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

                               Amendment No. 1 to
                                   FORM 10-QSB

[X]      QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR
         15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly period ended June 30, 2006

                        Commission file number 002-90519

                APPLIED DNA SCIENCES, INC.
  (Exact name of registrant as specified in its charter)

                   Nevada                                       59-2262718
      (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                     Identification Number)

    25 Health Sciences Drive, Suite 113
           Stony Brook, New York                                   11790
  (Address of Principal Executive Offices)                      (Zip Code)


                               (631) 444-6861
            (Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the last 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 is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                               Yes _____  No _X__

The number of shares of Common Stock,  $0.001 par value,  outstanding  on August
16, 2006, was 120,982,385 shares, held by approximately 1,341 shareholders.

Transitional Small Business Disclosure Format (check one):

                               Yes _____  No _X__

                                       -i-


<PAGE>


                                EXPLANATORY NOTE


This  Amendment No. 1 to Form 10-QSB/A (this  "Amendment")  amends the Quarterly
Report of Applied DNA  Sciences,  Inc.  (the  "Company")  on Form 10-QSB for the
quarter  ended  June  30,  2006,  as  filed  with the  Securities  and  Exchange
Commission on August 17, 2006 (the "Original  Filing").  This Amendment is being
filed for the purpose of correcting  errors in accounting for and disclosing the
issuance by the Company of warrants to acquire the Company's common stock.

We have not  updated  the  information  contained  herein for  events  occurring
subsequent to August 17, 2006, the filing date of the Original Filing.


                            APPLIED DNA SCIENCES, INC
           Amendment No. 1 to Quarterly Report on Form 10-QSB/A for the
                      Quarterly Period Ending June 30, 2006

                                Table of Contents



PART I.  FINANCIAL INFORMATION

   Item 1. Financial Statements

      Condensed Consolidated Balance Sheet: June 30, 2006 (Unaudited)       3

      Condensed Consolidated Statements of Losses:
      Three Months Ended June 30, 2006 and 2005 (Unaudited) and
      the Period from September 16, 2002 (Date of Inception)
      Through June 30, 2006 (Unaudited)                                     4

      Condensed Consolidated Statement of Stockholder's Equity
      (Deficiency): For the Period from September 16, 2002
      (Date of Inception) Through June 30 2006 (Unaudited)                  5

      Condensed Consolidated Statements of Cash Flows:
      Three Months Ended June 30, 2006 and 2005 (Unaudited) and
      the Period from September 16, 2002 (Date of Inception)
      Through  June 30, 2006 (Unaudited)                                    19

      Notes to Unaudited Condensed Consolidated Financial Information:
      June 30, 2006                                                        21-45

   Item 2. Management Discussion and Analysis                               46

   Item 3  Controls and Procedures                                          64


PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings                                                65

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      65

   Item 3. Defaults Upon Senior Securities                                  65

   Item 4. Submission of Matters to a Vote of Security Holders              66

   Item 5. Other Information                                                66

   Item 6. Exhibits                                                         66

Signatures                                                                  67

                                       -ii-


<PAGE>


                          PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

                          APPLIED DNA SCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                     CONDENSED CONSOLIDATED BALANCE SHEET
                                 JUNE 30, 2006
                                   RESTATED
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                        ASSETS
<S>                                                                                              <C>
Current assets:
Cash and cash equivalents                                                                        $   1,931,173
Accounts receivable                                                                                     18,900
Advances and other receivables                                                                          11,611
Prepaid expenses                                                                                       146,667
                                                                                                 --------------
Total current assets                                                                                 2,108,351

Property, plant and equipment-net of accumulated depreciation of $10,315                                38,286
Deposits                                                                                                 8,322
Capitalized finance costs                                                                            1,437,862

Intangible assets:
Patients, net of accumulated amortization of $16,881                                                    17,376
Intellectual property, net of accumulated amortization of $1,347,271                                 8,083,629
                                                                                                 --------------

Total Assets                                                                                     $  11,693,826
                                                                                                 ==============

                                  LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities                                                         $   4,680,849
Note payable- Related Party (Note G)                                                                   410,429
                                                                                                 --------------
Total current liabilities                                                                            5,091,278

Convertible notes payable, net of unamortized discount (Note  C)                                     3,306,371
Debt derivative and warrant liability (Note F)                                                       5,698,286

Commitments and contingencies (Note H)

Deficiency in Stockholders' Equity
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized;  60,000 issued and
outstanding                                                                                                  6
Common stock, par value $0.001 per share;  250,000,000 shares authorized;  118,582,385 issued
and outstanding                                                                                        118,582
Common stock subscription                                                                             (200,000)
Additional paid in capital                                                                          81,997,006
Accumulated deficit                                                                                (84,317,703)
                                                                                                 --------------
Total deficiency in stockholders' equity                                                            (2,402,109)

Total liabilities and Deficiency in Stockholders' Equity                                         $  11,693,826
                                                                                                 ==============
</TABLE>

See the accompanying notes to the unaudited condensed consolidated financial
statements

                                       -3-


<PAGE>


                          APPLIED DNA SCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
             CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSSES)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                          From
                                                                                                                       September
                                                                                                                           16,
                                                                                                                          2002
                                                                                                                       (Date of
                                                            For the Three                   For the Nine               Inception)
                                                                Months                        Months                    Through
                                                              Ended June 30,               Ended June 30,               June 30,
                                                          2006            2005            2006            2005            2006
                                                          ----            ----            ----            ----        -------------
                                                        RESTATED        RESTATED        RESTATED        RESTATED        RESTATED
                                                        --------        --------        --------        --------        --------
<S>                                                   <C>             <C>             <C>             <C>             <C>
Sales                                                 $      18,900   $           -   $      18,900   $           -   $      18,900
Cost of sales                                                15,639               -          15,639               -          15,639
                                                      --------------  --------------  --------------  --------------  --------------
Gross Profit                                                  3,261               -           3,261               -           3,261

