UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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





For the
quarterly period ended March 31, 2010





OR





 ̈
            Transition Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the
transition period from __________ to __________





Commission
File Number 001-14015





APPLIED
ENERGETICS, INC.





(Exact
Name of Registrant as Specified in Its Charter)





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





3590
      East Columbia StreetTucson,
      Arizona
                    
                    85714(Address
      of Principal Executive Offices)
                    
                    (Zip
      Code)





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





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈ No  ̈





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


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





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





Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.  As of May 13, 2010, there were
90,357,869 shares of the issuer's common stock, par value $.001 per share,
outstanding.








APPLIED
ENERGETICS, INC.


QUARTERLY
REPORT ON FORM 10-Q


TABLE
OF CONTENTS





PART
      I.  FINANCIAL INFORMATIONITEM
      1.
                Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
      31, 2009
                1Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2010 and 2009 (Unaudited)
                2Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2010 and 2009 (Unaudited)
                3Notes
      to Condensed Consolidated Financial Statements
                4ITEM
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                10ITEM
      4.
                Controls
      and Procedures
                13PART
      II.  OTHER INFORMATIONITEM
      1A.
                Risk
      Factors
                14ITEM
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                14ITEM
      6.
                Exhibits
                14SIGNATURES
                15








PART
I.  FINANCIAL INFORMATION





ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





APPLIED ENERGETICS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31, 2010
                  
                  
                  December 31, 2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  8,882,149
                  
                  
                  $
                  9,604,643Short
      term investments
                  
                  
                  225,000
                  
                  
                  
                  225,000Accounts
      receivable
                  
                  
                  2,473,721
                  
                  
                  
                  1,074,944Inventory
                  
                  
                  765,697
                  
                  
                  
                  785,479Prepaid
      expenses and deposits
                  
                  
                  243,993
                  
                  
                  
                  447,295Other
      receivables
                  
                  
                  116,996
                  
                  
                  
                  52,295Total
      current assets
                  
                  
                  12,707,556
                  
                  
                  
                  12,189,656Long
      term receivables - net
                  
                  
                  205,313
                  
                  
                  
                  205,313Property
      and equipment - net
                  
                  
                  2,736,899
                  
                  
                  
                  2,845,607Other
      assets
                  
                  
                  20,800
                  
                  
                  
                  20,800TOTAL
      ASSETS
                  
                  $
                  15,670,568
                  
                  
                  $
                  15,261,376LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  891,074
                  
                  
                  $
                  428,413Accrued
      expenses
                  
                  
                  576,117
                  
                  
                  
                  313,448Short
      term financing
                  
                  
                  134,272
                  
                  
                  
                  214,834Accrued
      compensation
                  
                  
                  624,595
                  
                  
                  
                  505,188Customer
      deposits
                  
                  
                  129,160
                  
                  
                  
                  104,160Billings
      in excess of costs
                  
                  
                  42,844
                  
                  
                  
                  42,716Total
      current liabilities
                  
                  
                  2,398,062
                  
                  
                  
                  1,608,759Total
      liabilities
                  
                  
                  2,398,062
                  
                  
                  
                  1,608,759Commitments
      and contingenciesStockholders’
      equitySeries
      A Convertible Preferred Stock, $.001 par value, 2,000,000 shares
      authorized;135,572 shares issued and outstanding at March 31, 2010 and at
      December 31, 2009
                  
                  
                  136
                  
                  
                  
                  136Common
      stock, $.001 par value, 125,000,000 shares authorized; 89,608,197 shares
      issued and outstanding at March 31, 2010 and 88,968,812 shares issued and
      outstanding at December 31, 2009
                  
                  
                  89,608
                  
                  
                  
                  88,969Additional
      paid-in capital
                  
                  
                  77,563,151
                  
                  
                  
                  76,931,065Accumulated
      deficit
                  
                  
                  (64,380,389
                  )
                  
                  
                  (63,367,553
                  )Total
      stockholders’ equity
                  
                  
                  13,272,506
                  
                  
                  
                  13,652,617TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  15,670,568
                  
                  
                  $
                  15,261,376





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 1
-





APPLIED
ENERGETICS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For the three months ended
                  March 31,2010
                
                
                2009Revenue
                
                $
                3,594,778
                
                
                $
                2,587,398Cost
      of revenue
                
                
                3,368,676
                
                
                
