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 periodendedSeptember 30, 2009





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: x
                Non-accelerated
      filer:  ̈
                
                Smaller reporting company: 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 o 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 November 5, 2009,
there were 88,819,359
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 September 30, 2009 (Unaudited) and
      December 31, 2008
                      1Condensed
      Consolidated Statements of Operations for the three months ended September
      30, 2009 and 2008 (Unaudited)
                      2Condensed
      Consolidated Statements of Operations for the nine months ended September
      30, 2009 and 2008 (Unaudited)
                      3Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008 (Unaudited)
                      4Notes
      to Condensed Consolidated Financial Statements
                      5ITEM
      2.
                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      11ITEM
      4.
                      Controls
      and Procedures
                      17PART
      II.  OTHER INFORMATIONITEM
      1.
                      Legal
      Proceedings
                      18ITEM
      1A.
                      Risk
      Factors
                      18ITEM
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      19ITEM
      6.
                      Exhibits
                      19SIGNATURES
                      20




i


PART
I.  FINANCIAL INFORMATION





ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


APPLIED ENERGETICS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30, 2009
                
                
                December 31, 2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                11,813,738
                
                
                $
                15,467,386Accounts
      receivable
                
                
                1,306,652
                
                
                
                2,727,853Inventory
                
                
                277,576
                
                
                
                157,189Prepaid
      expenses and deposits
                
                
                129,440
                
                
                
                495,718Other
      receivables
                
                
                261,849
                
                
                
                17,183Total
      current assets
                
                
                13,789,255
                
                
                
                18,865,329Long
      term receivables
                
                
                -
                
                
                
                253,130Property
      and equipment - net
                
                
                2,964,225
                
                
                
                3,523,641Intangible
      assets - net
                
                
                -
                
                
                
                36,900Other
      assets
                
                
                10,000
                
                
                
                29,089TOTAL
      ASSETS
                
                $
                16,763,480
                
                
                $
                22,708,089LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                324,955
                
                
                $
                883,228Estimated
      loss on uncompleted contract
                
                
                -
                
                
                
                98,239Accrued
      expenses
                
                
                234,387
                
                
                
                326,697Accrued
      compensation
                
                
                1,081,642
                
                
                
                1,048,774Customer
      deposits
                
                
                143,160
                
                
                
                11,565Billings
      in excess of costs
                
                
                20,426
                
                
                
                -Current
      portion of capital lease obligations
                
                
                -
                
                
                
                2,028Total
      current liabilities
                
                
                1,804,570
                
                
                
                2,370,531Litigation
      settlement payable in common stock
                
                
                1,200,000
                
                
                
                -Deferred
      rent
                
                
                -
                
                
                
                4,049Total
      liabilities
                
                
                3,004,570
                
                
                
                2,374,580Commitments
      and contingenciesStockholders’
      equitySeries
      A Convertible Preferred Stock, $.001 par value, 2,000,000 shares
      authorized;135,572 shares issued and outstanding at September 30,
      2009  and at December 31, 2008
                
                
                136
                
                
                
                136Common
      stock, $.001 par value, 125,000,000 shares
      authorized;    86,535,999 shares issued and
      outstanding at September 30, 2009 and  86,370,026 shares issued
      and outstanding at December 31, 2008
                
                
                86,536
                
                
                
                86,370Additional
      paid-in capital
                
                
                75,329,623
                
                
                
                73,936,085Accumulated
      deficit
                
                
                (61,657,385
                )
                
                
                (53,689,082
                )Total
      stockholders’ equity
                
                
                13,758,910
                
                
                
                20,333,509TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                16,763,480
                
                
                $
                22,708,089





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 1
-





APPLIED ENERGETICS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For
      the three months ended
                  September
      30,2009
                
                
                2008Revenue
                
                $
                1,877,865
                
                
                $
                4,014,302Cost
      of revenue
                
                
                1,777,840
                
                
                
                3,789,962Gross
      profit
                
                
                100,025
                
                
                
                224,340Operating
      expenses:General
      and administrative
                
                
                1,083,249
                
                
                
                1,647,366Settlement
      expenses
                
                
                265,197
                
                
                
                -Selling
      and marketing
                
                
                132,386
                
                
                
                61,565Research
      and development
                
                
                210,925
                
                
                
                359,807Total
      operating expenses
                
                
                1,691,757
                
                
                
                2,068,738Operating
      loss
                
                
                (1,591,732
                )
                
                
                (1,844,398
                )Other
      (expense) income:Interest
      expense
                
                
                -
                
                
                
                (388
                )Interest
      income
                
                
                8,388
                
                
                
                123,558Total
      other
                
                
                8,388
                
                
                
                123,170Net
      loss
                
                
                (1,583,344
                )
                
                
                (1,721,228
                )Preferred
      stock dividends
                
                
                (76,941
                )
                
                
                (277,274
                )Net
      loss attributable to common stockholders
                
                $
                (1,660,285
                )
                
                $
                (1,998,502
                )Net
      loss per common share – basic and diluted
                
                $
                (0.02
                )
                
                $
                (0.02
                )Weighted
      average number of shares outstanding, basic and diluted
                
                
                86,179,071
                
                
                
                80,628,098





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 2
-





APPLIED
ENERGETICS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For
      the nine months ended
                  September
      30,2009
                
