Three Months Ended June 30,						Nine Months Ended June 30,						June 30,
	2008			2007			2008			2007			2008
Revenues	$	—		$	—		$	—		$	—		$	—
Operating expenses:
Research and development	1,373,262			1,289,785			4,700,274			4,994,944			20,022,346
General and administrative	1,281,100			1,180,854			4,195,064			3,961,005			20,087,784
Impairment of asset	—			—			—			—			295,260
Gain on sale of assets	(114,748		)	—			(756,469		)	—			(756,469		)
Total operating expenses	2,539,614			2,470,639			8,138,869			8,955,949			39,648,921
Loss from operations	(2,539,614		)	(2,470,639		)	(8,138,869		)	(8,955,949		)	(39,648,921		)
Other income (expenses)
Interest income	21,933			81,034			69,440			322,766			924,143
Rental income - related party	—			—			—			—			73,727
Gain on debt extinguishment	—			—			—			—			35,283
Gain on assignment of lease - related party	—			—			—			—			55,614
Interest expense	(908		)	(562		)	(4,770		)	(5,244		)	(56,103		)
Total other income	21,025			80,472			64,670			317,522			1,032,664
Net loss	$	(2,518,589	)	$	(2,390,167	)	$	(8,074,199	)	$	(8,638,427	)	$	(38,616,257	)
Net loss per common share, basic and diluted	$	(0.07	)	$	(0.08	)	$	(0.25	)	$	(0.29	)	$	(1.44	)
Weighted average number of common shares outstanding - basic and diluted	33,859,053			30,669,301			31,792,851			29,934,127			26,801,723

The accompanying notes are an integral part of these consolidated financial statements.

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PARTICLE DRILLING TECHNOLOGIES, INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Period from September 30, 2007 to June 30, 2008

	Common Stock					Treasury Stock					Additional Paid-in			Deficit Accumulated During Development			Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Capital			Stage			(Deficit)
Balance, September 30, 2007	34,632,987		34,634			(3,003,086	)	(1,511,817		)	38,510,488			(30,542,058		)	6,491,247
Restricted stock cancelled in October 2007	(7,500	)	(8		)	—		—			8			—			—
Restricted stock issued to a Director at $3.28 per share in November 2007	5,000		5			—		—			(5		)	—			—
Common stock issued upon cashless exercise of warrants at $2.00 per share in December 2007	688		1			—		—			(1		)	—			—
Common stock issued upon exercise of warrants at $0.12 per share in December 2007	10,000		10			—		—			1,190			—			1,200
Restricted stock cancelled in January 2008	(4,000	)	(4		)	—		—			4			—			—
Common stock issued for cash at $0.12 per share upon exercise of employee stock options in February 2008	100,000		100			—		—			11,900			—			12,000
Restricted stock issued to Directors at $1.84 per share in March 2008	35,000		35			—		—			(35		)	—			—
Common stock issued in rights offering for cash at $1.50 per share in April 2008, less offering expense of $166,963	3,500,043		3,500			—		—			5,079,537			—			5,083,037
Common stock issued for cash at $0.12 per share upon exercise of employee stock options in May 2008	100,000		100			—		—			11,900			—			12,000
Common stock issued for cash at $0.12 per share upon exercise of employee stock options in June 2008	12,300		12			—		—			1,462			—			1,474
Restricted stock issued to employees at $2.65 per share in June 2008	382,500		383			—		—			(383		)	—			—
Stock-based employee compensation	—		—			—		—			2,045,947			—			2,045,947
Net loss	—		—			—		—			—			(8,074,199		)	(8,074,199		)
Balance, June 30, 2008	38,767,018		$	38,768		(3,003,086	)	$	(1,511,817	)	$	45,662,012		$	(38,616,257	)	$	5,572,706

The accompanying notes are an integral part of these statements.

