**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D.C. 20549**

**FORM      10-Q**

| x | **Quarterly                Report Pursuant to Section 13 or 15(d) of the Securities Exchange                Act of                1934** |
|---|------------------------------------------------------------------------------------------------------------------------------------------|

**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 001-14015**

**APPLIED      ENERGETICS, INC.**

----

| **Delaware**                                                                                 |   | **77-0262908**                                      |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| (State                or Other Jurisdiction of Incorporation                or Organization) |   | (IRS                Employer Identification Number) |

| **3590                  East Columbia Street** **Tucson,                  Arizona** |   | **85714**                   |
|------------------------------------------------------------------------------------------|--------|-----------------------------|
| (Address                  of Principal Executive                  Offices)               |   | (Zip                  Code) |

**Registrant’s      telephone number, including area code**
**(520)      628-7415**

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

----

**APPLIED      ENERGETICS, INC.**

**QUARTERLY      REPORT ON FORM      10-Q**

**TABLE      OF CONTENTS**

| PART                  I. FINANCIAL                  INFORMATION                                                                                                       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                  |   |   |   |   |
| ITEM 1.  Condensed                  Consolidated Financial Statements                                                                                  |   |   |   |   |
|                                                                                                                                                                  |   |   |   |   |
| Condensed                  Consolidated Balance Sheets as of September 30, 2008 (Unaudited)                  and                  December 31, 2007                   |   |   | 1 |   |
|                                                                                                                                                                  |   |   |   |   |
| Condensed                  Consolidated Statements of Operations for the three months ended                  September                  30, 2008 and 2007 (Unaudited) |   |   | 2 |   |
|                                                                                                                                                                  |   |   |   |   |
| Condensed                  Consolidated Statements of Operations for the nine months ended                  September                  30, 2008 and 2007 (Unaudited)  |   |   | 3 |   |
|                                                                                                                                                                  |   |   |   |   |
| Condensed                  Consolidated Statements of Cash Flows for the nine months ended                  September                  30, 2008 and 2007 (Unaudited)  |   |   | 4 |   |
|                                                                                                                                                                  |   |   |   |   |
| Notes                  to Condensed Consolidated Financial Statements                                                                                                 |   |   | 5 |   |
|                                                                                                                                                                  |   |   |   |   |
| ITEM                  2.  Management's                  Discussion and Analysis of Financial Condition and Results of                  Operations                |   |   | 13 |   |
|                                                                                                                                                                  |   |   |   |   |
| ITEM                  4.  Controls                  and Procedures                                                                                               |   |   | 16 |   |
|                                                                                                                                                                  |   |   |   |   |
| PART                  II. OTHER                  INFORMATION                                                                                                          |
|                                                                                                                                                                  |   |   |   |   |
| ITEM                  2.  Unregistered                  Sales of Equity Securities and Use of Proceeds                                                      |   |   | 17 |   |
|                                                                                                                                                                  |   |   |   |   |
| ITEM                  6.  Exhibits                                                                                                                               |   |   | 17 |   |
|                                                                                                                                                                  |   |   |   |   |
| SIGNATURES                                                                                                                                                            |   |   | 18 |   |