                
                2008Revenue
                
                $
                6,195,404
                
                
                $
                11,653,390Cost
      of revenue
                
                
                5,810,602
                
                
                
                10,719,524Gross
      profit
                
                
                384,802
                
                
                
                933,866Operating
      expenses:General
      and administrative
                
                
                5,219,034
                
                
                
                6,170,107Settlement
      expenses
                
                
                1,390,197
                
                
                
                -Selling
      and marketing
                
                
                561,410
                
                
                
                173,003Research
      and development
                
                
                1,051,572
                
                
                
                965,017Total
      operating expenses
                
                
                8,222,213
                
                
                
                7,308,127Operating
      loss
                
                
                (7,837,411
                )
                
                
                (6,374,261
                )Other
      (expense) income:Interest
      expense
                
                
                (19
                )
                
                
                (1,940
                )Interest
      income
                
                
                56,222
                
                
                
                539,166Other
                
                
                -
                
                
                
                10Total
      other
                
                
                56,203
                
                
                
                537,236Net
      loss
                
                
                (7,781,208
                )
                
                
                (5,837,025
                )Preferred
      stock dividends
                
                
                (187,093
                )
                
                
                (854,585
                )Net
      loss attributable to common stockholders
                
                $
                (7,968,301
                )
                
                $
                (6,691,610
                )Net
      loss per common share – basic and diluted
                
                $
                (0.09
                )
                
                $
                (0.08
                )Weighted
      average number of shares outstanding, basic and diluted
                
                
                86,186,310
                
                
                
                80,416,412





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 3
-





APPLIED
ENERGETICS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the nine months ended
                            September
      30,2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                          
                          $
                          (7,781,208
                          )
                          
                          $
                          (5,837,025
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                          
                          
                          498,758
                          
                          
                          
                          650,136Loss
      on equipment disposal
                          
                          
                          106,873
                          
                          
                          
                          -Deferred
      rent adjustment on purchase of premises
                          
                          
                          -
                          
                          
                          
                          118,594Provision
      for losses on projects
                          
                          
                          -
                          
                          
                          
                          94,953Litigation
      settlement payable in common stock
                          
                          
                          1,200,000
                          
                          
                          
                          -Non-cash
      stock based compensation expense
                          
                          
                          1,335,734
                          
                          
                          
                          2,965,334Changes
      in assets and liabilities:Accounts
      receivable
                          
                          
                          1,421,201
                          
                          
                          
                          (806,583
                          )Other
      receivable
                          
                          
                          (244,666
                          )
                          
                          
                          12,832Inventory
                          
                          
                          (218,625
                          )
                          
                          
                          (710,825
                          )Prepaid
      expenses and deposits
                          
                          
                          385,367
                          
                          
                          
                          294,354Long
      term receivables
                          
                          
                          253,129
                          
                          
                          
                          (253,130
                          )Accounts
      payable
                          
                          
                          (558,274
                          )
                          
                          
                          (212,271
                          )Billings
      in excess of costs
                          
                          
                          20,426
                          
                          
                          
                          20,530Accrued
      expenses, deposits and deferred rent
                          
                          
                          68,102
                          
                          
                          
                          4,133Net
      cash used in operating activities
                          
                          
                          (3,513,182
                          )
                          
                          
                          (3,658,968
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of land, building and equipment
                          
                          
                          (9,315
                          )
                          
                          
                          (2,686,101
                          )Proceeds
      from sale of available-for-sale marketable securities
                          
                          
                          -
                          
                          
                          
                          100,000Net
      cash used in investing activities
                          
                          
                          (9,315
                          )
                          
                          
                          (2,586,101
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid (preferred stock)
                          
                          
                          (129,123
                          )
                          
                          
                          (275,437
                          )Principal
      payments on capital lease obligations
                          
                          
                          (2,028
                          )
                          
                          
                          (11,474
                          )Net
      cash used in financing activities
                          
                          
                          (131,151
                          )
                          
                          
                          (286,911
                          )Net
      decrease in cash and cash equivalents
                          
                          
                          (3,653,648
                          )
                          
                          
                          (6,531,980
                          )Cash
      and cash equivalents, beginning of period
                          
                          
                          15,467,386
                          
                          
                          
                          14,981,192Cash
      and cash equivalents, end of period
                          
                          $
                          11,813,738
                          
                          
                          $
                          8,449,212





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 4
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(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 September 30, 2009 (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 nine-month period ended September 30, 2009, 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.  Our lack of earnings history and
continued future losses could adversely affect our financial position and
prevent us from fulfilling our contractual obligations, and if we are unable to
generate funds or obtain funds on acceptable terms, we may not be able to
develop and market our present and future products.





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, estimate to forecast
loss on a contract under the completed contract method of accounting, the
valuation of inventory, and estimate to forecast expected forfeiture rate on
stock-based compensation.





CASH
AND CASH EQUIVALENTS





At
September 30, 2009, we had approximately $11.8 million of cash and cash
equivalents.  Cash equivalents consist of money market
accounts.