Operating expenses:
Selling, general and administrative                       1,580,967       1,865,631       4,391,305      24,188,882      75,910,882
Research and development                                          -          88,870          75,276         345,958         968,711
Depreciation and amortization                               336,824           3,160       1,021,199          15,187       1,380,626
                                                      --------------  --------------  --------------  --------------  --------------
Total operating expenses                                  1,917,791       1,957,661       5,487,780      24,550,027      78,260,219
                                                      --------------  --------------  --------------  --------------  --------------

NET LOSS FROM OPERATIONS                                 (1,914,530)     (1,957,661)     (5,484,519)    (24,550,027)    (78,256,958)

Net gain  (loss)  in fair  value of debt  derivative
and warrant liabilities                                   3,493,961       5,679,175      14,250,621      16,454,928      30,951,611

Other income (expenses)                                       8,483             241          17,976           3,415          49,319
Interest income (expense)                                  (826,827)        (21,557)     (3,177,229)    (32,373,143)    (37,061,675)
                                                      --------------  --------------  --------------   ------------   --------------
Net income (loss) before provision for income taxes         761,087       3,700,198       5,043,099     (40,464,827)    (84,317,703)
                                                                  -
Income taxes (benefit)                                            -               -               -               -               -
                                                      --------------  --------------  --------------   ------------   --------------

NET INCOME (LOSS)                                     $     761,087   $   3,700,198   $   5,606,849   $ (40,464,827)  $ (84,317,703)
                                                      ==============  ==============  ==============  ==============  ==============

Net income (loss) per share-basic                     $        0.01   $        0.06   $        0.05   $       (0.83)
                                                      ==============  ==============  ==============  ==============

Net income (loss) per share-fully diluted             $        0.01   $        0.04   $        0.03
                                                      ==============  ==============  ==============

Weighted average shares outstanding-
    Basic                                               118,582,385      66,308,115     115,852,521      48,810,559
                                                      --------------  --------------  --------------  --------------
    Fully diluted                                       177,501,849     109,223,832     181,716,985
                                                      --------------  --------------  --------------
</TABLE>

See the accompanying notes to the unaudited condensed consolidated financial
statements

                                       -4-


<PAGE>
                         APPLIED DNA SCIENCES, INC
                      (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                               (Unaudited)
                                RESTATED
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital     Stock    Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                             <C>     <C>       <C>         <C>         <C>        <C>        <C>          <C>         <C>
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share          -         -      100,000  $      10   $     990  $     -    $       -    $      -    $    1,000

Net Loss                            -         -         -           -          -           -            -       (11,612)    (11,612)
                                ------  --------  ----------  ----------  ---------  ---------  -----------  ----------  ----------

Balance at September 30, 2002       -   $     -      100,000  $      10   $     990  $     -    $       -    $  (11,612) $  (10,612)
                                ======  ========  ==========  ==========  =========  =========  ===========  ==========  ==========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
 Inc on October 1, 2002             -         -   10,178,352       1,015       -           -            -           -         1,015

Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002                            -         -     (100,000)        (10)    (1,000)       -            -           -        (1,010)

Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share                               -         -      602,000          60     39,070        -            -           -        39,130

Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share                -         -      876,000          88     56,852        -        (56,940)        -           -

Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services                 -         -     (836,000)        (84)   (54,264)       -         54,340         -            (8)

Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003                        -         -    1,500,000         150     97,350        -            -           -        97,500

Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January  2003              -         -      586,250          58     76,155        -            -           -        76,213

Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003                    -         -        9,000           1        584        -            -           -           585

Issuance of common stock to
Founders in exchange for
services valued at $0.0001  per
share in March 2003                 -         -   10,140,000       1,014       -           -            -           -         1,014

Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003                 -         -       91,060          10    230,624        -            -           -       230,634
</TABLE>

See accompanying notes to the financial statements

                                      -5-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital     Stock    Subscription Development
                                Shares    Amount    Shares     Amount       Amount   Subscribed  Receivable     Stage       Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>         <C>         <C>        <C>        <C>          <C>
Issuance of common stock in
exchange for consulting services
valued at $ 0.065 per share in
March 2003                          -         -        6,000           1         389        -            -           -         390

Common stock subscribed in
exchange for cash at $1 per
share in March 2003                 -         -         -           -         18,000        -            -           -      18,000

Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003              -         -      860,000          86      55,814        -            -           -      55,900

Common stock issued in
exchange for cash at $ 1.00 per
share on April 9, 2003              -         -       18,000           2        -           -            -           -           2

Common stock issued in
exchange for consulting services
at $ 0.065 per share on April 9,
2003                                -         -        9,000           1         584        -            -           -         585

Common stock issued in
exchange for consulting services
at $ 2.50 per share on April 23,
2003                                -         -        5,000           1      12,499        -            -           -      12,500

Common stock issued in
exchange for consulting services
at $ 2.50 per share, on June 12,
2003                                -         -       10,000           1      24,999        -            -           -      25,000

Common stock issued in
exchange for cash at $ 1.00 per
share on June 17, 2003              -         -       50,000           5      49,995        -            -           -      50,000

Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 27, 2003          -         -         -           -           -        24,000          -           -      24,000

Common stock retired in
exchange for note payable
at $0.0118 per share,
in June 30, 2003                    -         -   (7,500,000)       (750)        750        -            -           -          -

Common stock issued in
exchange for consulting services
at $0.065 per share, on June 30,
2003                                -         -      270,000          27      17,523        -            -           -      17,550

Common stock subscribed in
exchange for cash at $ 1.00 per
share pursuant to private
placement on June 30, 2003          -         -         -           -           -        10,000          -           -      10,000

Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 30, 2003          -         -         -           -           -        24,000          -           -      24,000