----

**PART        I FINANCIAL INFORMATION**

**ITEM      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                                                                                                                                              |   | **September                  30, 2008** |        | **December                  31, 2007** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|----------------------------------------|--------|
|                                                                                                                                                                                                                                                                              |   | **(Unaudited)**                         |        |                                   |   |
| ASSETS                                                                                                                                                                                                                                                                            |   |                                    |        |                                   |   |
| Current                  assets                                                                                                                                                                                                                                                   |   |                                    |        |                                   |   |
| Cash                  and cash equivalents                                                                                                                                                                                                                                        |   | $                                       | 8,449,212   |                                   | $      | 14,981,192 |   |
| Accounts                  receivable                                                                                                                                                                                                                                              |   |                                    | 4,071,551   |                                   |   | 3,264,968 |   |
| Inventory                                                                                                                                                                                                                                                                         |   |                                    | 2,084,263   |                                   |   | 1,468,391 |   |
| Prepaid                  expenses and deposits                                                                                                                                                                                                                                    |   |                                    | 173,060     |                                   |   | 445,832 |   |
| Other                  receivables                                                                                                                                                                                                                                                |   |                                    | 47,151      |                                   |   | 59,983 |   |
| Total                  current assets                                                                                                                                                                                                                                             |   |                                    | 14,825,237  |                                   |   | 20,220,366 |   |
| Securities                  available for sale - net                                                                                                                                                                                                                              |   |                                    | 7,030,000   |                                   |   | 7,500,000 |   |
| Long                  term receivables - net                                                                                                                                                                                                                                      |   |                                    | 253,130     |                                   |   | - |   |
| Property                  and equipment - net                                                                                                                                                                                                                                     |   |                                    | 3,555,158   |                                   |   | 1,600,887 |   |
| Intangible                  assets - net                                                                                                                                                                                                                                          |   |                                    | 49,200      |                                   |   | 86,100 |   |
| Other                  assets                                                                                                                                                                                                                                                     |   |                                    | 37,935      |                                   |   | 59,517 |   |
| TOTAL                  ASSETS                                                                                                                                                                                                                                                     |   | $                                       | 25,750,660  |                                   | $      | 29,466,870 |   |
|                                                                                                                                                                                                                                                                              |   |                                    |        |                                   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                       |   |                                    |        |                                   |   |   |   |
| Current                  liabilities                                                                                                                                                                                                                                              |   |                                    |        |                                   |   |   |   |
| Accounts                  payable                                                                                                                                                                                                                                                 |   | $                                       | 935,995     |                                   | $      | 1,148,266 |   |
| Accrued                  expenses                                                                                                                                                                                                                                                 |   |                                    | 506,302     |                                   |   | 516,589 |   |
| Accrued                  compensation                                                                                                                                                                                                                                             |   |                                    | 1,067,585   |                                   |   | 1,060,603 |   |
| Customer                  deposits                                                                                                                                                                                                                                                |   |                                    | 1,064,600   |                                   |   | 936,373 |   |
| Billings                  in excess of costs                                                                                                                                                                                                                                      |   |                                    | 20,530      |                                   |   | - |   |
| Current                  portion of capital lease obligations                                                                                                                                                                                                                     |   |                                    | 4,491       |                                   |   | 13,937 |   |
| Total                  current liabilities                                                                                                                                                                                                                                        |   |                                    | 3,599,503   |                                   |   | 3,675,768 |   |
| Capital                  lease obligations                                                                                                                                                                                                                                        |   |                                    | -           |                                   |   | 2,028 |   |
| Deferred                  rent                                                                                                                                                                                                                                                    |   |                                    | 5,025       |                                   |   | 125,814 |   |
| Total                  liabilities                                                                                                                                                                                                                                                |   |                                    | 3,604,528   |                                   |   | 3,803,610 |   |
|                                                                                                                                                                                                                                                                              |   |                                    |        |                                   |   |   |   |
| Commitments                  and contingencies                                                                                                                                                                                                                                    |   |                                    |        |                                   |   |   |   |
|                                                                                                                                                                                                                                                                              |   |                                    |        |                                   |   |   |   |
| Stockholders’                  equity                                                                                                                                                                                                                                       |   |                                    |        |                                   |   |   |   |
| Series                  A Convertible Preferred stock, $.001 par value, 2,000,000                  sharesauthorized;                  650,672 shares issued and outstanding at September 30, 2008 and                  690,000 shares issued and outstanding at December 31, 2007 |   |                                    | 651         |                                   |   | 690 |   |
| Common                  stock, $.001 par value, 125,000,000 shares authorized; 81,078,499                  shares issued and outstanding at September 30, 2008 and80,244,617                  shares issued and outstanding at December 31, 2007                                  |   |                                    | 81,079      |                                   |   | 80,245 |   |
| Additional                  paid-in capital                                                                                                                                                                                                                                       |   |                                    | 69,881,952  |                                   |   | 66,344,066 |   |
| Accumulated                  deficit                                                                                                                                                                                                                                              |   |                                    | (47,447,550 | )                                      |   | (40,761,741 | ) |
| Accumulated                  other comprehensive loss                                                                                                                                                                                                                             |   |                                    | (370,000    | )                                      |   | - |   |
| Total                  stockholders’ equity                                                                                                                                                                                                                                 |   |                                    | 22,146,132  |                                   |   | 25,663,260 |   |
| TOTAL                  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                 |   | $                                       | 25,750,660  |                                   | $      | 29,466,870 |   |