FAIR
VALUE OF FINANCIAL MEASUREMENTS





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


- 5
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





2.
            ACCOUNTS
      RECEIVABLE





Accounts
receivable consists of the following:





September30, 2009
                      
                      
                      December 31, 2008Contracts
      receivable
                      
                      $
                      1,281,857
                      
                      
                      $
                      1,677,929Costs
      and estimated earnings on uncompleted contracts
                      
                      
                      24,795
                      
                      
                      
                      1,049,924Accounts
      receivable
                      
                      
                      1,306,652
                      
                      
                      
                      2,727,853Less:Allowance
      for doubtful accounts
                      
                      
                      -
                      
                      
                      
                      -Net
      Accounts Receivable
                      
                      $
                      1,306,652
                      
                      
                      $
                      2,727,853Contract
      retention included in other receivable (short term)
                      
                      
                      253,130
                      
                      
                      
                      -Long
      term receivable (contract retention)
                      
                      
                      -
                      
                      
                      
                      253,130$
                      1,559,782
                      
                      
                      $
                      2,980,983


Contracts
receivable at September 30, 2009 and December 31, 2008 are expected to be
collected within a year.





Costs and
Estimated Earnings on Uncompleted Contracts


September30, 2009
                                            
                                            
                                            December 31, 2008Costs
      incurred on uncompleted contracts
                                            
                                            $
                                            23,764,581
                                            
                                            
                                            $
                                            20,118,499Estimated
      earnings
                                            
                                            
                                            1,775,974
                                            
                                            
                                            
                                            1,564,814Total
      billable costs and estimated earnings
                                            
                                            
                                            25,540,555
                                            
                                            
                                            
                                            21,683,313Less:Billings
      to date
                                            
                                            
                                            25,536,186
                                            
                                            
                                            
                                            20,633,389Total
                                            
                                            $
                                            4,369
                                            
                                            
                                            $
                                            1,049,924Included
      in accompanying balance sheet:Costs
      in excess of billings included in accounts
      receivable
                                            
                                            $
                                            24,795
                                            
                                            
                                            $
                                            1,049,924Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                                            
                                            
                                            (20,426
                                            )
                                            
                                            
                                            -Total
                                            
                                            $
                                            4,369
                                            
                                            
                                            $
                                            1,049,924




- 6
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





3.
            INVENTORY





Our
inventories consist of the following:





September 30, 2009
                  
                  
                  December 31, 2008Raw
      materials
                  
                  $
                  103,451
                  
                  
                  $
                  124,849Work-in-process
                  
                  
                  174,125
                  
                  
                  
                  32,340Total
                  
                  $
                  277,576
                  
                  
                  $
                  157,189




4.
            PROPERTY
      AND EQUIPMENT





Our
property and equipment consist of the following:





September 30, 2009
                  
                  
                  December 31, 2008Land
      and buildings
                  
                  $
                  2,072,215
                  
                  
                  $
                  2,072,215Equipment
                  
                  
                  2,671,740
                  
                  
                  
                  3,214,640Furniture
      and building improvements
                  
                  
                  1,019,177
                  
                  
                  
                  1,107,245Software
                  
                  
                  875,298
                  
                  
                  
                  787,331Total
                  
                  
                  6,638,430
                  
                  
                  
                  7,181,431Less
      accumulated depreciation and amortization
                  
                  
                  (3,674,205
                  )
                  
                  
                  (3,657,790
                  )Net
      property and equipment
                  
                  $
                  2,964,225
                  
                  
                  $
                  3,523,641




We
evaluate general impairment of long-lived assets as an element of our annual
business planning process conducted in the fourth quarter of each year. During
this process, we evaluate the current carrying values of all long-lived assets
on our books to determine if carrying values are recoverable.





Our most
recent asset impairment test was performed on February 18, 2009, when we
determined that as of December 31, 2008 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.





- 7
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





5.
            SHARE-BASED
      COMPENSATION





Share-Based Compensation –
Employees, Directors and Non-Employees





For the
three months ended September 30, 2009 and 2008, share-based compensation expense
totaled $237,000 and $663,000, respectively.  For the nine months
ended September 30, 2009 and 2008, share-based compensation expense totaled $1.3
million and $3.0 million, 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 September 30, 2009, no shares of restricted stock were
granted.





On July 13, 2009, the Compensation
Committee of the Board of Directors awarded options to purchase approximately
2.7 million shares of common stock to employees effectiveJuly 16, 2009.The options are exercisable at a price
per share of $0.40 and expire on July16, 2014.One-third of the options became
exercisable on July 16, 2009.  An additional one-third of the shares
covered will become exercisable on the second day following the filing of our
Quarterly Report for the quarter ending June 30, 2010 and the remaining
one-third of the shares covered will become exercisable on the second day
following the filing of our Quarterly Report for the quarter ending June 30,
2011.





The
weighted average grant-date fair value of all outstanding option grants was
$0.14 and $1.36, per share, for the nine months ended September 30, 2009 and
2008, 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.


Nine Months Ended September 30,2009
                    
                    
                    2008Expected
      life (years)
                    
                    3
      years
                    
                    
                    4
      yearsDividend
      yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Expected
      volatility
                    
                    
                    67.3
                    %
                    
                    
                    65.0
                    %Risk
      free interest rates
                    
                    
                    1.3
                    %
                    
                    
                    2.9
                    %Weighted
      average fair value of options at grant date
                    
                    $
                    0.14
                    
                    
                    $
                    1.36




During
the nine months ended September 30, 2009, 464,093 shares of restricted stock
vested and 294,117 shares of restricted stock were forfeited, 83,333 options
were exercised, 4,069,203 options were forfeited and 1,923,137 options
expired.  The forfeited options include the options exchanged as a
result of the exchange offer.  As of September 30, 2009, $579,000 and
$229,000 of total unrecognized compensation cost, net of estimated forfeiture,
related to restricted stock and stock options is expected to be recognized over
a weighted average period of approximately 1.06 years and 1.89 years,
respectively.