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PARTICLE DRILLING TECHNOLOGIES, INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended June 30,						Period from June 9, 2003 (date of inception) to June 30,
	2008			2007			2008
Cash flows from operating activities:
Net loss	$	(8,074,199	)	$	(8,638,427	)	$	(38,616,257	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on debt extinguishment	—			—			(35,283		)
Impairment of asset	—			—			295,260
Gain on assignment of lease - related party	—			—			(55,614		)
Gain on sale of assets	(756,469		)	—			(756,469		)
Depreciation and amortization expense	433,364			585,684			2,472,180
Short-term note issued for services	—			—			44,000
Common stock issued for services	—			—			931,500
Warrants issued for services	—			—			63,829
Stock-based employee compensation	2,045,947			1,844,131			7,246,569
Changes in operating assets and liabilities:
Decrease in note receivable	—			385,839			385,839
(Increase) in accounts receivable - related party	—			—			(40,819		)
Decrease in prepaid expenses	131,547			102,094			264,348
Increase (Decrease) in accounts payable	(154,183		)	279			534,878
Increase in accrued liabilities	719,263			250,300			951,048
(Increase) Decrease in other assets	11,418			(51,144		)	(26,494		)
Increase in other liabilities	81,494			12,000			127,033
Net cash used in operating activities	(5,561,818		)	(5,509,244		)	(26,214,452		)
Cash flows from investing activities:
Payments to purchase property and equipment	(37,332		)	(1,229,578		)	(3,354,936		)
Proceeds from sale of property and equipment	851,617			—			872,574
Payments to purchase intangibles	(163,099		)	(99,351		)	(904,357		)
Payments to purchase other assets	—			—			(419,504		)
Payments issued for note receivable	—			—			(300,783		)
Payments issued for note receivable - related party	—			—			(56,784		)
Net cash provided by (used in) investing activities	651,186			(1,328,929		)	(4,163,790		)
Cash flows from financing activities:
Proceeds from issuance of common stock	5,109,712			10,717,951			36,849,022
Repurchase of common stock	—			—			(1,511,817		)
Proceeds from issuance of convertible notes	—			—			553,500
Repayments of notes payable	(98,623		)	(194,937		)	(950,077		)
Proceeds from borrowings under loan agreements - related parties	—			—			23,195
Repayment of borrowings under loan agreements - related parties	—			—			(23,195		)
Net cash provided by financing activities	5,011,089			10,523,014			34,940,628
Net increase in cash and cash equivalents	100,457			3,684,841			4,562,386
Cash and cash equivalents - beginning of period	4,461,929			2,291,586			—
Cash and cash equivalents - end of period	$	4,562,386		$	5,976,427		$	4,562,386
Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,771		$	5,244		$	56,103
Non-cash investing and financing activities:
Prepaid insurance acquired with note payable	$	—		$	—		$	478,844
Common stock issued as consideration for account payable	—			—			6,000
Common stock issued as consideration for note payable	—			—			50,000
Related party note receivable exchanged for property and equipment	—			—			56,783
Note payable converted into common stock	—			—			553,500
Property and equipment acquired with assumed liabilities	—			—			479,610
Intangibles acquired with assumed liabilities	—			—			757,792
Property and equipment acquired with note payable	—			—			30,487
Short-term investments reclassified from other assets	—			—			385,839

The accompanying notes are an integral part of these statements.

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PARTICLE DRILLING TECHNOLOGIES, INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements, which include the accounts of Particle Drilling Technologies, Inc. (which is referred to herein as “we,” “us,” “our” or the “Company”) and its subsidiary, have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted in accordance with such rules and regulations. The information furnished in the unaudited interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which in the opinion of management are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, these unaudited interim consolidated financial statements should be read in conjunction with the Company’s September 30, 2007 audited consolidated financial statements and notes thereto in its Annual Report on Form 10-K. Operating results for the three and nine months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

Certain reclassifications have been made to conform prior period amounts to the current period presentation. These reclassifications had no effect on net loss, net loss per share, or stockholders’ equity.

2.FINANCIAL CONDITION AND MANAGEMENT PLANS

The financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the condensed consolidated financial statements, for the three and nine months ended June 30, 2008, the Company reported net losses of approximately $2.5 million and $8.1 million, respectively, as compared to net losses of approximately $2.4 million and $8.6 million for the three and nine months ended June 30, 2007, respectively.  The condensed consolidated financial statements also show an accumulated deficit of approximately $38.6 million from inception (June 9, 2003) through the period ended June 30, 2008.  The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

The Company is currently a development stage company and its continued existence is dependent upon the Company’s successful development of the PID technology and its ability to successfully commercialize this technology.  The Company has yet to generate cashflow from operations, and until revenues commence, the Company is highly dependent upon debt and equity funding.  Should continuing funding requirements not be met, the Company’s operations may cease to exist.  Management cannot provide any assurance that any such financing will be available on acceptable terms or at all.  On April 21, 2008, the Company completed a subscription rights offering to sell approximately 3.5 million shares of our common stock at $1.50 per share yielding gross proceeds which totaled approximately $5.25 million.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Impairment of Long-Lived Assets.   We evaluate our long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows.  We also evaluate the capitalized costs for patents and patent applications filed but not issued for possible impairments. The evaluation of capitalized costs for patents and patent applications is based on a subjective cash flow forecast which is subject to change. We will reassess our cash flow forecast each time there are fundamental changes in the underlying potential use of the patents or patent applications in terms of performance, customer

7

acceptance or other factors that may affect such cash flow forecasts.

New Accounting Pronouncements.  In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 (our fiscal year 2008) and the provisions of FIN 48 will be applied to all tax positions under Statement No. 109 upon initial adoption.  We have adopted FIN 48 and there was no effect on our financial statements as a result of its implementation.