----

|                                                                              |   | For                  the three months endedSeptember                  30, |       |
|-----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|------------|
|                                                                              |   | 2008                                                                      |       | 2007 |   |
|                                                                              |   |                                                                      |       |   |   |
| Revenue                                                                           |   | $                                                                         | 4,014,302  |   | $ | 3,608,584 |   |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Cost                  of revenue                                                  |   |                                                                      | 3,789,962  |   |   | 5,641,565 |   |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Gross                  profit (loss)                                              |   |                                                                      | 224,340    |   |   | (2,032,981 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Operating                  expenses:                                              |   |                                                                      |       |   |   |   |   |
| General                  and administrative                                       |   |                                                                      | 1,647,366  |   |   | 2,851,179 |   |
| Selling                  and marketing                                            |   |                                                                      | 61,565     |   |   | 76,340 |   |
| Research                  and development                                         |   |                                                                      | 359,807    |   |   | 548,895 |   |
| Total                  operating expenses                                         |   |                                                                      | 2,068,738  |   |   | 3,476,414 |   |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Operating                  loss                                                   |   |                                                                      | (1,844,398 | ) |   | (5,509,395 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Other                  (expense) income                                           |   |                                                                      |       |   |   |   |   |
| Interest                  expense                                                 |   |                                                                      | (388       | ) |   | (453 | ) |
| Interest                  income                                                  |   |                                                                      | 123,558    |   |   | 341,872 |   |
| Total                  other                                                      |   |                                                                      | 123,170    |   |   | 341,419 |   |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Net                  loss                                                         |   |                                                                      | (1,721,228 | ) |   | (5,167,976 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Preferred                  stock dividends                                        |   |                                                                      | (277,274   | ) |   | (295,105 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Net                  loss attributable to common stockholders                     |   | $                                                                         | (1,998,502 | ) | $ | (5,463,081 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Net                  loss per common share – basic and diluted              |   | $                                                                         | (0.02      | ) | $ | (0.07 | ) |
|                                                                              |   |                                                                      |       |   |   |   |   |
| Weighted                  average number of shares outstanding, basic and diluted |   |                                                                      | 80,628,098 |   |   | 79,107,767 |   |

----

|                                                                              |   | For                  the nine months endedSeptember                  30, |       |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|------------|
|                                                                              |   | 2008                                                                     |       | 2007 |   |
|                                                                              |   |                                                                     |       |   |   |
| Revenue                                                                           |   | $                                                                        | 11,653,390 |   | $ | 8,828,367 |   |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Cost                  of revenue                                                  |   |                                                                     | 10,719,524 |   |   | 10,989,077 |   |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Gross                  profit (loss)                                              |   |                                                                     | 933,866    |   |   | (2,160,710 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Operating                  expenses:                                              |   |                                                                     |       |   |   |   |   |
| General                  and administrative                                       |   |                                                                     | 6,170,107  |   |   | 7,514,464 |   |
| Selling                  and marketing                                            |   |                                                                     | 173,003    |   |   | 331,155 |   |
| Research                  and development                                         |   |                                                                     | 965,017    |   |   | 856,722 |   |
| Total                  operating expenses                                         |   |                                                                     | 7,308,127  |   |   | 8,702,341 |   |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Operating                  loss                                                   |   |                                                                     | (6,374,261 | ) |   | (10,863,051 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Other                  (expense) income                                           |   |                                                                     |       |   |   |   |   |
| Interest                  expense                                                 |   |                                                                     | (1,940     | ) |   | (1,941 | ) |
| Interest                  income                                                  |   |                                                                     | 539,166    |   |   | 1,079,841 |   |
| Other                                                                             |   |                                                                     | 10         |   |   | 7,847 |   |
| Total                  other                                                      |   |                                                                     | 537,236    |   |   | 1,085,747 |   |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Net                  loss                                                         |   |                                                                     | (5,837,025 | ) |   | (9,777,304 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Preferred                  stock dividends                                        |   |                                                                     | (854,585   | ) |   | (885,326 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Net                  loss attributable to common stockholders                     |   | $                                                                        | (6,691,610 | ) | $ | (10,662,630 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Net                  loss per common share – basic and diluted              |   | $                                                                        | (0.08      | ) | $ | (0.14 | ) |
|                                                                              |   |                                                                     |       |   |   |   |   |
| Weighted                  average number of shares outstanding, basic and diluted |   |                                                                     | 80,416,412 |   |   | 78,677,306 |   |