Warrants –
Non-Employees





At
September 30, 2009 and December 31, 2008 there were outstanding warrants to
purchase approximately 1.0 million and 1.1 million shares of common stock,
respectively, which were either (i) issued in connection with the August 2006
financing, or (ii) issued to outside consultants.  The exercise price
of these warrants range from $9.15 to $12.00.


- 8
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





6.
            COMPREHENSIVE
      LOSS





Total
comprehensive loss consisted of the following:





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Comprehensive
      LossNet
      loss
                
                $
                (1,583,344
                )
                
                $
                (1,721,228
                )
                
                $
                (7,781,208
                )
                
                $
                (5,837,025
                )Other
      comprehensive loss:Unrealized
      gain (loss) on available-for-sale securities
                
                
                -
                
                
                
                5,000
                
                
                
                -
                
                
                
                (370,000
                )Total
                
                $
                (1,583,344
                )
                
                $
                (1,716,228
                )
                
                $
                (7,781,208
                )
                
                $
                (6,207,025
                )








7.
            SIGNIFICANT
      CUSTOMERS





Approximately
100% and 99% of revenues for the three-month periods and 98% and 96% of revenues
for the nine-month periods ended September 30, 2009 and 2008, respectively, were
generated from either the U.S. Government or contractors to the U.S.
Government.





8.
            NET
      LOSS PER SHARE





Basic net
loss per common share is computed by dividing net 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 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 loss per
share when issuance of the shares is no longer contingent. Due to the net loss
for the nine months ended September 30, 2009 and 2008, 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 are as
follows:


For the Three Months Ended
                      September 30,
                    
                    
                    For the Nine Months Ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Options
      to purchase common shares
                    
                    
                    235,869
                    
                    
                    
                    -
                    
                    
                    
                    87,412
                    
                    
                    
                    604Warrants
      to purchase common shares
                    
                    
                    -
                    
                    
                    
                    25,567
                    
                    
                    
                    -
                    
                    
                    
                    33,690Unvested
      restricted stock units
                    
                    
                    127,508
                    
                    
                    
                    434,583
                    
                    
                    
                    127,508
                    
                    
                    
                    434,583Convertible
      preferred stock
                    
                    
                    282,444
                    
                    
                    
                    1,355,572
                    
                    
                    
                    282,444
                    
                    
                    
                    1,355,572Total
      potentially dilutive securities
                    
                    
                    645,821
                    
                    
                    
                    1,815,722
                    
                    
                    
                    497,364
                    
                    
                    
                    1,824,449





As
further discussed in note 10, 2,283,887 shares of common stock were issued in
conjunction with the settlement of two class action complaints, which, had it
been issued in the current quarter, would have further diluted earnings per
share.





9.              DIVIDENDS





As of
September 30, 2009, we had 135,572 shares of our 6.5% Series A Convertible
Preferred Stock outstanding.  A dividend was paid in common stock on
November 1, 2009 to the holders of record as of October 15, 2009.





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
-


APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009


(Unaudited)





10.
            COMMITMENTS
      AND CONTINGENCIES





LITIGATION





In July
2006, two class action complaints were filed by George Wood and Raymond Deedon
against Applied Energetics, Inc. (then known as Ionatron, Inc.) and its
founders. Each of the class actions was filed in the United States District
Court for the District of Arizona and alleges, among other things, violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, claiming
that we issued false and misleading statements concerning the development of our
counter-IED product. The court consolidated these cases, and a consolidated
amended complaint was served. The action was later dismissed against Joseph C.
Hayden and Stephen W. McCahon with prejudice, and proceeded against us and the
remaining defendants. In July 2009, we reached an agreement with the lead
plaintiffs to settle the consolidated class action lawsuits.  In
September 2009, the court granted final approval of the
settlement.  Under the terms of the settlement, those lawsuits were
dismissed with prejudice, and Applied Energetics and all other defendants
received a full and complete release of all claims asserted against them in the
litigation, in exchange for the payment of $5.3 million in cash (paid by our
insurance carriers) and the issuance of 2,283,887 previously unissued shares of
common stock by Applied Energetics valued at $1.2 million.





In
September 2006, a derivative action was filed by John T. Johnasen in Arizona
State Court, Pima County, against certain of our current and former officers and
directors, alleging, among other things, breach of fiduciary duty. On April 30,
2008, the state court continued a stay of the derivative action until 30 days
notice from either party or until further court order terminating the stay. In
July 2009, we reached an agreement to settle the derivative
action.  In October 2009, the court granted final approval of the
settlement.  Under the terms of the settlement of the derivative
action, the lawsuit was dismissed with prejudice, and all defendants received a
full and complete release of all claims asserted against them in the litigation,
in exchange for Applied Energetics’ maintenance of certain corporate governance
measures and the payment by our insurance carriers of $225,000 of attorneys’
fees.





Insurance
proceeds of $6.2 million, less amounts reimbursed to Applied Energetics to pay
expenses of the litigations (approximately $646,000), were paid directly to the
plaintiffs by our insurance carriers. Our part of the settlement costs and
estimated expenses in excess of our insurance coverage of the settlement have
been reflected in the financial statements as settlement expenses.