                2,401,446Gross
      profit
                
                
                226,102
                
                
                
                185,952Operating
      expensesGeneral
      and administrative
                
                
                1,077,232
                
                
                
                2,435,723Selling
      and marketing
                
                
                71,654
                
                
                
                238,023Research
      and development
                
                
                32,862
                
                
                
                517,661Total
      operating expenses
                
                
                1,181,748
                
                
                
                3,191,407Operating
      loss
                
                
                (955,646
                )
                
                
                (3,005,455
                )Other
      (expense) incomeInterest
      expense
                
                
                (1,667
                )
                
                
                (19
                )Interest
      income
                
                
                2,462
                
                
                
                31,027Total
      other
                
                
                795
                
                
                
                31,008Net
      loss
                
                
                (954,851
                )
                
                
                (2,974,447
                )Preferred
      stock dividends
                
                
                (57,984
                )
                
                
                (55,076
                )Net
      loss attributable to common stockholders
                
                $
                (1,012,835
                )
                
                $
                (3,029,523
                )Net
      loss per common share – basic and diluted
                
                $
                (0.01
                )
                
                $
                (0.04
                )Weighted
      average number of shares outstanding, basic and diluted
                
                
                89,000,884
                
                
                
                86,444,383





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 2
-





APPLIED
ENERGETICS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the three months ended
                    March
      31,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (954,851
                  )
                  
                  $
                  (2,974,447
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  111,268
                  
                  
                  
                  195,148Loss
      on equipment disposal
                  
                  
                  11,684
                  
                  
                  
                  559Provision
      for losses on projects
                  
                  
                  29,000
                  
                  
                  
                  -Non-cash
      stock based compensation expense
                  
                  
                  525,657
                  
                  
                  
                  877,089Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  (1,398,777
                  )
                  
                  
                  1,400,167Other
      receivable
                  
                  
                  (15,618
                  )
                  
                  
                  (176,466
                  )Inventory
                  
                  
                  (9,218
                  )
                  
                  
                  (94,605
                  )Prepaid
      expenses and deposits
                  
                  
                  203,302
                  
                  
                  
                  171,443Accounts
      payable
                  
                  
                  462,661
                  
                  
                  
                  (325,095
                  )Billings
      in excess of costs
                  
                  
                  128
                  
                  
                  
                  1,774Accrued
      expenses, deposits and deferred rent
                  
                  
                  326,514
                  
                  
                  
                  793,912Net
      cash (used in) operating activities
                  
                  
                  (708,250
                  )
                  
                  
                  (130,521
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:(Purchase)/disposal
      of land, building and equipment
                  
                  
                  (14,244
                  )
                  
                  
                  3,226Net
      cash (used in)/provided by investing activities
                  
                  
                  (14,244
                  )
                  
                  
                  3,226CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid (preferred stock)
                  
                  
                  -
                  
                  
                  
                  (55,076
                  )Principal
      payments on capital lease obligations
                  
                  
                  -
                  
                  
                  
                  (2,028
                  )Net
      cash (used in) financing activities
                  
                  
                  -
                  
                  
                  
                  (57,104
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  (722,494
                  )
                  
                  
                  (184,399
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  9,604,643
                  
                  
                  
                  15,467,386Cash
      and cash equivalents, end of period
                  
                  $
                  8,882,149
                  
                  
                  $
                  15,282,987





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 3
-


APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2010
 (Unaudited)


1.
            BASIS
      OF PRESENTATION





The
accompanying interim unaudited condensed consolidated financial statements
include the accounts of Applied Energetics, Inc. and its wholly owned
subsidiaries, Ionatron Technologies, Inc. and North Star Power Engineering, Inc.
as of March 31, 2010 (collectively, "company," "Applied Energetics," "we," "our"
or "us").  All intercompany balances and transactions have been
eliminated.  In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary for a fair presentation of the results
for the interim periods presented have been made.  The results for the
three-month period ended March 31, 2010, may not be indicative of the results
for the entire year.  The interim unaudited condensed consolidated
financial statements should be read in conjunction with the company's audited
consolidated financial statements contained in our Annual Report on Form
10-K.





The
following unaudited condensed financial statements are presented pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the company believes that the disclosures made are adequate to make the
information not misleading.