----

|                                                                                                          |   | For                  the nine months endedSeptember                  30, |       |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|------------|
|                                                                                                          |   | 2008                                                                     |       | 2007 |   |
| CASH                  FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                                                                     |       |   |   |
| Net                  loss                                                                                     |   | $                                                                        | (5,837,025 | ) | $ | (9,777,304 | ) |
| Adjustments                  to reconcile net loss to net cash used in operating                  activities: |   |                                                                     |       |   |   |   |   |
| Depreciation                  and amortization                                                                |   |                                                                     | 650,136    |   |   | 756,877 |   |
| Loss                  on equipment disposal                                                                   |   |                                                                     | -          |   |   | 76,767 |   |
| Deferred                  rent adjustment on purchase of premises                                             |   |                                                                     | 118,594    |   |   | - |   |
| Provision                  for losses on projects                                                             |   |                                                                     | 94,953     |   |   | 1,165,854 |   |
| Non-cash                  stock based compensation expense                                                    |   |                                                                     | 2,965,334  |   |   | 2,809,980 |   |
| Changes                  in assets and liabilities:                                                           |   |                                                                     |       |   |   |   |   |
| Accounts                  receivable                                                                          |   |                                                                     | (806,583   | ) |   | (1,237,387 | ) |
| Other                  receivable                                                                             |   |                                                                     | 12,832     |   |   | 1,681 |   |
| Inventory                                                                                                     |   |                                                                     | (710,825   | ) |   | 211,678 |   |
| Prepaid                  expenses and deposits                                                                |   |                                                                     | 294,354    |   |   | 491,832 |   |
| Long                  term receivables - net                                                                  |   |                                                                     | (253,130   | ) |   | - |   |
| Accounts                  payable                                                                             |   |                                                                     | (212,271   | ) |   | 688,879 |   |
| Billings                  in excess of costs                                                                  |   |                                                                     | 20,530     |   |   | - |   |
| Accrued                  expenses, deposits and deferred rent                                                 |   |                                                                     | 4,133      |   |   | (60,589 | ) |
| Net                  cash used in operating activities                                                        |   |                                                                     | (3,658,968 | ) |   | (4,871,732 | ) |
| CASH                  FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                                                                     |       |   |   |   |   |
| Purchase                  of land, building and equipment                                                     |   |                                                                     | (2,686,101 | ) |   | (385,404 | ) |
| Proceeds                  from sale of available-for-sale marketable securities                               |   |                                                                     | 100,000    |   |   | - |   |
| Proceeds                  from disposal of equipment                                                          |   |                                                                     | -          |   |   | 17,180 |   |
| Net                  cash used in investing activities                                                        |   |                                                                     | (2,586,101 | ) |   | (368,224 | ) |
|                                                                                                          |   |                                                                     |       |   |   |   |   |
| CASH                  FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                                                                     |       |   |   |   |   |
| Dividends                  paid (preferred stock)                                                             |   |                                                                     | (275,437   | ) |   | - |   |
| Exercise                  of stock options and warrants                                                       |   |                                                                     | -          |   |   | 113,837 |   |
| Principal                  payments on capital lease obligations                                              |   |                                                                     | (11,474    | ) |   | (55,606 | ) |
|                                                                                                          |   |                                                                     |       |   |   |   |   |
| Net                  cash (used in) provided by financing activities                                          |   |                                                                     | (286,911   | ) |   | 58,231 |   |
|                                                                                                          |   |                                                                     |       |   |   |   |   |
| Net                  decrease in cash and cash equivalents                                                    |   |                                                                     | (6,531,980 | ) |   | (5,181,725 | ) |
|                                                                                                          |   |                                                                     |       |   |   |   |   |
| Cash                  and cash equivalents, beginning of period                                               |   |                                                                     | 14,981,192 |   |   | 22,123,792 |   |
|                                                                                                          |   |                                                                     |       |   |   |   |   |
| Cash                  and cash equivalents, end of period                                                     |   | $                                                                        | 8,449,212  |   | $ | 16,942,067 |   |