There was
no admission of liability by any of the defendants in any of the
litigations.  As stated in the settlement documents, Applied
Energetics denies any liability in connection with the litigation and denies the
claims asserted by the plaintiffs in the complaints.





On June
29, 2009, Applied Energetics received notice from the American Arbitration
Association that an arbitration demand was filed against it and its subsidiary
North Star Power Engineering, Inc. ("NSPE") by eScrub Systems, Inc. The claim
asserted a breach of an October 27, 2003 License Agreement between eScrub and
North Star Research Corporation (whose assets were acquired by NSPE) relating to
certain power technology and sought $1,000,000 in damages.  eScrub
asserted that the agreement was improperly assigned to Applied Energetics and,
alternatively, that Applied Energetics breached the agreement by failing to
exploit the license. The claim also alleged misappropriation of trade secrets
relating to technology that eScrub asserted is not a subject of the License
Agreement and seeks an additional $1,350,000 in damages and an order enjoining
Applied Energetics from using the alleged trade secrets.  In August
2009, Applied Energetics and eScrub settled the dispute.  Pursuant to
the settlement agreement, Applied Energetics and eScrub received full and
complete releases from each other of all claims that they may have or claim to
have against the other party and Applied Energetics made payments of $50,000 to
eScrub.





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.





11.
            SUBSEQUENT
      EVENTS





Subsequent events have been evaluatedthroughNovember 9, 2009, the date the financial
statements were available to be issued.


- 10
-





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, 2008.





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", "expect", "expected", "project", "anticipate",
"anticipated”, “estimates", "plans", "strategy", "target", "prospects" or
"continue".  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 for the
year ended December 31, 2008.  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 (LGETM), we have gained
expertise and proprietary knowledge in high performance lasers, high-voltage
electronics, advanced dynamic optics and atmospheric and plasma energy
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.  Additionally, we develop and manufacture
high-voltage and laser products for government and commercial customers for a
range of applications.





In the
third quarter of 2009, we initiated a new strategic plan.  The
objective of this effort was to identify the areas in which our core strengths
can be developed to increase our business across new applications in the
military, government and commercial sectors.  The goals for the
strategic plan include increasing revenues, achieving positive cash flow,
profitability, development of new products and markets, and controlling costs to
improve margins.





On July 30, 2009, we received a $992,000
contract (currently funded in the amount of $600,000) for the design,
development and delivery of a laser system to the U.S. Navy.  Weanticipatethat the contract will be fully funded
at the beginning of 2010,provided that the objectives of the
first phase are met,as the
government has allocated the full funding amount to the contracting
authority.  On August 18, 2009,we received a $3.1 million contract
from the U.S. Army’s Research, Development and Engineering Command for the
continued advancement and development of our LGETMtechnology.  The
contract is for a period of three years with apotentialcontract ceiling of $13.4million.





During 2009, we received additional
funding through contract modifications for our U.S. Marine Corps program for
approximately $476,000, of which $224,000 was received in September, to support
further development and operational assessment of the technology.  We
expect additional funding in the fourth quarter of 2009 for this program based
upon favorable assessment reports received and positive feedback from our Marine
Corps customer.





Our
counter-IED technology continues to perform well and receive favorable
evaluations by the U.S. Marine Corps.  As a result, we expect
continued funding will be received for further systems and development
activities in the fourth quarter of 2009.  The delivery and successful
employment of this technology by a customer in a rugged field environment is an
important milestone for Applied Energetics, as we believe it validates our
ability to transition technologies from the laboratory to the field and provide
customer support throughout the product life cycle.


- 11
-





On
September 1, 2009, the company and Kenneth M. Wallace entered into a separation
agreement (the “Separation Agreement”) pursuant to which Mr. Wallace’s
employment as Chief Financial Officer of the Registrant
terminated.  Pursuant to the terms of the separation agreement, Mr.
Wallace has received lump sum payments of $29,000, and $7,682 as reimbursement
for health and medical insurance premiums for six months, and will receive four
(4) monthly payments of $28,125.





On
September 1, 2009, the company appointed Humberto Astorga, Director of Finance,
as its principal financial officer and principal accounting officer for SEC
reporting purposes.





RECENT
ACCOUNTING PRONOUNCEMENTS





The
Financial Accounting Standards Board (“FASB”) has issued Accounting Standards
Update 2009-01, (Topic 105) Generally Accepted Accounting Principles amendments
based on Statement of Financial Accounting Standards (“SFAS”) No. 168 – The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles. Accounting Standards Update 2009-01 amends the
Codification for the issuance of Statement No. 168.  SFAS 168 was
intended to replace Statement 162 “The Hierarchy of Generally Accepted
Accounting Principles”, and to establish the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP.  Rules and interpretive
releases of the SEC under federal securities laws are also sources of
authoritative GAAP for SEC registrants.  This statement is effective
for interim reporting periods ending after September 15, 2009.  The
adoption of the standard is not expected to have a significant impact on the
company’s consolidated financial statements.





The FASB
has issued Accounting Standards Update (“ASU”) 2009-04, Accounting for
Redeemable Equity Instruments.  ASU 2009-04 updates Topic 480-10-S99
to reflect the SEC staff’s view regarding the application of Accounting Series
Release No. 268, Presentation in Financial Statements of “Redeemable Preferred
Stocks”.  The adoption of the standard is not expected to have a
significant impact on the company’s consolidated financial
statements.