USE
OF ESTIMATES





The
preparation of consolidated financial statements in conformity with United
States Generally Accepted Accounting Principles (“GAAP”) requires management to
make estimates, judgments and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Management bases its
assumptions on historical experiences and on various other estimates that it
believes 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.  In addition, management
considers the basis and methodology used in developing and selecting these
estimates, the trends in and amounts of these estimates, specific matters
affecting the amount of and changes in these estimates, and any other relevant
matters related to these estimates, including significant issues concerning
accounting principles and financial statement presentation.  Such estimates
and assumptions could change in the future, as more information becomes known
which could impact the amounts reported and disclosed herein.  Significant
estimates include revenue recognition under the percentage of completion method
of contract accounting, estimating costs at completion on a contract, the
valuation of inventory, and expected forfeiture rate on stock-based
compensation.





CASH
AND CASH EQUIVALENTS





At March
31, 2010, we had approximately $8.9 million of cash and cash equivalents. 
 Our cash position decreased during the first three months of 2010 by
approximately $722,000.  During the first three months of 2010, operating
activities used $708,000 in cash.





FAIR
VALUE OF FINANCIAL MEASUREMENTS





The
carrying amount of the certificate of deposit, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of these instruments.


- 4
-




APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


(Unaudited)





2.
            ACCOUNTS
      RECEIVABLE





Accounts
receivable consists of the following:





March 31, 2010
                      
                      
                      December 31, 2009Contracts
      receivable
                      
                      $
                      2,448,010
                      
                      
                      $
                      1,031,960Costs
      and estimated earnings on uncompleted contracts
                      
                      
                      25,711
                      
                      
                      
                      42,984Accounts
      receivable, net
                      
                      $
                      2,473,721
                      
                      
                      $
                      1,074,944Short
      term receivable (contract retention)
                      
                      
                      47,817
                      
                      
                      
                      47,817Long
      term receivable (contract retention)
                      
                      
                      205,313
                      
                      
                      
                      205,313$
                      2,726,851
                      
                      
                      $
                      1,328,074





Contracts
receivable are expected to be collected within a year.





Costs
      and Estimated Earnings on Uncompleted ContractsMarch 31, 2010
                    
                    
                    December 31, 2009Costs
      incurred on uncompleted contracts
                    
                    $
                    22,224,201
                    
                    
                    $
                    18,890,642Estimated
      earnings
                    
                    
                    1,734,224
                    
                    
                    
                    1,479,680Total
      billable costs and estimated earnings
                    
                    
                    23,958,425
                    
                    
                    
                    20,370,322Less:Billings
      to date
                    
                    
                    23,975,558
                    
                    
                    
                    20,370,054Total
                    
                    $
                    (17,133
                    )
                    
                    $
                    268Included
      in accompanying balance sheet:Unbilled
      costs and estimated earnings on uncompleted contracts included in accounts
      receivable
                    
                    $
                    25,711
                    
                    
                    $
                    42,984Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    (42,844
                    )
                    
                    
                    (42,716
                    )Total
                    
                    $
                    (17,133
                    )
                    
                    $
                    268


- 5
-




APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


(Unaudited)





3.
            INVENTORY





Our
inventories consist of the following:





March 31, 2010
                  
                  
                  December 31, 2009Raw
      materials
                  
                  $
                  95,901
                  
                  
                  $
                  103,451Work-in-process
                  
                  
                  720,796
                  
                  
                  
                  704,028Provision
      for loss on project
                  
                  
                  (51,000
                  )
                  
                  
                  (22,000
                  )Total
                  
                  $
                  765,697
                  
                  
                  $
                  785,479





4.
            PROPERTY
      AND EQUIPMENT





Our
property and equipment consist of the following:





March 31, 2010
                  
                  
                  December 31, 2009Land
      and buildings
                  
                  $
                  2,072,215
                  
                  
                  $
                  2,072,215Equipment
                  
                  
                  2,657,429
                  
                  
                  
                  2,677,926Furniture
      and building improvements
                  
                  
                  848,797
                  
                  
                  
                  858,379Software
                  
                  
                  800,566
                  
                  
                  
                  800,566Total
                  
                  
                  6,379,007
                  
                  
                  
                  6,409,086Less
      accumulated depreciation and amortization
                  
                  
                  (3,642,108
                  )
                  
                  
                  (3,563,479
                  )Net
      property and equipment
                  
                  $
                  2,736,899
                  
                  
                  $
                  2,845,607





Periodically,
we evaluate general impairment of assets.  As an element of our annual
business planning process conducted in the fourth quarter of each year, we
consider expected revenues and resulting cash flow from operations. Revenue
planning is based upon actual and expected contract awards as the majority of
our revenues are sourced from Government contracts. During this process, we
evaluate the current carrying values of all long-lived assets on our books.
 We compare these values against business plans to determine if carrying
values are recoverable.