----

| **1.** | **BASIS                  OF PRESENTATION** |
|--------|--------------------------------------------|

**USE      OF ESTIMATES**

**RECENT      ACCOUNTING PRONOUNCEMENTS**

**CASH      AND MARKETABLE SECURITIES**

----

| **2.** | **ACCOUNTS                RECEIVABLE** |
|--------|----------------------------------------|

|                                                                   |   | September                  30, 2008 |      | December                  31, 2007 |   |
|------------------------------------------------------------------------|--------|-------------------------------------|-----------|------------------------------------|--------|
|                                                                   |   |                                |      |                               |   |
| Contracts                  receivable                                  |   | $                                   | 2,590,437 |                               | $      | 1,734,140 |   |
|                                                                   |   |                                |      |                               |   |   |   |
| Costs                  and estimated earnings on uncompleted contracts |   |                                | 1,481,114 |                               |   | 1,530,828 |   |
|                                                                   |   |                                |      |                               |   |   |   |
| Total                                                                  |   | $                                   | 4,071,551 |                               | $      | 3,264,968 |   |

| Costs                  and Estimated Earnings on Uncompleted Contracts                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                              |
|                                                                                                                                              |   | September                  30, 2008 |   | December                  31, 2007 |   |
|                                                                                                                                              |   |   |   |   |   |
| Costs                  incurred on uncompleted contracts                                                                                          |   | $ | 17,151,234 |   | $ | 10,881,465 |   |
| Estimated                  earnings                                                                                                               |   |   | 1,328,091 |   |   | 829,764 |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
| Total                  billable costs and estimated earnings                                                                                      |   |   | 18,479,325 |   |   | 11,711,229 |   |
| Less:                                                                                                                                             |   |   |   |   |   |   |   |
| Billings                  to date                                                                                                                 |   |   | 17,018,741 |   |   | 10,180,401 |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
| Total                                                                                                                                             |   | $ | 1,460,584 |   | $ | 1,530,828 |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
| Included                  in accompanying balance sheet**:**                                                                                      |   |   |   |   |   |   |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
| Unbilled                  costs and estimated earnings on uncompleted contracts included                  in accounts                  receivable |   |   |   |   |   |   |   |
|                                                                                                                                              |   | $ | 1,481,114 |   | $ | 1,530,828 |   |
| Billings                  in excess of costs and estimated earnings on uncompleted                  contracts                                     |   |   | (20,530 | ) |   | - |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
|                                                                                                                                              |   |   |   |   |   |   |   |
| Total                                                                                                                                             |   | $ | 1,460,584 |   | $ | 1,530,828 |   |

| **3.** | **INVENTORY** |
|--------|---------------|

|                           |   | September                  30, 2008 |      | December                  31, 2007 |   |
|--------------------------------|--------|-------------------------------------|-----------|------------------------------------|--------|
| Raw                  materials |   | $                                   | 192,778   |                               | $      | 213,645 |   |
| Work-in-process                |   |                                | 1,891,485 |                               |   | 1,254,746 |   |
|                           |   |                                |      |                               |   |   |   |
| Total                          |   | $                                   | 2,084,263 |                               | $      | 1,468,391 |   |