In September 2006, the FASB issued Statement of Financial Accounting Standards, “SFAS” No. 157, Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted.  The Company believes that the adoption of SFAS No. 157 will not have a material impact on its financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 on October 1, 2008 and have not yet determined the impact, if any, on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS 141, Business Combinations. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations beginning in the Company’s 2010 fiscal year.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. SFAS 160 is effective for the Company’s 2010 fiscal year. Upon adoption of SFAS 160, the Company will be required to report its noncontrolling interests, if any, as a separate component of shareholders’ equity. The Company will also be required to present net income allocable to the noncontrolling interests, if any, and net income attributable to the shareholders of the Company separately in its consolidated statements of income. Currently, noncontrolling interests (minority interests) are reported as a liability in a Company’s statement of financial position and the related income attributable to minority interests is reflected as an expense in arriving at net income. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the adoption of SFAS No. 161 to significantly impact its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company

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Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

4.NET LOSS PER COMMON SHARE

The Company has presented basic and diluted net loss per share pursuant to SFAS No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Dilutive net loss per share would give effect to the dilutive effect of common stock equivalents consisting of options and warrants. Potentially dilutive securities have been excluded from the net loss per common share calculation as the effects would be antidilutive. Potentially dilutive securities not included in the computation of weighted average diluted shares of common stock because the impact of these potentially dilutive securities were antidilutive were 1,244,594 and 2,498,200 shares for the three months ended June 30, 2008 and 2007, respectively, and 1,853,293 and 2,485,717 shares for the nine months ended June 30, 2008 and 2007, respectively.

5.COMMON STOCK

In October 2007, the Company cancelled 7,500 shares of restricted stock.

In November 2007, the Company issued 5,000 shares of restricted stock to a Director at $3.28 per share.

In December 2007, the Company issued 688 shares of its common stock upon a cashless exercise of warrants at $2.00 per share.

In December 2007, the Company issued 10,000 shares of its common stock upon an exercise of warrants at $0.12 per share.

In January 2008, the Company cancelled 4,000 shares of restricted stock.

In February 2008, the Company issued 100,000 shares of its common stock upon an exercise of stock options at $0.12 per share.

In March 2008, the Company issued 35,000 shares of restricted stock to its Directors at $1.84 per share.

On April 21, 2008, the Company completed a subscription rights offering to sell 3,500,043 shares of common stock at $1.50 per share.  Gross proceeds totaled approximately $5.25 million. In the subscription rights offering, all common shareholders received one non-transferable right to purchase 0.11025 shares of the Company’s common stock for each share that they held of record as of 5:00 p.m., central time, on March 17, 2008.  These subscription rights expired if not exercised by 5:00 pm, central time on April 16, 2008.

In May 2008, the Company issued 100,000 shares of its common stock upon an exercise of stock options at $0.12 per share.

In June 2008, the Company issued 12,300 shares of its common stock upon an exercise of stock options at $0.12 per share.

In June 2008, the Company issued 382,500 shares of restricted stock to its employees at $2.65 per share.

At June 30, 2008, the Company had 35,763,932 shares of common stock outstanding and had outstanding options and warrants to purchase up to 5,793,216 additional shares of the Company’s common stock in the aggregate.

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6.STOCK-BASED EMPLOYEE COMPENSATION

In April 2004, the Board of Directors adopted the 2004 Stock Incentive Plan (the “2004 Plan”).  The 2004 Plan provides for the issuance of incentive stock options, non-statutory stock options and restricted stock to directors, employees and consultants of PDTI. Provisions under the 2004 Plan allow for the issuance of up to 3,500,000 shares of common stock pursuant to awards under this plan.  As of  June 30, 2008, the Company had 1,250 awards available for grant under the 2004 Plan. Under the 2004 Plan, the exercise price of each option is equal to the market value of the Company’s common stock on the date of grant and the maximum term for the options is ten years.

In March 2005, the Board of Directors adopted the 2005 Stock Incentive Plan (the “2005 Plan”).  The 2005 Plan provides for the issuance of non-statutory stock options and restricted stock grants to directors, employees and consultants of PDTI.  Provisions under the 2005 Plan allow for the issuance of options and restricted stock awards to purchase or issue up to 2,000,000 shares of common stock.  As of June 30, 2008, the Company had 1,000 shares of common stock available for issuance pursuant to awards under the 2005 Plan.  Under the 2005 Plan, the exercise price of each option is equal to the market value of the Company’s common stock on the date of grant and the maximum term for the options is ten years.

In March 2007, the shareholders adopted the 2007 Stock Incentive Plan (the “2007 Plan”).  The 2007 Plan provides for the issuance of incentive stock options, non-statutory stock options and restricted stock to directors, employees and consultants of PDTI. Provisions under the 2007 Plan allow for the issuance of up to 1,500,000 shares of common stock pursuant to awards under this plan.  As of June 30, 2008, the Company had 631,750 awards available for grant under the 2007 Plan. Under the 2007 Plan, the exercise price of each option is equal to the market value of the Company’s common stock on the date of grant and the maximum term for the options is ten years.