Common stock issued in
exchange for consulting services
at approximately $2.01 per
share, July 2003                    -         -      213,060          21     428,798        -            -           -     428,819
</TABLE>

See accompanying notes to the financial statements

                                      -6-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)

<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital      Stock   Subscription Development
                                Shares    Amount    Shares     Amount      Amount    Subscribed  Receivable     Stage       Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>         <C>         <C>        <C>        <C>          <C>
Common stock canceled in July
2003, previously issued for
services rendered  at $2.50 per
share                               -         -      (24,000)         (2)    (59,998)       -          -            -       (60,000)

Common stock issued in
exchange for options exercised
at $1.00 per share in July 2003     -         -       20,000           2      19,998        -          -            -        20,000

Common stock issued in
exchange for exercised of
options previously subscribed at
$1.00 per share in July 2003        -         -       10,000           1       9,999    (10,000)       -            -            -

Common stock issued in
exchange for consulting services
at approximately $2.38 per
share, August 2003                  -         -      172,500          17     410,915        -          -            -       410,932

Common stock issued in exchange
for options exercised at $1.00
per share in August 2003            -         -       29,000           3      28,997        -          -            -        29,000

Common stock issued in
exchange for consulting services
at approximately $2.42 per
share, September 2003               -         -      395,260          40     952,957        -          -            -       952,997

Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-September 2003              -         -       19,200          2       47,998    (48,000)       -            -            -

Common stock issued in
exchange for cash at $2.50 per
share pursuant to private
placement September 2003            -         -        6,400           1      15,999        -          -            -        16,000

Common stock issued in
exchange for options exercised
at $1.00 per share in
September 2003                      -         -       95,000          10      94,991        -          -            -        95,001

Common stock subscription
receivable reclassification
adjustment                          -         -         -           -           -           -        2,600          -         2,600

Common Stock subscribed to
at $2.50 per share in September
2003                                -         -         -           -           -       300,000        -            -       300,000

Net Loss for the year
ended September 30, 2003            -         -         -           -           -           -          -     (3,445,164) (3,445,164)
                                 ------  -------  ----------  ----------  ----------  ---------  ---------  -----------  ----------

Balance at September 30, 2003       -    $    -   17,811,082  $    1,781  $2,577,568  $ 300,000  $     -    $(3,456,776) $ (577,427)
                                 ======  =======  ==========  ==========  ==========  =========  =========  ===========  ==========
</TABLE>

See accompanying notes to the financial statements

                                      -7-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)

<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital      Stock   Subscription Development
                                Shares    Amount    Shares     Amount      Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>          <C>          <C>       <C>        <C>         <C>
Preferred shares issues in
exchange for services at $25.00
per share, October 2003          15,000        15       -            -            -          -         -           -             15

Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003                 -         -      287,439           29      820,389       -         -           -        820,418

Common stock issued in
exchange  for cash at $2.50 per
share-subscription
payable-October 2003                -         -      120,000           12      299,988  (300,000)      -           -            -

Common stock canceled in
October 2003, previously issued
for services rendered  at $2.50
per share                           -         -     (100,000)         (10)    (249,990)      -         -           -       (250,000)

Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003                       -         -      100,000           10      299,990       -         -           -        300,000

Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003           -         -      100,000           10      249,990       -         -           -        250,000

Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003           -         -        6,400            1       15,999       -         -           -         16,000

Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003                -         -    2,125,500          213    5,504,737       -         -           -      5,504,950

Common Stock subscribed to
at $2.50 per share in
December 2003                       -         -         -            -            -      104,000       -           -        104,000

Beneficial conversion feature
relating to notes payable           -         -         -            -       1,168,474       -         -           -      1,168,474

Beneficial conversion feature
relating to warrants                -         -         -            -         206,526       -         -           -        206,526

Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
in December 2004                    -         -         -      10,223,166  (10,223,166)      -         -           -            -

Common Stock issued pursuant
to subscription at $2.50 share
in January 2004                     -         -       41,600       20,800       83,200  (104,000)      -           -            -

Common stock issued in
exchange for consulting services
at $2.95 per share, January 2004    -         -       13,040        6,520       31,948       -         -           -         38,468

Common stock issued in
exchange for consulting services
at $2.60 per share, January 2004    -         -      123,000       61,500      258,300       -         -           -        319,800
</TABLE>

See accompanying notes to the financial statements

                                      -8-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)

<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital      Stock   Subscription Development
                                Shares    Amount    Shares     Amount      Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>          <C>         <C>       <C>          <C>       <C>
Common stock issued in
exchange for consulting services
at $3.05 per share, January 2004    -         -        1,000         500       2,550        -            -           -       3,050

Common stock issued in
exchange for employee services
at $3.07 per share, February 2004   -         -        6,283       3,142      16,147        -            -           -      19,289

Common stock issued in
exchange for consulting services
at $3.04 per share, March 2004      -         -       44,740      22,370     113,640        -            -           -     136,010

Common Stock issued for
options exercised at $1.00 per
share in March 2004                 -         -       55,000      27,500      27,500        -            -           -      55,000

Common stock issued in
exchange for employee services
at $3.00 per share, March 2004      -         -        5,443       2,722      13,623        -            -           -      16,345

Common stock issued in
exchange for employee services
at $3.15 per share, March 2004      -         -        5,769       2,885      15,292        -            -           -      18,177

Preferred shared converted to
common shares for consulting
services at $3.00 per share,
March 2004                       (5,000)      (5)    125,000      62,500     312,500        -            -           -     374,995

Common stock issued in
exchange for employee services
at $3.03 per share, March 2004      -         -        8,806       4,400      22,238        -            -           -      26,638

Common Stock issued pursuant
to subscription at $2.50 per
share in March 2004                 -         -       22,500      11,250      (9,000)       -            -           -       2,250

Beneficial Conversion Feature
relating to Notes Payable                               -           -        122,362        -           -           -      122,362