Our most
recent asset impairment test was performed on February 15, 2010, when we
determined that as of December 31, 2009 the net book values of long-lived assets
were recoverable through expected undiscounted business cash flows based on
anticipated and actual future revenue bookings and backlog. We will continue to
evaluate the carrying values in the future.  We evaluate impairments as
such circumstances warrant.


- 6
-


APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2010
 (Unaudited)


5.
            SHARE-BASED
      COMPENSATION





Share-Based Compensation –
Employees and Directors





For the
three months ended March 31, 2010 and 2009, share-based compensation expense
totaled $526,000 and $877,000, respectively.





There was
no related income tax benefit recognized because our deferred tax assets are
fully offset by a valuation allowance.





During
the three months ended March 31, 2010, the compensation committee granted
460,000 shares of common stock to the members of the Board of Directors, which
were fully vested upon grant.  The shares were valued at the closing market
price for the date of grant, or $0.60, for an aggregate value of $276,000. 
As of March 31, 2010, $260,000 of total unrecognized compensation cost related
to restricted stock is expected to be recognized over a weighted average period
of approximately .67 years.





The
compensation committee granted options to purchase an aggregate of 1,347,000
shares of our common stock during the three months ended March 31, 2010. 
The options are exercisable at a price per share of $0.60 and expire on March
23, 2015.  One-third of the options became exercisable on March 23,
2010.  An additional one-third of the shares will become exercisable on
March 23, 2011, and the final one-third on March 23, 2012.





The
weighted average grant-date fair value of all outstanding option grants was
$0.22 and $0.35, per share, for the three months ended March 31, 2010 and 2009,
respectively.  We determine the fair value of share-based awards at their
grant date, using a Black-Scholes Option-Pricing Model applying the assumptions
in the following table.





Three Months Ended March 31,2010
                    
                    
                    2009Expected
      life (years)
                    
                    2.9
      - 3 years
                    
                    
                    2
      yearsDividend
      yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Expected
      volatility
                    
                    
                    93.6
                    %
                    
                    
                    67.3
                    %Risk
      free interest rates
                    
                    
                    1.5
                    %
                    
                    
                    1.3
                    %Weighted
      average fair value of options at grant date
                    
                    $
                    0.22
                    
                    
                    $
                    0.35





During
the three months ended March 31, 2010, we granted 40,000 shares of restricted
stock to two non-employee consultants, which vest December 10, 2010.  The
weighted average fair value of the restricted stock grants of $0.61 per share is
being expensed over the requisite service period.





During
the three months ended March 31, 2010, 112,507 shares of restricted stock vested
and 16,074 shares of restricted stock were forfeited, and 114,833 options were
exercised.  The cash proceeds from the settlement of an option exercise,
which were not paid as of the balance sheet date, were received on April 9,
2010.  The receivable, which totaled $49,083, is included in the other
receivables caption on the balance sheet.





Warrants –
Non-Employees





At March
31, 2010 and December 31, 2009 there were outstanding warrants to purchase
approximately 1.0 million shares of common stock, which were either (i) issued
in connection with the August 2006 financing, or (ii) issued to outside
consultants.  The exercise price of the warrants ranges from $9.15 to
$12.00.


- 7
-




APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


(Unaudited)





6.
            SIGNIFICANT
      CUSTOMERS





Approximately
100% of revenues for the three-month periods ended March 31, 2010 and 2009, are
generated from either the U.S. Government or contractors to the U.S.
Government.