The FASB
has issued Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements
and Disclosures (Topic 820) – Measuring Liabilities at Fair
Value.  ASU 2009-05 amends Subtopic 820-10, Fair Value Measurements
and Disclosures – Overall, for the fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided
for in this update.  This statement is effective for interim reporting
periods immediately after issuance in August, 2009.  The adoption of
the standard is not expected to have a significant impact on the company’s
consolidated financial statements.





The FASB
has issued Accounting Standards Update (“ASU”) 2009-13, Multiple Deliverable
Revenue Arrangements.  ASU 2009-13 replaces EITF 00-21, and clarifies
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 anticipate adopting
ASU 2009-13 as of January 1, 2010 for new commercial revenue arrangements that
fall within the scope of this Update.  The adoption of the standard is
not expected to have a significant impact on the company’s consolidated
financial statements.


- 12
-


RESULTS
OF OPERATIONS





COMPARISON
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008:





2009
                  
                  
                  2008Revenue
                  
                  $
                  1,877,865
                  
                  
                  $
                  4,014,302Cost of revenue
                  
                  
                  1,777,840
                  
                  
                  
                  3,789,962General
      and administrative
                  
                  
                  1,083,249
                  
                  
                  
                  1,647,366Settlement
      expenses
                  
                  
                  265,197
                  
                  
                  
                  -Selling
      and marketing
                  
                  
                  132,386
                  
                  
                  
                  61,565Research
      and development
                  
                  
                  210,925
                  
                  
                  
                  359,807Other
      (expense) income:Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (388
                  )Interest
      income
                  
                  
                  8,388
                  
                  
                  
                  123,558Net
      loss
                  
                  $
                  (1,583,344
                  )
                  
                  $
                  (1,721,228
                  )





REVENUE





Revenue
decreased approximately $2.1 million for the three months ended September 30,
2009 compared to the three months ended September 30, 2008, which was
attributable to the expected decrease in revenue from the Counter-IED product
line of approximately $1.6 million, and from the LGE product line of
approximately $700,000.  The decreases in these two product lines were
offset by an increase in our new Laser product line revenue of
$100,000.





COST
OF REVENUE





Cost of
revenue decreased approximately $2.0 million compared for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008, which
was in line with the decrease in revenues of 53% for the same period. Cost of
revenue includes manufacturing labor, fringe and overhead, and an allocation of
allowable general and administration and research and development costs in
accordance with the terms of our government contracts.





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses decreased approximately $564,000 for the three
months ended September 30, 2009 compared to the three months ended September 30,
2008.  Lower revenues in 2009 caused an increase in general and
administrative costs of approximately $973,000 due to applied labor and overhead
not being allocated to government contracts.  Professional services
costs increased by approximately $18,000.  Offsetting these increases
are reductions in salaries, benefits, and temporary help of approximately
$713,000 and non-cash employee compensation costs of approximately $424,000 due
to the previously reported restructuring and reductions in
force.  Additional reductions included recruiting and travel related
costs of approximately $191,000 operational expenses of approximately $166,000,
and depreciation and amortization costs of approximately $60,000.





SETTLEMENT
EXPENSES





The
settlement of the class action and derivative lawsuits caused an increase of
$265,000 for the three months ended September 30, 2009.





SELLING
AND MARKETING





Selling
and marketing expenses increased approximately $71,000 for the three months
ended September 30, 2009 from the same period in 2008, reflecting increased
allocation of time of existing personnel and costs associated with business
development, professional conferences and exhibitions, marketing literature, and
updated web content.


- 13
-





RESEARCH
AND DEVELOPMENT





Internal
research and development expenses decreased approximately $149,000 during the
three months ended September 30, 2009 as compared to the same period in 2008.
The decrease is related to cancellation of research and development projects
conducted at the St. Louis facility that was closed in the second quarter of
2009. We continue to focus on the development of proprietary high voltage and
laser technologies at our Tucson, Arizona location.





Our
short-term research and development goals are to develop innovative laser
sources, novel high-voltage electrical products, efficient optical systems and
to engineer laser hardware to be more compact and rugged as an essential element
of maturing our LGE technology to be practical for
fielding.  Longer-term research objectives include development of
tunable and eye safe laser sources to improve safety and utility of LGE, adjunct
military and commercial applications for lasers to expand accessible markets for
our technology, and integrated weapon and counter-weapon system
technologies.





INTEREST
INCOME AND INTEREST EXPENSE





Net
interest income for the three months ended September 30, 2009 was lower by
approximately $115,000 from the same period of 2008 primarily due to the lower
balance of invested funds and lower interest rates on our investments in
2009.





NET
LOSS





Our
operations for the three months ended September 30, 2009 resulted in a net loss
of approximately $1.6 million, a decrease of approximately $138,000 compared to
the $1.7 million loss for the same period in 2008.