Beneficial Conversion Feature       -         -
relating to Warrants                                    -           -        177,638        -            -           -     177,638

Common stock issued in
exchange for consulting services
at $2.58 per share, April 2004      -         -        9,860       4,930      20,511        -            -           -      25,441

Common stock issued in
exchange for consulting services
at $2.35 per share, April 2004      -         -       11,712       5,856      21,667        -            -           -      27,523

Common stock issued in
exchange for consulting services
at $1.50 per share, April 2004      -         -      367,500     183,750     367,500        -            -           -     551,250

Common stock returned to
treasury at $0.065 per share,
April 2004                          -         -      (50,000)    (25,000)     21,750        -            -           -      (3,250)

Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004                         (4,000)      (4)    100,000      50,000      51,250        -            -           -     101,246

Common stock issued per
subscription May 2004               -         -       10,000       5,000      (4,000)       -        (1,000)        -          -
</TABLE>

See accompanying notes to the financial statements

                                      -9-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital      Stock   Subscription Development
                                Shares    Amount    Shares     Amount      Amount    Subscribed  Receivable     Stage       Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>          <C>         <C>       <C>         <C>        <C>
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004                   -         -      137,000      68,500      50,730        -            -           -     119,230

Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004                   -         -       26,380      13,190      17,147        -            -           -      30,337

Common stock returned to
treasury at $0.065 per
share, June 2004                    -         -       (5,000)     (2,500)     2,175         -            -           -        (325)

Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004                  -         -      270,500     135,250      45,310        -            -           -     180,560

Common stock issued in
exchange for consulting services
at $0.89 per share in June 2004     -         -        8,000       4,000       3,120        -            -           -       7,120

Common stock issued in
exchange for consulting services
at $0.65 per share in June 2004     -         -       50,000      25,000       7,250        -            -           -      32,250

Common stock issued pursuant
to private placement at $1.00
per share in June 2004              -         -      250,000     125,000     125,000        -            -           -     250,000

Common stock issued in
exchange for consulting services
at $0.54 per share in July 2004     -         -      100,000      50,000       4,000        -            -           -      54,000

Common stock issued in
exchange for consulting services
at $0.72 per share in July 2004     -         -        5,000       2,500       1,100        -            -           -       3,600

Common stock issued in
exchange for consulting services
at $0.47 per share in July 2004     -         -      100,000      50,000      (2,749)       -            -           -      47,251

Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004                -         -      100,000      50,000     (11,000)       -            -           -      39,000

Preferred stock converted
to common stock for
consulting services at
$0.39 per share in August 2004   (2,000)      (2)     50,000      25,000      (5,500)       -            -           -      19,498

Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004                -         -      100,000      50,000         250        -            -           -      50,250

Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004                -         -      200,000     100,000      12,500        -            -           -     112,500

Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004                -         -       92,500      46,250      (8,605)       -            -           -      37,645

Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004             -         -    1,000,000     500,000      17,500        -            -           -     517,500
</TABLE>

See accompanying notes to the financial statements

                                      -10-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)

<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred              Common      Paid in     Common       Stock       During
                              Preferred   Shares    Common      Stock      Capital      Stock   Subscription Development
                                Shares    Amount    Shares     Amount      Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>         <C>          <C>         <C>       <C>      <C>           <C>
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004             -         -        5,000        2,500        (212)      -         -           -            2,288

Common stock issued pursuant
to subscription at $0.50 per
share in September 2004             -         -       40,000       20,000        -          -         -           -           20,000

Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004                   (4,000)      (4)    100,000       50,000       4,000       -         -           -           53,996

Preferred shares issued in
exchange for service at $25 per
share in September 2004          60,000        6        -            -      1,499,994       -         -           -        1,500,000

Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services
rendered at approximately $0.71
per warrant in September  2004      -         -         -            -      2,019,862       -         -           -        2,019,862


Net Loss                            -         -         -            -           -          -         -    (19,358,258) (19,358,258)
                                 ------  -------  ----------  -----------  ----------  --------  -------  ------------  -----------
Balance at September 30, 2004    60,000  $     6  23,981,054  $11,990,527  $6,118,993  $    -    $(1,000) $(22,815,034) $(4,706,508)
                                 ======  =======  ==========  ===========  ==========  ========  =======  ============  ===========
</TABLE>

See accompanying notes to the financial statements

                                      -11-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>       <C>    <C>          <C>        <C>         <C>       <C>          <C>         <C>
Common stock issued in
exchange for consulting services
at $0.68 per share in October
2004                                -         -      200,000     100,000      36,000        -            -           -     136,000

Common stock returned
to treasury at $0.60 per share
in October 2004                     -         -   (1,069,600)   (534,800)   (107,297)       -            -           -    (642,097)

Common stock issued in exchange
for consulting services at $0.60
per share in October 2004           -         -       82,500      41,250       8,250        -            -           -      49,500

Common Stock issued pursuant to
subscription at $0.60 per share
in October 2004                     -         -      500,000     250,000      50,000   (300,000)         -           -          -

Common stock issued in exchange
for consulting servicesat $0.50
per share in October 2004           -         -      532,500     266,250        -           -            -           -     266,250

Common Stock issued in exchange
for debt at $0.50 per share
in October 2004                     -         -      500,000     250,000        -           -            -           -     250,000

Common Stock issued pursuant to
subscription at $0.45 per share
in October 2004                     -         -    1,000,000     500,000     (50,000)  (450,000)         -           -          -

Common stock issued in exchange
for consulting services at $0.45
per share in October 2004           -         -      315,000     157,500     (15,750)       -            -           -     141,750

Common Stock issued in
exchange for consulting
services at $0.47 per share
in November 2004                    -         -      100,000      50,000      (3,000)       -            -           -      47,000

Common Stock issued in
exchange for consulting
services at $0.80 per share
in November 2004                    -         -      300,000     150,000      90,000        -            -           -     240,000