7.
            NET
      LOSS PER SHARE





Basic net
income (loss) per common share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period before giving effect to stock options, stock
warrants, restricted stock units and convertible securities outstanding, which
are considered to be dilutive common stock equivalents.  Diluted net income
(loss) per common share is calculated based on the weighted average number of
common and potentially dilutive shares outstanding during the period after
giving effect to convertible preferred stock, stock options, warrants and
restricted stock units. Contingently issuable shares are included in the
computation of basic earnings (loss) per share when issuance of the shares is no
longer contingent. Due to the losses from continuing operations for the three
months ended March 31, 2010 and 2009, basic and diluted loss per common share
were the same, as the effect of potentially dilutive securities would have been
anti-dilutive.





Potentially
dilutive securities not included in the diluted loss per share calculation, due
to net losses from continuing operations, were as follows:





Three Months Ended March
31,2010
                  
                  
                  2009Options
      to purchase common shares
                  
                  
                  5,382,432
                  
                  
                  
                  2,690,519Warrants
      to purchase common shares
                  
                  
                  1,024,939
                  
                  
                  
                  1,091,605Unvested
      restricted stock units
                  
                  
                  -
                  
                  
                  
                  339,742Convertible
      preferred stock
                  
                  
                  135,572
                  
                  
                  
                  135,572Total
      potentially dilutive securities
                  
                  
                  6,542,943
                  
                  
                  
                  4,257,438


- 8
-




APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


(Unaudited)





8.
            DIVIDENDS





As of
March 31, 2010, we had 135,572 shares of our 6.5% Series A Convertible Preferred
Stock outstanding.  A dividend was declared and paid in common stock on May
1, 2010 to the holders of record as of April 15, 2010.





Dividends
on Preferred Stock are accrued when the amount and kind of the dividend is
determined and are payable quarterly on the first day of February, May, August
and November, in cash or shares of common stock, at the discretion of the
company.





9.
            COMMITMENTS
      AND CONTINGENCIES





LITIGATION





On
February 1, 2010, NewOak Capital Markets, LLC, formerly known as J. Giordano
Securities, LLC, the placement agent for our October 2005 private placement of
preferred stock, commenced an arbitration proceeding against us with Financial
Industry Regulatory Authority (“FINRA”).  NewOak alleges that we made
material misrepresentations between May 2005 and May 10, 2006 concerning the
status of its products.





We
previously settled class action and derivative lawsuits relating to the alleged
misrepresentations.  NewOak, however, opted out of the class action and
alleges that the alleged misrepresentations constituted breaches of its
agreement with the company and that we breached warranties we made to NewOak in
connection with the 2005 private placement.  NewOak seeks indemnification
and recovery for alleged breach of contract, unjust enrichment, quantum meruit,
fraudulent misrepresentation, tortuous interference with prospective economic
relations and violation of Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, and seeks an award of monetary damages in excess of $10
million, plus punitive damages and attorney’s fees and costs.





We filed
a petition in the Supreme Court of the State of New York, New York County to
stay the arbitration on the ground that the claims are not subject to
arbitration.  NewOak removed the proceeding to the United States District
Court, Southern District of New York, and filed a motion to compel
arbitration.





We intend
to defend ourselves vigorously in any arbitration or legal proceedings and
believe we have substantial defenses to the claims.





In
addition, we may from time to time be involved in legal proceedings arising from
the normal course of business.  As of the date of this report, we have not
received notice of any other legal proceedings.





10.
            SUBSEQUENT
      EVENTS





On April
29, 2010, we entered into agreements with two stockholders to issue an aggregate
of 10,000 shares of our common stock in exchange for the return for cancellation
of 1,000 shares of our Series A Redeemable Convertible Preferred
Stock.





On May
13, 2010, we were awarded increased funding for our contract from the U.S.
Army’s Research, Development and Engineering Command (U.S. Army RDECOM –
Picatinny, NJ) for the continued development and advancement of our LGE
technology in the amount of $1.8 million.


- 9
-





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





Our
discussion and analysis of the financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and the related disclosures included elsewhere herein and
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations included as part of our Annual Report on Form 10-K for the year ended
December 31, 2009.