----

| **4.** | **SECURITIES                AVAILABLE FOR SALE** |
|--------|--------------------------------------------------|

| ·   | Defines                fair value as the price that would be received to sell an asset or                paid to                transfer a liability in an orderly transaction between market participants                at the measurement date; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Establishes                a three-level hierarchy (“Valuation Hierarchy”) for fair value                measurements; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Requires                consideration of the company’s creditworthiness when valuing liabilities;                and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   | Expands                disclosures about instruments measured at fair                value. |
|--------------------|---------------------------------------------------------------------------------------------|

| ·   | Level                1 - inputs to the valuation methodology are quoted prices (unadjusted)                for                identical assets or liabilities in active                markets. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level                2 - inputs to the valuation methodology include quoted prices for                similar                assets and liabilities in active markets, and inputs that are observable                for the asset or liability, either directly or indirectly, for                substantially the full term of the financial instrument. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level                3 - inputs to the valuation methodology are unobservable and significant                to the fair value measurement. See below for further discussion of                the                company’s level 3 fair value                measurements. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                           |   | Asset                  Backed Securities |      |
|----------------------------------------------------------------|--------|------------------------------------------|-----------|
| Fair                  value December 31, 2007                  |   | $                                        | 7,500,000 |   |
|                                                           |   |                                     |      |   |
| Unrealized                  losses - 1st quarter 2008          |   |                                     | (375,000  | ) |
| Sales                  - 3rd quarter 2008                      |   |                                     | (100,000  | ) |
| Unrealized                  loss adjustment - 3rd quarter 2008 |   |                                     | 5,000     |   |
|                                                           |   |                                     |      |   |
| Fair                  value September 30, 2008                 |   | $                                        | 7,030,000 |   |

----

| **5.** | **PROPERTY                AND EQUIPMENT** |
|--------|-------------------------------------------|

|                                                            |   | September                  30, 2008 |       | December                  31, 2007 |   |
|-----------------------------------------------------------------|--------|-------------------------------------|------------|------------------------------------|--------|
|                                                            |   |                                |       |                               |   |
| Land                  and buildings                             |   | $                                   | 2,072,215  |                               | $      | - |   |
|                                                            |   |                                |       |                               |   |   |   |
| Equipment                                                       |   |                                | 3,145,186  |                               |   | 2,717,940 |   |
|                                                            |   |                                |       |                               |   |   |   |
| Furniture                  and building improvements            |   |                                | 1,061,698  |                               |   | 1,036,178 |   |
|                                                            |   |                                |       |                               |   |   |   |
| Software                                                        |   |                                | 794,732    |                               |   | 753,947 |   |
|                                                            |   |                                |       |                               |   |   |   |
| Total                                                           |   |                                | 7,073,831  |                               |   | 4,508,065 |   |
|                                                            |   |                                |       |                               |   |   |   |
| Less                  accumulated depreciation and amortization |   |                                | (3,518,673 | )                                  |   | (2,907,178 | ) |
|                                                            |   |                                |       |                               |   |   |   |
| Net                  property and equipment                     |   | $                                   | 3,555,158  |                               | $      | 1,600,887 |   |

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| **6.** | **SHARE-BASED                COMPENSATION** |
|--------|---------------------------------------------|

|                                                                  |   | Nine                  Months Ended September 30, |
|-----------------------------------------------------------------------|--------|--------------------------------------------------|
|                                                                  |   | 2008                                             |   | 2007 |
| Expected                  life (years)                                |   | 4                  years                         |   | 4                  years |
| Dividend                  yield                                       |   | 0.0%                                             |   | 0.0% |
| Expected                  volatility                                  |   | 65.0%                                            |   | 46.0% |
| Risk                  free interest rates                             |   | 2.9%                                             |   | 4.55%                  - 4.74% |
| Weighted                  average fair value of options at grant date |   | $1.36                                            |   | $1.94 |