Common Stock issued in
exchange for consulting
services at $1.44 per share
in November 2004                    -         -      115,000      57,500     108,100        -            -           -     165,600

Common Stock issued in
exchange for employee
services at $1.44 per share
in November 2004                    -         -        5,000       2,500       4,700        -            -           -       7,200
</TABLE>

See accompanying notes to the financial statements

                                      -12-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>       <C>    <C>         <C>         <C>          <C>       <C>         <C>         <C>
Warrants exercised
at $0.60 per share
in November 2004                    -         -       60,000      30,000       6,000     (4,000)         -           -      32,000

Beneficial Conversion discount
relating to Notes Payable           -         -         -           -      1,465,000        -            -           -   1,465,000

Common stock issued at $0.016
per share in exchange for note
payable in December 2004            -         -    5,500,000   2,750,000  (2,661,500)       -            -           -      88,500

Common stock issued in
settlement of debt at $0.50 per
share in December 2004              -         -    2,930,000   1,465,000        -      (125,000)         -           -   1,340,000

Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $0.52 per warrant in October
and December  2004                  -         -         -           -      3,169,052        -            -           -   3,169,052

Warrants exercised at $0.10 per
share in January 2005               -         -       25,000      12,500     (10,000)       -            -           -       2,500

Common Stock issued in
settlement of debt at $0.33 per
share in January 2005               -         -    1,628,789     814,395    (276,895)       -            -           -     537,500

Warrants exercised at $0.10 per
share in January 2005               -         -       17,500       8,750      (7,000)       -            -           -       1,750

Common Stock issued in
settlement of debt at $0.33 per
share in January 2005               -         -    2,399,012   1,199,504    (407,830)       -            -           -     791,674

Common Stock issued in
exchange for consulting
services at $1.30 per share         -         -      315,636     157,818     252,508        -            -           -     410,326
in January 2005

Fair value of warant liability
reclassed due to registration
rights granted in
February  2005                      -         -         -           -     (3,108,851)       -            -           -   (3,108,851)

Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005                    -         -    5,796,785   2,898,393   5,418,814        -            -           -   8,317,207

Fair value of 55,000 warrants
issued to consultants for
services at $1.31 per warrant
in February  2005                   -         -         -           -         72,017        -            -           -     72,017

Common Stock issued in
settlement of debt at $0.33 per
share in February 2005              -         -       75,757      37,879     (12,879)       -            -           -      25,000
</TABLE>

See accompanying notes to the financial statements

                                      -13-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>     <C>      <C>          <C>         <C>        <C>          <C>         <C>      <C>
Warrants exercised at $0.10 per
share in February 2005              -         -       20,000      10,000      (8,000)       -            -           -       2,000

Common Stock issued in
settlement of debt at $0.33 per
share in February 2005              -         -      606,060     303,030    (103,030)       -            -           -     200,000

Warrants exercised at $0.10 per
share in February 2005              -         -       45,000      22,500     (18,000)       -            -           -       4,500

Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005                                -         -    1,500,000     750,000   1,215,000        -            -           -   1,965,000

Common Stock issued in
settlement of debt at $0.33 per
share in February 2005              -         -      278,433     139,217     (47,334)       -            -           -      91,883

Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005                                -         -       17,236       8,618      11,548        -            -           -      20,166

Common stock issued in
exchange for debt at $0.50 per
share in February 2005              -         -      300,000     150,000        -           -            -           -     150,000

Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005                    -         -      716,500     358,250     322,425        -            -           -     680,675

Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005                    -         -       10,500       5,250       4,725        -            -           -       9,975

Common stock issued in
exchange for debt at $0.50 per
share in March 2005                 -         -   13,202,000   6,601,000        -           -            -           -   6,601,000

Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005                       -         -      185,000      92,500     127,650        -            -           -     220,150

Options exercised at $0.60 per
share in March 2005                 -         -      100,000      50,000      10,000        -            -           -      60,000

Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005                       -         -    1,675,272     837,636     804,131        -            -           -   1,641,767
</TABLE>

See accompanying notes to the financial statements

                                      -14-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>       <C>    <C>         <C>          <C>         <C>        <C>           <C>      <C>
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005                       -         -       24,333       12,167      10,219        -            -           -      22,386

Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005                       -         -       15,000        7,500       7,350        -            -           -      14,850

Common stock issued in exchange
for debt at $0.50 per
share in March 2005                 -         -    1,240,000      620,000        -           -            -           -     620,000

Common stock canceled for
shares issued in exchange of
debt in March 2005                  -         -     (500,000)    (250,000)       -           -            -           -    (250,000)

Common stock subscribed
Canceled in March 2005              -         -         -            -           -       750,000          -           -     750,000

Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005                       -         -       10,000        5,000       3,900        -            -           -       8,900

Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
Mar-05                              -         -         -     (32,312,879) 32,312,879        -            -           -          -

Beneficial Conversion discount
relating to Notes Payable in
March 2005                          -         -         -            -      7,371,000        -            -           -   7,371,000

Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005                 -         -         -            -        180,000        -            -           -     180,000

Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005    -         -      160,000          160     127,840        -            -           -     128,000

Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005    -         -       40,000           40      31,960        -            -           -      32,000
</TABLE>

See accompanying notes to the financial statements

                                      -15-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>       <C>    <C>           <C>       <C>         <C>        <C>         <C>         <C>
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005    -         -      850,000         850     636,650         -           -           -     637,500

Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005    -         -      500,000         500     164,500         -           -           -     165,000

Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share                               -         -      (10,000)        (10)    (34,190)        -           -           -     (34,200)

Common Stock issued in
settlement of debt at $0.33 per
share in April 2005                 -         -       75,758          77      24,923    (25,000)         -           -          -

Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005    -         -       50,000          50      33,950         -           -           -      34,000

Proceeds received against
subscription Payable in June
2005                                -         -           -            -          -     118,000          -           -     118,000

Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share                               -         -      (10,000)        (10)     (4,990)        -           -           -      (5,000)

Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock    -         -           -            -    (180,000)        -           -           -    (180,000)

Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005     -         -      157,000         157      94,043         -           -           -      94,200

Common Stock issued in exchange
for intellectual property
at $0.67 per share in July 2005     -         -   36,000,000      36,000  24,084,000         -           -           -   24,120,000

Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005                        -         -      640,000         640     383,360         -           -           -     384,000

Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005     -         -    8,000,000       8,000   3,832,000         -           -           -   3,840,000
</TABLE>

See accompanying notes to the financial statements

                                      -16-
<PAGE>
                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>    <C>     <C>          <C>         <C>         <C>        <C>      <C>           <C>
Common Stock issued in
exchange for consulting
services at $0.94 per share
in July 2005                        -       -      121,985         121      168,217        -        -             -         168,338

Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005                      -       -      250,000         250      119,750        -        -             -         120,000

Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share
in September 2005                   -       -      814,158         814      501,858        -        -             -         502,672

Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share
in September 2005                   -       -      391,224         391      273,466        -        -             -         273,857

Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005                   -       -      185,000         185      173,715        -        -             -         173,900

Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share                     -       -     (740,000)       (740)    (453,232)    56,000    1,000           -        (396,972)

Net Loss                            -       -          -           -            -          -        -     (67,109,519)  (67,109,519)
                                 ------  -----  -----------  ---------  -----------  ---------  -------  ------------  ------------
Balance as of September
30, 2005                         60,000  $   6  112,230,392  $ 112,230  $82,320,715  $  20,000  $   -    $(89,924,553) $ (7,471,602)
                                 ======  =====  ===========  =========  ===========  =========  =======  ============  ============
</TABLE>

See accompanying notes to the financial statements

                                      -17-
<PAGE>

                          APPLIED DNA SCIENCES, INC
                       (A development stage company)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
  FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
                                (Unaudited)
                                 RESTATED
                                (Continued)

<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                         Additional                          Accumulated
                                        Preferred               Common     Paid in     Common       Stock       During
                              Preferred   Shares    Common       Stock     Capital      Stock   Subscription Development
                                Shares    Amount    Shares      Amount     Amount    Subscribed  Receivable     Stage      Total
                              --------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
<S>                              <C>       <C>   <C>          <C>        <C>         <C>        <C>         <C>          <C>
Common stock issued pursuant
to subscription at $0.50 per
share in October 2005               -         -      400,000        400     199,600   (200,000)         -           -            -

Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005                     -         -      100,000        100      74,900        -            -           -        75,000

Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share         -         -     (350,000)      (350)   (209,650)       -            -           -      (210,000)

Common stock issued pursuant
to subscription at $0.50 per
share in December 2005              -         -       40,000         40      19,960    (20,000)         -           -            -

Common Stock to investors
pursuant to registration rights
agreement at $0.51 per share in
December 2005                       -         -      505,854        506     257,480        -            -           -       257,986

Common Stock returned in
January 2006, previously issued
for services rendered at $0.60
per share                           -         -     (250,000)      (250)   (149,750)       -            -           -      (150,000)

Common Stock issued to investors
pursuant to registration rights
agreement at $0.32 per share
in January 2006                     -         -      806,212        806     257,182        -            -           -       257,988

Common Stock issued to investors
pursuant to registration rights
agreement at $0.20 per share
in January 2006                     -         -    1,289,927      1,290     256,695        -            -           -       257,985

Fair value of 200,000 warrants
issued to consultants for
services at $0.22 per warrant
in January  2006                    -         -          -          -        43,098        -            -           -        43,098

Common Stock issued in exchange
for consulting services at $0.17
per share in February 2006          -         -      160,000        160      27,040        -            -           -        27,200

Common Stock issued in exchange
for consulting services at $0.16
per share in February 2006          -         -    3,800,000      3,800     604,200        -            -           -       608,000

Common Stock returned in
March 2006, previously issued
for services rendered at $0.80
per share                           -         -     (150,000)      (150)   (119,850)       -            -           -     (120,000)

Previously issued warrants
reclassed to warrant liability      -         -          -          -    (1,584,614)       -            -           -    (1,584,614)

Net Income                          -         -          -          -           -          -            -     5,606,849   5,606,849
                                 ------ -------  -----------  ---------  ----------  ---------  ----------- -----------  ----------
Balance as of June 30, 2006      60,000       6  118,582,385    118,582  81,997,006   (200,000)         -   (84,317,703) (2,402,109)
                                 ====== =======  ===========  =========  ==========  =========  =========== ===========  ==========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements

                                      -18-
<PAGE>

                            APPLIED DNA SCIENCES, INC
                          (A DEVELOPMENT STAGE COMPANY)
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                  For the Period
                                                                                                                September 16, 2002
                                                                                                                (Date of Inception)
                                                                        For the nine months ended June 30,           through
                                                                            2006                 2005             June 30, 2006
                                                                        --------------      --------------       --------------
                                                                          RESTATED             RESTATED              RESTATED
<S>                                                                     <C>                 <C>                  <C>
Cash flows from operating activities:
Net income (loss)                                                       $   5,606,849       $ (40,464,827)       $ (84,317,703)
Adjustments to reconcile net loss to net used in operating activities:
Depreciation and amortization                                               1,021,199              15,187            1,368,711
Organization expenses                                                                                                   88,500
Preferred shares issued in exchange for services                                    -                   -            1,500,000
Warrants issued to consultants                                                 43,100           3,241,068            9,421,530
Income   attributable  to  repricing  of  warrants  and  debt
derivatives                                                               (14,250,621)        (16,454,929)         (30,951,611)
Financing costs attributable to issuance of warrants                        2,271,000          23,148,214           25,418,674
Amortization  of  beneficial  conversion  feature-convertible
notes                                                                                           8,836,000           10,461,000
Amortization of capitalized financing costs                                   247,238                   -              247,238
Amortization  of debt discount  attributable  to  convertible
debenture                                                                     276,090                   -              276,090