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





Certain
statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements within the meaning of the securities laws.  Forward-looking
statements include all statements that do not relate solely to the historical or
current facts, and can be identified by the use of forward looking words such as
"may", "believe", "will", “would”, “could”, “should”, "expect", "expected",
"project", "anticipate", “estimates", “”possible”, "plan", "strategy", "target",
"prospect" or "continue" and other similar terms and phrases.  These
forward looking statements are based on the current plans and expectations of
our management and are subject to a number of uncertainties and risks that could
significantly affect our current plans and expectations, as well as future
results of operations and financial condition and may cause our actual results,
performances or achievements to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. Important factors that could cause our actual results to differ
materially from our expectations are described in Item 1A.  (Risk Factors)
of our Annual Report on Form 10-K, as amended, for the year ended December 31,
2009.  In making these forward-looking statements, we claim the protection
of the safe-harbor for forward-looking statements contained in the Private
Securities Reform Act of 1995.  Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct.  We do
not assume any obligation to update these forward-looking statements to reflect
actual results, changes in assumptions, or changes in other factors affecting
such forward-looking statements.





OVERVIEW





Applied
Energetics is a leader in the development and manufacture of applied energy
systems for military and commercial applications.  Through our efforts in
developing our core technology, Laser Guided Energy (“LGE”TM), we have gained
expertise and proprietary knowledge in high performance lasers, high-voltage
electronics, advanced dynamic optics and atmospheric and plasma
interactions.  We apply these technologies to deliver innovative solutions
to urgent military requirements, including neutralizing improvised explosive
devices (“IEDs”) and other high priority missions of U.S. and allied military
forces.  We have developed an effective and robust counter-IED (“CIED”)
technology as a result of our research and development.  Additionally, we
develop and manufacture high-voltage and laser products for government and
commercial customers for a range of applications.





During
the first quarter of 2010, we continued our focus on fulfilling our US Marine
Corps (“USMC”) customers’ CIED requirements by focusing on providing further
operational assessment of the technology, developing additional systems,
providing training and field support for systems, developing a smaller version
of the technology for installation on other military platforms and vehicles, and
upgrading the engineering documentation of the system.  This work is being
performed under the $10.4 million contract modification received in January of
2010.  On March 31, the Operational Assessment portion of the contract was
completed.  We continue to provide extended field operational support for
this mission at the request of the USMC Field Commander.





During
the first quarter of 2010, we continued the development and advancement of our
LGE technology by working with our customer, the U.S. Army’s Research,
Development and Engineering Command.  We also continued our work on the U.S
Navy ultra-short pulse laser system, which is scheduled for delivery in the
second quarter of 2010.  We also made progress in discussions with other
large defense contractors in developing teaming arrangements to support the next
generation of CIED systems.  We expect that utilizing the resources and
capabilities of established Department of Defense (“DoD”) contractors will allow
us to focus on the technology development within our core capabilities. 
These organizations have experience and a sound track record in delivering fully
qualified military systems and the associated documentation and certifications
to DoD customers.  We will continue to concentrate our efforts on
maintaining the excellent customer relationships that have been established over
the past 2 years.


- 10
-


RECENT
ACCOUNTING PRONOUNCEMENTS





The
Financial Accounting Standards Board (“FASB”) has issued Accounting Standards
Update (“ASU”) No. 2010-09, "Amendments to Certain Recognition and Disclosure
Requirements" ("ASU 2010-09"), which amends ASU Topic 855, "Subsequent Events."
The amendments to ASC Topic 855 does not change existing requirements to
evaluate subsequent events, but: (i) defines a "SEC Filer," which we are; (ii)
removes the definition of a "Public Entity"; and (iii) for SEC Filers, reverses
the requirement to disclose the date through which subsequent events have been
evaluated. ASU 2010-09 was effective for us upon issuance.  The adoption of
the standard is not expected to have a significant impact on the company’s
consolidated financial statements.





The FASB
has issued ASU 2010-17, “Revenue Recognition – Milestone Method”.  ASU
2010-17 provides guidance on the criteria that should be met for determining
whether the milestone method of revenue recognition is appropriate.  We can
recognize consideration that is contingent upon achievement of a milestone in
its entirety as revenue in the period in which the milestone is achieved only if
the milestone meets all criteria to be considered substantive.  ASU 2010-17
will be effective for us beginning July 2010.  The adoption of the standard
is not expected to have a significant impact on the company’s consolidated
financial statements.