COMPARISON
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008:




2009
                      
                      
                      2008Revenue
                      
                      $
                      6,195,404
                      
                      
                      $
                      11,653,390Cost
      of revenue
                      
                      
                      5,810,602
                      
                      
                      
                      10,719,524General
      and administrative
                      
                      
                      5,219,034
                      
                      
                      
                      6,170,107Settlement
      expenses
                      
                      
                      1,390,197
                      
                      
                      
                      -Selling
      and marketing
                      
                      
                      561,410
                      
                      
                      
                      173,003Research
      and development
                      
                      
                      1,051,572
                      
                      
                      
                      965,017Other
      (expense) income:Interest
      expense
                      
                      
                      (19
                      )
                      
                      
                      (1,940
                      )Interest
      income
                      
                      
                      56,222
                      
                      
                      
                      539,166Other
                      
                      
                      -
                      
                      
                      
                      10Net
      loss
                      
                      $
                      (7,781,208
                      )
                      
                      $
                      (5,837,025
                      )





REVENUE





Revenue
decreased approximately $5.5 million for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008, which was
attributable to a decrease in revenue from the Counter-IED product line of
approximately $4.1 million, from the LGE product line of approximately $1.2
million, and from a reduction in revenue on the High Voltage product line of
approximately $334,000. The decreases in revenues from these three product lines
were offset by an increase in our new Laser product line revenue of
$116,000.





COST
OF REVENUE





Cost of
revenue decreased approximately $4.9 million for the nine months ended September
30, 2009 compared to the nine months ended September 30, 2008, which was in line
with the decrease in revenues of 47% for the same period. Cost of revenue
includes manufacturing labor, fringe and overhead, and an allocation of
allowable general and administration and research and development costs in
accordance with the terms of our government contracts.


- 14
-




GENERAL
AND ADMINISTRATIVE





General
and administrative expenses increased by approximately $951,000 for the nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008.  Lower revenues in 2009 caused an increase in general and
administrative costs of approximately $2.414 million due to applied labor and
overhead not being allocated to government
contracts.   Professional services increased approximately
$129,000 and disposals of equipment and leasehold improvements increased
approximately $92,000 in 2009. Offsetting these increases are reductions in
non-cash compensation costs of approximately $1.645 million, salaries, benefits,
and temporary help of approximately $1.131 million due to the previously
reported restructuring and reductions in our workforce, recruiting and travel
related costs of approximately $402,000, operational expenses of approximately
$261,000, and depreciation and amortization costs of $151,000.





SETTLEMENT
EXPENSES





The
settlement of the class action and derivative lawsuits caused an increase of
approximately $1.4 million for the nine months ended September 30,
2009.





SELLING
AND MARKETING





Selling
and marketing expenses increased approximately $388,000 for the nine months
ended September 30, 2009 from the same period in 2008, reflecting increased
allocation of time of existing personnel and costs associated with business
development, professional conferences and exhibitions, marketing literature, and
updated web content.





RESEARCH
AND DEVELOPMENT





Internal
research and development expenses increased approximately $87,000 during the
nine months ended September 30, 2009 as compared to the same period in 2008. The
increase is related to the continued development of proprietary high voltage and
laser technologies.





Our
short-term research and development goals are to develop innovative laser
sources, novel high-voltage electrical products, efficient optical systems and
to engineer laser hardware to be more compact and rugged as an essential element
of maturing our LGE technology to be practical for
fielding.  Longer-term research objectives include development of
tunable and eye safe laser sources to improve safety and utility of LGE, adjunct
military and commercial applications for lasers to expand accessible markets for
our technology, and integrated weapon and counter-weapon system
technologies.





INTEREST
INCOME AND INTEREST EXPENSE





Net
interest income for the nine months ended September 30, 2009 was lower by
approximately $483,000 from the same period of 2008 primarily due to the lower
balance of invested funds and lower interest rates on our investments in
2009.





NET
LOSS





Our
operations for the nine months ended September 30, 2009 resulted in a net loss
of approximately $7.8 million, an increase of approximately $1.9 million
compared to the $5.8 million loss for the same period of 2008.





LIQUIDITY
AND CAPITAL RESOURCES





At
September 30, 2009, we had approximately $11.8 million of cash and cash
equivalents.  Our cash position decreased during the first nine months
of 2009 by approximately $3.7 million.  During the first nine months
of 2009, we used $3.5 million of cash in operating activities, which is
comprised of our net loss of $7.8 million, plus adjustments in non-cash
share-based compensation expense of $1.3 million, depreciation and amortization
of $499,000, loss on equipment disposal of $107,000, and the litigation
settlement payable in common shares of $1.2 million.  Changes in
assets and liabilities that provided cash include decreases in accounts
receivable of $1.4 million, prepaid expenses and deposits of $386,000, long-term
receivables of $253,000, accrued expenses of $68,000, and billings in excess of
costs of $20,000.  Changes in assets and liabilities that used cash
were a decrease in accounts payable of $558,000, and increases in other
receivables of $245,000 and inventory of $219,000.


- 15
-





As part
of our total cash use during the first nine months of 2009, investment
activities used approximately $9,000.  Financing activities used
approximately $131,000, primarily from the preferred stock cash dividends paid
in February, May, and August, 2009.





We
anticipate that short-term and long-term funding needs will be provided by the
cash flows from current and future contracts and existing cash and cash
equivalents.  We determined that we have sufficient working capital to
fulfill existing contracts and expected contracts in 2009 and 2010.





BACKLOG
OF ORDERS





At
September 30, 2009, we had a backlog (workload remaining on signed contracts) of
approximately $4.7 million to be completed within the next twelve
months.  The backlog does not include proposals and contracts under
negotiation.