Fair value of common stock issued to related  party in excess
of previously incurred debt                                                         -           1,365,000            1,365,000
Common stock issued in exchange for services                                  710,200          13,396,202           31,284,573
Common  stock   exchanged   for   intellectual   property  in
connection with costs of acquiring intangible assets                                -                   -           14,689,100
Common stock issued as penalty in connection financing                        773,958                                1,550,487
Common stock canceled-previously issued for services rendered                (480,000)           (181,298)          (1,343,845)
Change in assets and liabilities:
Increase in accounts receivable                                               (18,900)                                 (18,900)
Increase in prepaid expenses and deposits                                    (145,849)            (33,291)            (163,472)
Decrease in other assets                                                        5,940                   -               (3,128)
Decrease in due related parties                                               (52,662)            (20,631)                   -
Increase   (decrease)   in   accounts   payable  and  accrued
liabilities                                                                 1,685,792            (833,465)           4,085,745
                                                                        --------------      --------------       --------------
Net cash used in operating activities                                      (2,306,666)         (7,986,770)         (15,042,011)

Cash flows from investing activities:
Payments for patent filing                                                          -              (4,347)             (25,698)
Capital expenditures                                                          (35,851)                  -              (48,602)
                                                                        --------------      --------------       --------------
Net cash used in investing activities                                         (35,851)             (4,347)             (74,300)

Cash flows from financing activities:
Proceeds from sale of common stock, net of cost                                                         -              432,000
Proceeds from issuance of convertible notes                                 4,242,500           9,079,000           13,446,500
Proceeds form exercise of options and warrants                                      -             102,750              343,750
Payment of debt                                                                     -                   -              (24,854)
Proceeds from loans                                                                 -                   -            2,750,000
Advances from shareholders                                                          -                   -              100,088
                                                                        --------------      --------------       --------------
Net cash provided by financing activities                                   4,242,500           9,181,750           17,047,484

Net increase in cash and cash equivalents                                   1,899,983           1,190,633            1,931,173
Cash and cash equivalents at beginning of period                               31,190               1,832                    -
                                                                        --------------      --------------       --------------
Cash and cash equivalents at end of period                              $   1,931,173       $   1,192,465        $   1,931,173
                                                                        ==============      ==============       ==============
</TABLE>

See the accompanying notes to the unaudited condensed consolidated financial
statements


                                      -19-
<PAGE>

                            APPLIED DNA SCIENCES, INC
                          (A DEVELOPMENT STAGE COMPANY)
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                  For the Period
                                                                                                                September 16, 2002
                                                                                                                (Date of Inception)
                                                                        For the nine months ended June 30,           through
                                                                            2006                2005              June 30, 2006
                                                                        --------------      --------------       --------------
                                                                          RESTATED             RESTATED              RESTATED
<S>                                                                     <C>                 <C>                  <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest                                                -                   -                    -
Cash paid during period for taxes                                                   -                   -                    -

Non-cash transactions:
Common stock issued for services                                              710,200          13,396,202           31,284,573
Common stock issued in exchange for previously incurred debt                        -           2,313,500            2,313,500
Common stock canceled-previously issued for services rendered                (480,000)           (181,298)          (1,343,845)
Beneficial conversion feature attributable to convertible notes                                 8,836,000           10,461,000
Preferred shares in exchange for services                                           -                   -            1,500,000
Warrants issued to consultants                                                 43,100           3,241,068            9,421,530

Warrants issued in exchange for financing costs                             2,271,000          23,148,214           25,418,674

Acquisition:
Common stock retained                                                               -               1,015                1,015
Assets acquired                                                                     -                (135)                (135)
                                                                        --------------      --------------       --------------
Total consideration paid                                                            -                 880                  880
                                                                        --------------      --------------       --------------
Organizational expenses-note issued in exchange for shares retired                                                      88,500
Common stock issued in exchange for note payable                                                                        88,500
</TABLE>

See the accompanying notes to the unaudited condensed consolidated financial
statements


                                      -20-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

General

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB/A, and therefore, do
not include all the information  necessary for a fair  presentation of financial
position,  results of  operations  and cash flows in conformity  with  generally
accepted accounting principles.

In the opinion of management,  all adjustments  (consisting of normal  recurring
accruals)  considered  necessary  for a fair  presentation  have been  included.
Operating  results for the three and nine month  periods ended June 30, 2006 are
not  necessarily  indicative  of the results that may be expected for the fiscal
year ending September 30, 2006. The unaudited condensed  consolidated  financial
statements  should be read in conjunction  with the  consolidated  September 30,
2005 financial  statements and footnotes  thereto  included in the Company's SEC
Form 10-KSB, as amended.

Business and Basis of Presentation

On  September  16,  2002,  Applied  DNA  Sciences,   Inc.  (the  "Company")  was
incorporated  under  the laws of the  State of  Nevada.  The  Company  is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded  biotechnology  security  solutions in the United States.  To date, the
Company has generated  nominal  sales  revenues,  has incurred  expenses and has
sustained  losses.  Consequently,  its  operations  are subject to all the risks
inherent in the establishment of a new business enterprise.  For the period from
inception  through  June  30,  2006,  the  Company  has  accumulated  losses  of
$84,317,703.

The consolidated  financial  statements include the accounts of the Company, and
its wholly-owned  subsidiary  ProHealth Medical  Technologies,  Inc. Significant
inter-company transactions have been eliminated in consolidation.

Reclassification

Certain prior period amounts have been reclassified for comparative purposes.