Stock-based employee compensation expense recorded for awards issued under the 2004 Plan, the 2005 Plan, and the 2007 Plan for the three months ended June 30, 2008 and 2007 was $627,150 and $592,987, respectively.  Stock-based employee compensation expense recorded for awards issued under the 2004 Plan, the 2005 Plan, and the 2007 Plan for the nine months ended June 30, 2008 and 2007 was $2,045,947 and $1,844,131, respectively.  Stock-based employee compensation expense recorded for awards issued under the 2004 Plan, the 2005 Plan, and the 2007 Plan since inception (June 9, 2003) to June 30, 2008 was $7,246,569.

7.COMMITMENTS AND CONTINGENCIES

In April 2007, we entered into a 60-month lease agreement that commenced in September 2007 for a new corporate office and operating facility and delivered to the lessor a security deposit of $41,144.  The new facility combines the corporate office personnel and the operations personnel into one location at 5611 Baird Court, Houston, Texas 77041.  The total future minimum lease payments under this lease are $1,944,822.

8.  INCOME TAXES

The Company follows Statements of Financial Accounting Standards (“SFAS”) No. 109 Accounting for Income Taxes. This statement requires an asset and liability approach for financial accounting and reporting for income tax purposes.   This statement recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the consolidated financial statements or tax returns.  Provisions (benefits) for income taxes result from permanent and temporary differences in the recognition of accounting transactions for tax and financial reporting purposes.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

As discussed in Footnote 3, we adopted FIN 48 and, as a result, there was no effect on our financial statements.  FIN 48 prescribes a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. It also provides guidance for de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The Company recognizes interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing operations in the consolidated statements of income. There are no unrecognized tax benefits as of the date of adoption.  There are no unrecognized tax benefits that if recognized would affect the tax rate. There is no interest or penalties recognized as of the date of adoption or for the three months ended June 30, 2008.

We filed our income tax return for the tax year ended September 30, 2007.  The tax years ended September 30, 2006 and September 30, 2005 are open for examination by the U.S. and State taxing authorities.

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The Company anticipates recording no tax benefit for the year, based upon management’s assessment that the realization of the anticipated financial loss for the year is not at this point reasonably assured; accordingly no benefit has been recorded for the three months ended June 30, 2008.

For the period ended June 30, 2008, there were permanent and temporary differences of approximately $13,000 and $936,000, respectively, which decreased the loss for the current year.

At June 30, 2008, the Company has cumulative net operating loss carryforwards of approximately $31,970,000 which expire in years 2009 through 2027. No effect has been shown in the financial statements for the net operating loss carryforwards as the likelihood of future tax benefit from such net operating loss carryforwards is not determinable at this time. Accordingly, the potential tax benefits of the net operating loss carryforwards, estimated based upon current tax rates at June 30, 2008, have been offset by valuation reserves of the same amount.  The valuation allowance increased approximately $ 3,058,000 from September 30, 2007 to June 30, 2008.

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

The following discussion of our financial condition and results of operations should be read together with the unaudited consolidated financial statements and related notes that are included elsewhere in this report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.   Please see “Forward-Looking Statements” below.

Overview

On January 14, 2005, we acquired Particle Drilling Technologies, Inc., a privately-held Delaware corporation (“PDTI”). As a result of this acquisition, our Company, which previously had no material operations, acquired the business of PDTI and we are now engaged in the development of the Particle Impact Drilling System, a patented system utilizing a specially designed “fit for purpose” drill bit fitted with jetting nozzles and polycrystalline diamond compact cutting structures for use in the oil and gas drilling industry.

We are a development-stage company and have a limited operating history. Our predecessor company for financial reporting purposes was formed on June 9, 2003 to acquire the technology related to the Particle Impact Drilling System (the “PID technology”). We are still developing this technology, and to date, we have not generated any revenues from our operations. As we continue to execute our operations plan, we expect our development and operating expenses to increase.

The PID System has demonstrated higher rates of penetration than current conventional drilling methods. The rate of penetration gains generated by the PID System are expected to result in operators paying less variable drilling costs (e.g., rig time, labor, fuel, bits, rentals), which are purchased as part of the ordinary drilling cycle. As a result, we believe the PID System can reduce drilling costs and lower finding costs, thus improving the overall economics to the oil and gas industry in certain geologic intervals.