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| **7.** | **COMPREHENSIVE                    LOSS** |
|--------|-------------------------------------------|

|                                                                     |   | Three                  Months Ended September 30, |       | Nine                  Months Ended September 30, |   |
|--------------------------------------------------------------------------|--------|---------------------------------------------------|------------|--------------------------------------------------|--------|
|                                                                     |   | 2008                                              |       | 2007                                             |   | 2008 |   | 2007 |   |
|                                                                     |   |                                              |       |                                             |   |   |   |   |   |
| Comprehensive                  Loss                                      |   |                                              |       |                                             |   |   |   |   |   |
| Net                  loss                                                |   | $                                                 | (1,721,228 | )                                                | $      | (5,167,976 | ) | $ | (5,837,025 | ) | $ | (9,777,304 | ) |
| Other                  comprehensive loss:                               |   |                                              |       |                                             |   |   |   |   |   |   |   |   |   |
| Unrealized                  gain (loss) on available-for-sale securities |   |                                              | 5,000      |                                             |   | - |   |   | (370,000 | ) |   | - |   |
|                                                                     |   |                                              |       |                                             |   |   |   |   |   |   |   |   |   |
| Total                                                                    |   | $                                                 | (1,716,228 | )                                                | $      | (5,167,976 | ) | $ | (6,207,025 | ) | $ | (9,777,304 | ) |

|                                                                         |   | September                  30, 2008 |     | December                  31, 2007 |   |
|------------------------------------------------------------------------------|--------|-------------------------------------|----------|------------------------------------|--------|
|                                                                         |   |                                |     |                               |   |
| Cumulative                  unrealized loss on available-for-sale securities |   | $                                   | (370,000 | )                                  | $      | - |   |
|                                                                         |   |                                |     |                               |   |   |   |
| Total                  accumulated other comprehensive loss                  |   | $                                   | (370,000 | )                                  | $      | - |   |

| **8.** | **SIGNIFICANT                CUSTOMERS** |
|--------|------------------------------------------|

| **9.** | **NET                LOSS PER SHARE** |
|--------|---------------------------------------|

| **10.** | **DIVIDENDS** |
|---------|---------------|

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| **11.** | **COMMITMENTS                AND CONTINGENCIES** |
|---------|--------------------------------------------------|

**LITIGATION      **

| **12.** | **SUPPLEMENTAL                CASH FLOW INFORMATION** |
|---------|-------------------------------------------------------|

|                                              |   | Nine                  Months Ended September 30, |   |
|---------------------------------------------------|--------|--------------------------------------------------|--------|
|                                              |   | 2008                                             |   | 2007 |   |
| Cash                  paid during the period for: |   |                                             |   |   |   |
| Interest                                          |   | $                                                | 1,940  |   | $ | 1,941 |   |
| Income                  taxes                     |   | $                                                | -      |   | $ | - |   |

| **13.** | **SUBSEQUENT                EVENTS** |
|---------|--------------------------------------|

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**ITEM      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      OPERATIONS**

**CAUTIONARY      NOTE REGARDING FORWARD-LOOKING STATEMENTS**

**OVERVIEW**

----

**RESULTS      OF OPERATIONS**

**COMPARISON      OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND      2007:**

|                                        |   | 2008   |       | 2007   |   |
|---------------------------------------------|--------|--------|------------|--------|--------|
| Revenue                                     |   | $      | 4,014,302  |   | $      | 3,608,584 |   |
| Cost                  of revenue            |   |   | 3,789,962  |   |   | 5,641,565 |   |
| General                  and administrative |   |   | 1,647,366  |   |   | 2,851,179 |   |
| Selling                  and marketing      |   |   | 61,565     |   |   | 76,340 |   |
| Research                  and development   |   |   | 359,807    |   |   | 548,895 |   |
| Other                  (expense) income:    |   |   |       |   |   |   |   |
| Interest                  expense           |   |   | (388       | )      |   | (453 | ) |
| Interest                  income            |   |   | 123,558    |   |   | 341,872 |   |
|                                        |   |   |       |   |   |   |   |
| Net                  loss                   |   | $      | (1,721,228 | )      | $      | (5,167,976 | ) |