The FASB
has issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements”.  ASU
2009-13 clarified the criteria for separating revenue between multiple
deliverables.  This statement is effective for new revenue arrangements or
materially modified arrangements in periods subsequent to adoption. 
Adoption is required for fiscal years beginning on or after June 15, 2010, but
early adoption is allowed.  We originally anticipated adopting ASU 2009-13
as of January 1, 2010 for new commercial revenue arrangements, but will defer
adoption until adoption is required.  The adoption of the standard is not
expected to have a significant impact on the company’s consolidated financial
statements.





RESULTS
OF OPERATIONS





COMPARISON
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009:





2010
                    
                    
                    2009Revenue
                    
                    $
                    3,594,778
                    
                    
                    $
                    2,587,398Cost of revenue
                    
                    
                    3,368,676
                    
                    
                    
                    2,401,446General
      and administrative
                    
                    
                    1,077,232
                    
                    
                    
                    2,435,723Selling
      and marketing
                    
                    
                    71,654
                    
                    
                    
                    238,023Research
      and development
                    
                    
                    32,862
                    
                    
                    
                    517,661Other
      (expense) income:Interest
      expense
                    
                    
                    (1,667
                    )
                    
                    
                    (19
                    )Interest
      income
                    
                    
                    2,462
                    
                    
                    
                    31,027Net
      loss
                    
                    $
                    (954,851
                    )
                    
                    $
                    (2,974,447
                    )





REVENUE





Revenue
increased approximately $1.0 million to $3.6 million for the three months ended
March 31, 2010 compared to $2.6 million for the three months ended March 31,
2009.  Revenues from the CIED product line increased by $1.5 million to
$2.2 million due to the contract modification of $10.4 million received in
January 2010.  Additional revenue of $565,000 was derived from our new
Laser product line.  LGE revenues decreased by $1.0 million to $838,000 for
the three months ended March 31, 2010 compared to the three months ended March
31, 2009.





COST
OF REVENUE





Cost of
revenue includes manufacturing labor, benefits and overhead, and an allocation
of allowable general and administration and research and development costs in
accordance with the terms of our government contracts.


- 11
-





Cost of
revenue increased approximately $967,000 to $3.4 million for the three months
ended March 31, 2010, compared to $2.4 million for the three months ended March
31, 2009.  The increase in cost of revenue is directly tied to the increase
in sales activity of 39%, and to provisions for losses on current contracts of
approximately $29,000.  By product line, CIED cost of revenue increased by
approximately $1.3 million, Laser cost of revenue increased by $558,000 and LGE
cost of revenue decreased by approximately $936,000.





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses decreased approximately $1.3 million to $1.1 million
for the three months ended March 31, 2010 compared to $2.4 million for the three
months ended March 31, 2009.  Salaries and wages decreased by approximately
$791,000 as a result of downsizing in the second quarter of 2009, non-cash
compensation costs decreased by approximately $77,000, travel expenses decreased
by approximately $26,000 and directors and officers insurance costs decreased by
approximately $18,000.  These were offset by an increase in legal expenses
of approximately $100,000, a decrease in applied labor, overhead and material
handling costs allocated to cost of revenue of approximately $38,000 and to
asset disposals associated with leasehold improvement of approximately
$18,000.





SELLING
AND MARKETING





Selling
and marketing expenses decreased approximately $166,000 to $72,000 for the three
months ended March 31, 2010 compared to $238,000 for the three months ended
March 31, 2009.  The decrease was mostly due to decreases in labor
allocation and travel related to business development activities of $136,000 and
to a decrease in bids and proposal costs of $30,000.  Overall spending in
this area reduced significantly as our short- and long-term strategy has become
more focused.  New sales orders and contracts of approximately $10.7
million were added to the backlog in the three months ended March 31,
2010.





RESEARCH
AND DEVELOPMENT





Internal
research and development expenses decreased by approximately $485,000 to $33,000
during the three months ended March 31, 2010 as compared to $518,000 for the
three months ended March 31, 2009.  Our internal research and development
costs involve experimentation, design, development and enhancement of
proprietary technologies and new products.  The decrease in internal
research and development expense is primarily due to the closure of the St.
Louis facility in 2009 and the deployment of key technical personnel to
fulfilling current contracts.





INTEREST
INCOME AND INTEREST EXPENSE





Net
interest income for the three months ended March 31, 2010 was lower by
approximately $29,000 as compared to the three months ended March 31, 2009
primarily due to the lower balance of invested funds.