In January 2007, we entered into a one-year agreement with a multi-national independent exploration and production company (the “Operator”), which has been subsequently extended to October 15, 2008.  We expect to provide our PID services under the terms of this agreement in connection with the Operator’s drilling program in East Texas. The original agreement anticipated that PID services would be conducted on an initial four wells and provides the basis for additional wells and cooperation between us and the Operator with respect to financing of future PID systems by the Operator and an obligation by us to provide to the Operator preferred access to additional PID systems in the future. The compensation under the agreement, if any, is based on our performance pursuant to a gain-sharing formula.  As is customary within the oilfield service industry, this contract is cancellable by either party at any time.

Research and development.   We have made and expect to continue to make substantial investments in research and development activities in order to develop and market the PID technology. Research and development costs consist primarily of general and administrative and operating expenses related to research and development activities. We expense research and development costs as incurred except for property, plant and equipment related to research and development activity that have an alternative future use. Property, plant and equipment for research and development activity that have an alternative future use are capitalized and the related depreciation is expensed as research and development costs.

After conducting four full scale field trials, we believe that all components of the PID system are now functioning satisfactorily with the exception of the frac pump driven injection system.  While some minor modifications will be made to the PID bit in order to further improve performance, most of our focus is now directed towards implementation of a new particle injection system.  As we have gained more experience with PID drilling and have run the system for longer periods

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of time, we have determined that the continuously increasing and fluctuating well pressure encountered on recent trials resulted in unexpected levels of maintenance on the frac pump and caused difficulty in maintaining a continuous flow of particles to the drill bit. While the frac pump driven particle injection system has allowed us to demonstrate the potential of the PID technology, it has been unreliable. In April 2007, we began testing an extruder based injection system and the associated pressure diffuser. The pressure diffuser was determined to be unreliable in July 2007 and therefore we began testing a pressurized extruder system. In early August 2007, we were able to successfully inject particles, at a controllable rate, into pressures up to 5,200 pounds per square inch. This was the first time that goal was achieved. The next step in the development required a pressure barrier that would allow the pressurized extruder to continuously refill with particles. We selected a high pressure gate valve to serve as the pressure barrier and successfully tested the gate valve in September 2007 for 3,000 cycles, representing approximately three days of operating time. Following this test, all necessary components needed to build the new particle injection system were placed on order. The new injection system was assembled in late December 2007 and integrated with our test facility on January 9, 2008.  We tested the subsystems and components that are integral to the safe operation of the new injection system.  Some refinements and modifications were made as needed during the initial testing. On January 24, 2008, we completed the first phase of our in-house test program with good results.  The testing confirmed that the automated system operates as designed as a mechanical means to inject particles into pressurized drilling fluid at the rates needed for commercial use.

        We completed the construction of the new injection system in mid-January 2008 and initiated our in-house test program in order to learn how the system performed under various conditions, including different injection rates, pressure environments and flow rates.  Our testing revealed several weak links in some of the system’s components which required maintenance, horsepower upgrades or some level of modification.  On February 20, 2008, we announced that certain modifications made to the system had allowed us to reach a continuous injection rate of 14 gallons per minute, which is sufficient for field operations.  On May 8, 2008, we declared the PID injection system ready for field use and began exchanging information with the Operator with the objective of scheduling the next field trial.

        On June 2, 2008, we were informed by the Operator that the next field trial was to be completed utilizing the same drilling rig as was used on the prior commercial trial in May 2007.   Based on previous wells drilled in this area, we anticipated that this particular drilling rig would complete its current well in June 2008, allowing us to conduct the next field trial on or around July 15, 2008.  In early July, we were informed that the particular drilling rig assigned to us had encountered some unexpected delays which would result in a further delay in conducting the next field trial.  On July 14, 2008, we issued a press release indicating that the drilling rig had yet to complete its current assignment and that we had been informed by the Operator that we were next in line following the completion of the current well. Preparations for that commercial trial were completed recently and the previously selected drilling rig began drilling on the well targeted in June; however, on August 4, 2008, we were contacted by the Operator and informed that they would like to shift the next field trial from the Deep Bossier area, which had previously been scheduled to commence in August 2008, to the Haynesville area in Northwest Louisiana.  The Operator is drilling with a larger drill bit in this area, however, and thus a new bit would have to be designed and manufactured to meet this application.  The reasons for this change have not been fully vetted at this time given the short time frame between receiving this information and the filing of this report.  We are actively working with the Operator to revert back to the original drilling rig in the Bossier area which should be nearing the target formation in the near future.  Currently, the discussion with the Operator is continuing.  Should this discussion not get resolved soon, we are also currently in active discussions with another potential customer about field trial opportunities in another location.

General and administrative.   General and administrative expenses consist primarily of salaries and benefits, office expense, professional services, and other corporate overhead costs. We have experienced and expect to continue to experience increases in general and administrative expenses as a result of: (1) reporting and compliance obligations applicable to publicly-held companies; (2) our continuing efforts to develop, test and prepare the PID technology for commercialization; and (3) the hiring of additional personnel.

Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Research and development.   Research and development expenses were $1,373,262 and $1,289,785 for the three months ended June 30, 2008 and 2007, respectively, representing an increase of $83,477. This increase was primarily related to higher expenses from increases in salaries and wages and  stock compensation expense for the three months ended June 30, 2008 compared to the three months ended June 30, 2007.  In addition, bonus expense continued to accrue for research and development personnel in the three months ended June 30, 2008, whereas this bonus expense ceased to accrue in the later part of the three months ended June 30, 2007.

General and administrative.   General and administrative expenses were $1,281,100 and $1,180,854 for the three months

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ended June 30, 2008 and 2007, respectively, representing an increase of $100,246. While salaries and wages remained fairly consistent, stock compensation expense increased slightly in the three months ended June 30, 2008 compared to the three months ended June 30, 2007.  In addition, bonus expense continued to accrue for administrative personnel  in the three months ended June 30, 2008, whereas this bonus expense ceased to accrue in the later part of the three months ended June 30, 2007.

Gain on Sale of Assets.  The gain on sale of assets relates to the diposal of our OPI triplex pump that was sold  for net proceeds of $165,000 during the three months ended June 30, 2008.

Other income (expenses).   Other income was $21,025 and $80,472 for the three months ended June 30, 2008 and 2007, respectively, representing a decrease in other income of $59,447. The decrease was primarily attributable to the decrease in interest income associated with a higher cash and cash equivalents during the three months ended June 30, 2007 compared to the three months ended June 30, 2008.

Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007

Research and development.  Research and development expenses were $4,700,274 and $4,994,944 for the nine months ended June 30, 2008 and 2007, respectively, representing a decrease of $294,670. During the nine months ended June 30, 2008, we spent approximately $730,000 less in direct costs, most of which related to the substantial completion of the new particle injection system compared to the nine months ended June 30, 2007.  In addition, depreciation expense relating to research and development property and equipment decreased approximately $152,000 during the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007 due to the sale of certain non-essential assets.  These decreases were offset in part by the increase in research and development overhead.  Salaries and wages and stock compensation expense increased approximately $97,000 during the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007.  Facility rent, repairs and maintenance, and supplies increased approximately $488,000 during the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007.

General and administrative.  General and administrative expenses were $4,195,064 and $3,961,005 for the nine months ended June 30, 2008 and 2007, respectively, representing an increase of $234,059.   This increase was primarily the result of increased costs related to salaries and wages and stock-based compensation for personnel other than research and development personnel during the nine months ended June 30, 2008.

Gain on Sale of Assets.  The gain on sale of assets relates to the diposal on our older frac pump, a tractor trailor, a machine shop lathe and an OPI triplex pump that were sold for net proceeds of $851,617 during the nine months ended June 30, 2008.

Other Income.  Other income was $64,670 and $317,522 for the nine months ended June 30, 2008 and 2007, respectively, representing a decrease of $252,852.  The decrease was primarily attributable to the decrease in interest income associated with a higher cash and cash equivalents balance during the nine months ended June 30, 2007 compared to the nine months ended June 30, 2008.

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents on hand.  We expect that cash requirements through the end of the fiscal year 2008 will be primarily to fund research and development activities, to continuously improve service capabilities, to expand operations, general and administrative costs and capital expenditures.  As of the date of this report on Form 10-Q, we believe we have sufficient cash and cash equivalents to meet our working capital and capital expenditure requirements for at least the next 12 months; however, our continued existence depends on the successful development of the PID technology and our ability to successfully commercialize this technology.  To date we have not yet generated cashflow from operations, and until we commence recognizing revenue, we are highly dependent upon debt and equity funding.  If we are not able to meet our funding requirements, our operations may cease to exist.  We cannot provide any assurance that any such funding will be available on acceptable terms or at all.

Since inception on June 9, 2003 through June 30, 2008, we have financed our operations through private sales of our equity  and the issuance of convertible notes payable.  In April 2008, we also competed a subscription rights offering.  Since inception through the completion of our subscription rights offering in April 2008, we have raised aggregate net proceeds of $35,397,913 from the private sales of equity, the issuance of convertible notes payable and the completion of a subscription rights offering.  As of June 30, 2008, we had $4,562,386 in cash and cash equivalents.  In April 2008, we completed a rights offering of approximately 3.5 million shares of our common stock for $1.50 per share, yielding gross proceeds of approximately $5.25 million.  We intend to use the net proceeds from the subscription rights offering to maintain our current development plan with respect to the PID technology and for general corporate purposes.

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Cash Flows from Operating Activities.  Cash flow used for operations is primarily affected by our research and development progress and business development.  Net cash flows used in operating activities during the nine months ended June 30, 2008 were $5,561,818 compared to $5,509,244 for the nine months ended June 30, 2007.  The increase from fiscal 2007 to fiscal 2008 was primarily the result of an decrease in the net loss and an increase in accrued liabilities between the two periods.