- 16
-


ITEM
4.  CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Our
management, with the participation of our Principal Executive Officer and
Principal Accounting Officer, evaluated the effectiveness of our disclosure
controls and procedures as of September 30, 2009.  Based on that
evaluation, our Principal Executive Officer and Principal Accounting 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 nine months ended September 30, 2009, 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.




- 17
-


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





In
September, 2009, the court granted final approval of the settlement of the
consolidated class action lawsuits.  Under the terms of the
settlement, those lawsuits were dismissed with prejudice, and Applied Energetics
and all other defendants received a full and complete releae of all claims
asserted against them in the litigation, in exchange for the payment of an
aggregate of $5.3 million in cash and the issuance of 2,283,887 previously
unissued shares of common stock by Applied Energetics valued at $1.2
million.





In
October, 2009 the court granted final approval of the settlement of the
derivative action filed against our current and former officers and
directors.  Under the terms of the settlement of the derivative
action, the lawsuit was dismissed with prejudice, and all defendants received a
full and complete release of all claims asserted against them in the litigation,
in exchange for Applied Energetics’ maintenance of certain corporate governance
measures and the payment by our insurance carriers of $225,000 of attorneys’
fees. There was no admission of liability by any of the defendants in any of
these proceedings.





Insurance
proceeds of $6.2 million, less amounts reimbursed to Applied Energetics to pay
expenses of the litigations (approximately $646,000 to date), were paid directly
to the plaintiffs by our insurance carriers.





There was
no admission of liability by any of the defendants in any of the
litigations.  As stated in the settlement documents, Applied
Energetics denies any liability in connection with the litigation and denies the
claims asserted by the plaintiffs in the complaints.





ITEM
1A.  RISK FACTORS





Our
common stock could be delisted from the NASDAQ Global Market if we do not regain
compliance with the $1.00 minimum bid requirement, which would negatively impact
the liquidity of our stock.





On
September 17, 2009 we received a notice from The NASDAQ Stock Market stating
that the minimum bid price of our common stock was below $1.00 per share for 30
consecutive business days and that we were therefore not in compliance with
Marketplace Rule 5450(a)(2).   We have until March 16, 2010 to
regain compliance with the minimum closing bid requirement. In accordance with
Marketplace Rule 5810(c)(3)(a), we can regain compliance if the closing bid
price of our common stock meets or exceeds $1.00 per share for at least 10
consecutive business days.





If we do
not regain compliance by March 16, 2010, NASDAQ will provide written
notification to us that our securities are subject to delisting. In the event we
do not regain compliance by March 16, 2010, we may be eligible for an additional
180 calendar day grace period if we meet the initial listing standards, with the
exception of bid price, for the NASDAQ Capital Market. Although we believes that
we currently meet the initial listing requirements for the NASDAQ Capital Market
(other than the bid price) and intend to apply for such listing  if we
do not regain compliance with such requirement, we cannot assure you that we
will meet such requirements to  list our common stock on the NASDAQ
Capital Market.  The September 17, 2009 notification has no immediate
effect on the listing of our common stock pending the expiration of the grace
period. However, if we do not regain compliance and our stock is delisted,
trading in our stock will be more difficult and stockholder and investor
liquidity could suffer.





If
we fail to maintain compliance with applicable NASDAQ Rules and our stock is
delisted from the NASDAQ StockMarket, it may become subject to Penny Stock
Regulations and there will be less interest for our stock in the
market.





If our
stock is not listed on NASDAQ and fails to maintain a price of $5.00 or more per
share, our stock would become subject to the Securities and Exchange
Commission's "Penny Stock" rules. These rules require a broker to deliver, prior
to any transaction involving a Penny Stock, a disclosure schedule explaining the
Penny Stock Market and its risks. Additionally, broker/dealers who recommend
Penny Stocks to persons other than established customers and accredited
investors must make a special written suitability determination and receive the
purchaser's written agreement to a transaction prior to the sale.  If
our common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed and security holders may find it more difficult to
sell their securities.




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ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





At the
Annual Meeting of Stockholders of Applied Energetics, Inc. held on September 16,
2009, 71,381,276 shares of Applied Energetics’ Common Stock, or approximately
83% of the total Common Stock outstanding on the record date for such meeting,
were represented.





The
stockholders of Applied Energetics elected General James M. Feigley and Mr.
George Farley as Class II Directors to hold office until the 2012 Annual Meeting
of Stockholders, and until their respective successors have been duly elected
and qualified.  Of the shares voted with respect to the election of
General Feigley, 70,233,320 were voted in favor and 1,148,956 were
withheld.  Of the shares voted with respect to the election of Mr.
Farley, 52,616,811 were voted in favor and 18,764,465 were
withheld.





Continuing
as Class I Directors with a term expiring in 2011 are Messrs. John F. Levy and
Mark J. Lister.  Continuing as Class III Directors with terms expiring
in 2010 are Mr. James K. Harlan and Mr. David C. Hurley.





ITEM
      6.
            EXHIBITS





EXHIBIT
                                NUMBER
                              
                              DESCRIPTION10.1
                              
                              Agreement
      and Complete and Full General Release by and between Kenneth M. Wallace
      and the Registrant dated September 1, 2009.31.1
                              
                              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 Accounting 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
      Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


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SIGNATURES




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




APPLIED
      ENERGETICS, INC.By
                /s/ Joseph C. HaydenJoseph
      C. HaydenChief
      Operating Officer and Principal Executive
  Officer




Date:  November
9, 2009


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