**REVENUE**

**COST      OF REVENUE**

**GENERAL      AND ADMINISTRATIVE**

**SELLING      AND MARKETING**

**RESEARCH      AND DEVELOPMENT**

----

**INTEREST      INCOME AND INTEREST EXPENSE**

**NET      LOSS**

**COMPARISON      OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND      2007:**

|                                        |   | 2008   |       | 2007   |   |
|---------------------------------------------|--------|--------|------------|--------|--------|
| Revenue                                     |   | $      | 11,653,390 |   | $      | 8,828,367 |   |
| Cost                  of revenue            |   |   | 10,719,524 |   |   | 10,989,077 |   |
| General                  and administrative |   |   | 6,170,107  |   |   | 7,514,464 |   |
| Selling                  and marketing      |   |   | 173,003    |   |   | 331,155 |   |
| Research                  and development   |   |   | 965,017    |   |   | 856,722 |   |
| Other                  (expense) income:    |   |   |       |   |   |   |   |
| Interest                  expense           |   |   | (1,940     | )      |   | (1,941 | ) |
| Interest                  income            |   |   | 539,166    |   |   | 1,079,841 |   |
| Other                                       |   |   | 10         |   |   | 7,847 |   |
|                                        |   |   |       |   |   |   |   |
| Net                  loss                   |   | $      | (5,837,025 | )      | $      | (9,777,304 | ) |

**REVENUE**

**COST      OF REVENUE**

**GENERAL      AND ADMINISTRATIVE**

**SELLING      AND MARKETING**

----

**RESEARCH      AND DEVELOPMENT**

**INTEREST      INCOME AND INTEREST EXPENSE**

**NET      LOSS**

**LIQUIDITY      AND CAPITAL RESOURCES**

**BACKLOG      OF ORDERS**

**ITEM      4. CONTROLS AND PROCEDURES**

**EVALUATION      OF DISCLOSURE CONTROLS AND PROCEDURES**

----

**PART      II - OTHER INFORMATION**

**ITEM      2.**
**UNREGISTERED      SALE OF SECURITIES AND USE OF PROCEEDS**

**ITEM      6.**
**EXHIBITS**

| EXHIBIT                NUMBER |   | DESCRIPTION                                                                                                                                                                                                                                          |
|-------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |                                                                                                                                                                                                                                                 |
| 23.1                          |   | Consent                of Houlihan Smith & Company, Inc.                                                                                                                                                                                         |
|                          |   |                                                                                                                                                                                                                                                 |
| 31.1                          |   | Certification                of Chief Executive pursuant to Rule 13a-14 or 15d-14 of the Securities                Exchange Act of 1934, as adopted pursuant to Section 302 of the                Sarbanes-Oxley Act of 2002.                        |
|                          |   |                                                                                                                                                                                                                                                 |
| 31.2                          |   | Certification                of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the                Securities Exchange Act of 1934, as adopted pursuant to Section 302                of the                Sarbanes-Oxley Act of 2002. |
|                          |   |                                                                                                                                                                                                                                                 |
| 32.1                          |   | Chief                Executive Officer Certification pursuant to 18 U.S.C. Section 1350,                as                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                2002.                                          |
|                          |   |                                                                                                                                                                                                                                                 |
| 32.2                          |   | Chief                Financial Officer Certification pursuant to 18 U.S.C. Section 1350,                as                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                2002.                                          |

----

**SIGNATURES      **

|         |                                               |                                                 |
|--------------|----------------------------------------------------|------------------------------------------------------|
|         | **APPLIED                ENERGETICS, INC.**        |
|    |                                          |                                            |
|         | By                                       | /s/              Dana              A, Marshall  |
|         | Dana              A. Marshall                      |
|         | Chief              Executive Officer and President |

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