Cash Flows from Investing Activities.  Cash flow provided by (used in) investing activities for the nine months ended June 30, 2008 was $651,186 compared to $(1,328,929) for the nine months ended June 30, 2007.  The cash flows provided by investing activities for the nine months ended June 30, 2008 consisted of  $686,617 from the sale of our Condor frac pump, $165,000 from the sale of our OPI triplex pump, as well as from the sale of other various non-essential assets.  Also included in cash flows provided by investing activities for the nine months ended June 30, 2008 was $163,099 for costs associated with filing new and protecting existing patents, and approximately $37,332 for the purchase of various equipment.  We anticipate that our capital expenditures for the next year will continue to be fully funded from our available cash and cash equivalents.

Cash Flow from Financing Activities.  Net cash  provided by financing activities for the nine months ended June 30, 2008 was $5,011,089 compared to $10,523,014 for the nine months ended June 30, 2007.  On April 21, 2008, we completed a subscription rights offering to sell 3,500,043 shares of common stock at $1.50 per share.  Gross proceeds totaled approximately $5.25 million. In the subscription rights offering, all common shareholders received one non-transferable right to purchase 0.11025 shares of our common stock for each share that they held of record as of 5:00 p.m., central time, on March 17, 2008.  These subscription rights expired if not exercised by 5:00 pm, central time on April 16, 2008.

Contractual Obligations.  In April 2007, we entered into a 60-month lease agreement that commenced in September 2007 for a new corporate office and operating facility and delivered to the lessor a security deposit of $41,144.  The new facility combines the corporate office personnel and the operations personnel into one location at 5611 Baird Court, Houston, Texas 77041.  The total future minimum lease payments under this lease are $1,944,822.

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Long-Term Debt Obligation and Short Term Notes Payable (including current portion)	$	27,683	$	11,261	$	14,908	$	1,514	$	—
Purchase Obligations	530,605		530,605		—		—		—
Operating Lease Obligations	1,944,822		418,757		1,442,272		83,793		—
Total	$	2,503,110	$	960,623	$	1,457,180	$	85,307	$	—

Off-Balance Sheet Arrangements

In connection with the acquisition of the PID technology in January 2004, PDTI entered into a Royalty Agreement with ProDril Services, Incorporated (“PSI”) pursuant to which we are obligated to pay PSI a royalty on a quarterly basis equal to 18% of our earnings before interest, income taxes, depreciation and amortization (“EBITDA”) derived from the use of the PID technology, until an aggregate of $67,500,000 has been paid. PDTI also entered into a Royalty Agreement in January 2004 with ProDril Services, International, Ltd. (“PSIL”) pursuant to which we are obligated to pay PSIL a royalty on a quarterly basis equal to 2% of our EBITDA derived from the use of the PID technology, until an aggregate of $7,500,000 has been paid. In addition, we are obligated to pay CCORE Technology and Licensing, Ltd. (“CTL”), PSI and PSIL a royalty equal to 1.6%, 1.2% and 1.2%, respectively, of our quarterly gross revenue, derived from the use of the PID technology.  As of June 30, 2008, we had no revenues or EBITDA; therefore no royalties have been paid or accrued.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in the preparation of our consolidated financial statements.

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Impairment of Long-Lived Assets.   We evaluate our long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows.  We also evaluate the capitalized costs for patents and patent applications filed but not issued for possible impairments.  The evaluation of capitalized costs for patents and patent applications is based on a subjective cash flow forecast which is subject to change.  We will reassess our cash flow forecast each time there are fundamental changes in the underlying potential use of the patents or patent applications in terms of performance, customer acceptance or other factors that may affect such cash flow forecasts.

Asset held for sale.  In January 2007, we purchased a quintaplex frac pump for approximately $1.4 million. In September 2007, management decided to place this frac pump on the market for sale as a result of the development of the new extruder-based injection system being constructed that is meant to replace the frac pump based injection system. We commenced our selling efforts during September 2007 at which time the carrying amount of the frac pump was reclassified as an asset held for sale.   In September 2007, we recognized an impairment on the asset of $295,260, and the net book value of the frac pump was reduced to $900,000, reflecting management’s estimate of the realizable value of the frac pump.

In April 2008, management decided to reclassify the quintaplex frac pump to assets held for use to be used in testing of the extruder based injection system.  Based on the current stated value, management concluded there was no further impairment needed on this asset.

Stock-Based Compensation.   We follow SFAS No. 123(R), Share-Based Payment. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.

Research and Development.   The costs of materials and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses are capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities acquired or constructed for research and development activities that have no alternative future uses are considered research and development costs and are expensed at the time the costs are incurred.