NET
LOSS





Our
operations for the three months ended March 31, 2010 resulted in a net loss of
approximately $955,000, a reduction of approximately $2.0 million compared to
the $3.0 million loss for the three months ended March 31, 2009.





LIQUIDITY
AND CAPITAL RESOURCES





At March
31, 2010, we had approximately $8.9 million of cash and cash equivalents, and
$225,000 in a certificate of deposit.  Our cash position decreased during
the first quarter of 2010 by approximately $722,000.  During the first
three months of 2010, we used $708,000 of cash in operating activities, which is
primarily comprised of our net loss of $955,000, and increases in accounts
receivables and other receivables of approximately $1.4 million.  Partially
offsetting these amounts were non-cash compensation expense of $526,000, an
increase in accounts payable and accrued expenses of $789,000, a decrease in
prepaid expenses of $203,000, and depreciation and amortization of approximately
$111,000.  Additionally, investing activities used approximately
$14,000.





We
anticipate that short-term and long-term funding needs will be provided by
existing cash and cash equivalents and the cash flows from servicing our
government contracts.  We believe that we have sufficient working capital
to fulfill existing contracts and expected contracts in 2010 and into
2011.  The government contracts, which currently represent a major portion
of our current activity, are on a cost plus fixed fee basis.  This means
all work performed is done at our Government-approved rates, which include
general and administrative costs, overhead, labor and materials, fees and
profit. These costs are accrued as incurred and billed monthly.


- 12
-





BACKLOG
OF ORDERS





At March
31, 2010, we had a backlog (workload remaining on signed contracts) of
approximately $10.4 million, to be completed within the next twelve
months.  As of May 14, 2010, our backlog is $11.3 million.





ITEM
4.  CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Our
management, with the participation of our Principal Executive Officer and
Principal Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of March 31, 2010.  Based on that evaluation,
our Principal Executive Officer and Principal Financial Officer have concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.





During
the three months ended March 31, 2010, there was no significant change in our
internal controls over financial reporting that has materially affected or which
is reasonably likely to materially affect our internal controls over financial
reporting.


- 13
-


PART
II – OTHER INFORMATION





ITEM
1A.            RISK
FACTORS





We have
outstanding options to purchase a significant number of shares of our common
stock which are exercisable at a price below the current market price of our
common stock.





We
currently have outstanding options to purchase approximately 5.4 million shares
of common stock.  The exercise price of these options range from $ 0.40 to
$ 0.60 and options to purchase approximately 3.0 million shares of common stock
are exercisable below the market price of our common stock on May 14,
2010.   Substantially all of these shares may be sold in the public
market by their holders upon exercise.  The number of shares that may be
exercised may be significant to the current trading value of our common stock
when they are exercised and, therefore, could adversely affect the price of our
common stock.  In addition, to the extent options are exercised, your
ownership percentage in our company will be diluted.





ITEM
2. 
             UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Issuer
      Purchases of Equity SecuritiesPeriod
                    
                    (a)
                      Total number
                      of Shares (or
                      Units)
                      Surrendered
                    
                    
                    (b)
                      Average
                      Price Paid
                      per Share
                      (or Unit)
                    
                    
                    (c)
                      Total Number of
                      Shares (or Units)
                      Purchased as
                      Part of Publicly
                      Announced Plans
                      or Programs
                    
                    (d)
                      Maximum Number (or
                      Approximate Dollar
                      Value) of Shares (or
                      Units) that May Yet Be
                      Purchased Under the
                      Plans or ProgramsMar.
      2010
                    
                    
                    115,000
                    
                    
                    $
                    0.60
                    
                    
                    
                    115,000
                    
                    Undetermined





ITEM
6. 
             EXHIBITS





EXHIBIT
                NUMBER
              
              DESCRIPTION31.1
              
              Certification
      of Principal Executive 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 2002.31.2
              
              Certification
      of Principal 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
              
              Principal
      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
              
              Principal
      Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


- 14
-





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.




APPLIED
ENERGETICS, INC.





By
                /s/ Joseph C. HaydenJoseph
      C. HaydenChief
      Operating Officer and Principal Executive
  Officer





Date:  May
17, 2010


- 15
-