Income Taxes.   We follow Statements of Financial Accounting Standards (“SFAS”) No. 109 Accounting for Income Taxes. This statement requires an asset and liability approach for financial accounting and reporting for income tax purposes.   This statement recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the consolidated financial statements or tax returns.  Provisions (benefits) for income taxes result from permanent and temporary differences in the recognition of accounting transactions for tax and financial reporting purposes.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

As discussed in Footnote 3, we adopted FIN 48 and, as a result, there was no effect on our financial statements.  FIN 48 prescribes a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. It also provides guidance for de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing operations in the consolidated statements of income. There are no unrecognized tax benefits as of the date of adoption.  There are no unrecognized tax benefits that if recognized would affect the tax rate. There is no interest or penalties recognized as of the date of adoption or for the three months ended June 30, 2008.

We filed our income tax return for the tax year ended September 30, 2007.  The tax years ended September 30, 2006 and September 30, 2005 are open for examination by the U.S. and State taxing authorities.

We anticipate recording no tax benefit for the year, based upon management’s assessment that the realization of the anticipated financial loss for the year is not at this point reasonably assured; accordingly no benefit has been recorded for the three months ended June 30, 2008.

For the period ended June 30, 2008, there were permanent and temporary differences of approximately $13,000 and $936,000, respectively, which decreased the loss for the current year.

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At June 30, 2008, we had cumulative net operating loss carryforwards of approximately $31,970,000 which expire in years 2009 through 2027. No effect has been shown in the financial statements for the net operating loss carryforwards as the likelihood of future tax benefit from such net operating loss carryforwards is not determinable at this time. Accordingly, the potential tax benefits of the net operating loss carryforwards, estimated based upon current tax rates at June 30, 2008, have been offset by valuation reserves of the same amount.  The valuation allowance increased approximately $ 3,058,000 from September 30, 2007 to June 30, 2008.

Net Loss per Share.   We have presented basic and diluted net loss per share pursuant to SFAS No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Dilutive net loss per share would give effect to the dilutive effect of common stock equivalents consisting of options and warrants. Potentially dilutive securities have been excluded from the net loss per common share calculation as the effects would be antidilutive. Potentially dilutive securities not included in the computation of weighted average diluted shares of common stock because the impact of these potentially dilutive securities were antidilutive were 1,244,594 and 2,498,200 shares for the three months ended June 30, 2008 and 2007, respectively, and 2,485,717 and 1,853,293 shares for the nine months ended June 30, 2008 and 2007, respectively.

Forward-Looking Statements

Statements in this quarterly report on Form 10-Q that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements subject to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements can be identified by the use of forward-looking terminology including “forecast,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward-looking” information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements.

These forward-looking statements are made based upon our management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties.  We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including but not limited to dependence upon energy industry spending, the volatility of oil and gas prices, weather interruptions, the results of testing of our products, the availability of capital resources and the other factors described under “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2007 filed with the SEC on December 13, 2007.  We undertake no obligation to update any forward-looking statements except as required by law.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We believe that we do not have any material exposure to financial market risk and we do not enter into foreign currency or interest rate transactions.

Item 4.Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, an evaluation was performed 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 under Rule 13a-15(e) and Rule 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q filed with the SEC. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2008.

There was no change in our internal control over financial reporting during our third quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

None

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Item 6.Exhibits

Exhibits:

Exhibit No.	Description
3.1	Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the current report on Form 8-K (File No. 000-30819), filed on May 23, 2008).
4.1	Rights Agreement, dated as of May 23, 2008, between Particle Drilling Technologies, Inc. and Computershare Trust Company, N.A., as Rights Agent, including the form of Certificate of Designation of Series A Junior Participating Preferred Stock, the forms of the Rights Certificate, Assignment and Election to Purchase, and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively (Incorporated by reference to Exhibit 4.1 to the current report on Form 8-K (File No. 000-30819), filed on May 23, 2008).
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

*Filed herewith

**Furnished herewith

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SIGNATURES

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

	PARTICLE DRILLING TECHNOLOGIES, INC.
	(Registrant)
Date:  August 8, 2008	/s/ J. CHRIS BOSWELL
	J. Chris Boswell
	Senior Vice President and Chief Financial Officer (authorized officer, principal financial officer and principal accounting officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Certificate of Designation of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the current report on Form 8-K (File No. 000-30819), filed on May 23, 2008).
4.1	Rights Agreement, dated as of May 23, 2008, between Particle Drilling Technologies, Inc. and Computershare Trust Company, N.A., as Rights Agent, including the form of Certificate of Designation of Series A Junior Participating Preferred Stock, the forms of the Rights Certificate, Assignment and Election to Purchase, and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively (Incorporated by reference to Exhibit 4.1 to the current report on Form 8-K (File No. 000-30819), filed on May 23, 2008).
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

*Filed herewith

**Furnished herewith

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