Property and Equipment

Property and equipment are stated at cost and  depreciated  over their estimated
useful  lives of 3 to 5 years using the straight  line method.  At June 30, 2006
property and equipment consist of:

<TABLE>
<S>                             <C>
Computer equipment              $   15,328
Furniture                           33,273
Accumulated  depreciation          (10,315)
                                -----------

Net                             $   38,286
</TABLE>

Stock Based Compensation

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  this
statement  amends  the  disclosure  requirements  of  SFAS  No.  123 to  require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported  results.  The Company has chosen to continue to account
for stock-based  compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related  interpretations.  Accordingly,  compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the  Company's  stock at the date of the grant  over the  exercise  price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial  reports for the year ended  September 30, 2003 and for
the subsequent periods.

Had compensation  costs for the Company's stock options been determined based on
the fair value at the grant dates for the  awards,  the  Company's  net loss and
losses  per share  would  have been as  follows  (transactions  involving  stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):


                                      -21-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

<TABLE>
<CAPTION>
                                                                                                     For the Period
                                                                                                     September, 16
                                                                                                     2002 (Date of
                            For The Three     For The Three     For The Nine       For The Nine        Inception
                            Months ended      Months ended      Months ended       Months ended         through
                              June 30,          June 30,          June 30,           June 30,           June 30,
                                2006              2005              2006               2005               2006
<S>                           <C>               <C>               <C>              <C>                <C>
Net income  (loss) - as
reported                      $   761,087       $ 3,700,198       $ 5,606,849      $ (40,464,827)     $ (84,317,703)
Add:  Total stock based
employee   compensation
expense   as   reported
under  intrinsic  value
method (APB No. 25)                    --                --                --                 --                 --
Deduct:   Total   stock
based          employee
compensation    expense
as reported  under fair
value  method  (APB No.
123)                                             (1,406,350)                          (1,406,350)        (1,406,350)
                              ------------      ------------      ------------     --------------     --------------
Net  income   (loss)  -
Pro Forma                     $   761,087       $ 2,293,848       $ 5,606,849      $ (41,871,177)     $ (85,724,053)
                              ============      ============      ============     ==============     ==============
Net    income    (loss)
attributable  to common
stockholders    -   Pro
Forma                         $   761,087       $ 2,293,848       $ 5,606,849      $ (41,871,177)     $ (85,724,053)
                              ============      ============      ============     ==============     ==============
Basic   income   (loss)
per share - as reported       $      0.01       $      0.06       $      0.05      $       (0.83)
                              ============      ============      ============     ==============
Basic   income   (loss)
per share - Pro Forma         $      0.01       $      0,04       $      0.04      $       (0.86)
                              ============      ============      ============     ==============

Fully diluted income per
    share - as reported       $      0.01       $      0.04       $      0.03             N/A               N/A
                              ============      ============      ============     ==============     ==============
Fully diluted income per
     share - Pro Forma        $      0.01       $      0.03       $      0.03             N/A               N/A
                              ============      ============      ============     ==============     ==============
</TABLE>


                                      -22-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

On December 16, 2004,  the Financial  Accounting  Standards  Board (FASB) issued
FASB  Statement  No.  123R  (revised  2004),  "Share-Based  Payment"  which is a
revision of FASB Statement No. 123,  "Accounting for Stock-Based  Compensation".
Statement 123R  supersedes APB opinion No. 25,  "Accounting  for Stock Issued to
Employees",  and amends  FASB  Statement  No.  95,  "Statement  of Cash  Flows".
Generally,  the approach in Statement 123R is similar to the approach  described
in Statement 123. However,  Statement 123R requires all share-based  payments to
employees,  including grants of employee stock options,  to be recognized in the
income statement based on their fair values.  Pro-forma  disclosure is no longer
an  alternative.  On April 14, 2005,  the SEC amended the effective  date of the
provisions of this  statement.  The effect of this  amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this  statement  will have on Company's  consolidated
financial statements.

Revenue Recognition

Revenues are  recognized in the period that  services are provided.  For revenue
from product  sales,  the Company  recognizes  revenue in accordance  with Staff
Accounting  Bulletin No. 104, REVENUE RECOGNITION  ("SAB104"),  which superseded
Staff Accounting Bulletin No. 101, REVENUE  RECOGNITION IN FINANCIAL  STATEMENTS
("SAB101"). SAB 101 requires that four basic criteria must be met before revenue
can be  recognized:  (1)  persuasive  evidence  of an  arrangement  exists;  (2)
delivery has occurred; (3) the selling price is fixed and determinable;  and (4)
collectibility is reasonably assured.  Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products  delivered and the  collectibility of those amounts.  Provisions
for discounts and rebates to customers,  estimated  returns and allowances,  and
other  adjustments  are  provided  for in the same period the related  sales are
recorded.  The  Company  defers any  revenue  for which the product has not been
delivered  or is subject  to refund  until  such time that the  Company  and the
customer jointly determine that the product has been delivered or no refund will
be required. At June 30, 2006 the Company did not have any deferred revenue.

SAB 104 incorporates  Emerging Issues Task Force 00-21 ("EITF 00-21"),  MULTIPLE
DELIVERABLE   REVENUE   ARRANGEMENTS.   EITF  00-21  addresses   accounting  for
arrangements that may involve the delivery or performance of multiple  products,
services and/or rights to use assets.  The effect of implementing  EITF 00-21 on
the Company's financial position and results of operations was not significant.

Concentrations of Credit Risk

Financial instruments and related items which potentially subject the Company to
concentrations  of credit risk consist  primarily of cash, cash  equivalents and
trade  receivables.  The Company places its cash and temporary cash  investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. The Company periodically reviews its trade receivables
in determining its allowance for doubtful accounts.  At June 30, 2006, allowance
for doubtful receivable was $0.

Derivative Financial Instruments

The Company's derivative  financial  instruments consist of embedded derivatives
related to the 10% Secured  Convertible  Promissory  Notes (the "Serial  Notes")
entered into in 2006 (see Note D). These embedded  derivatives  include  certain
conversion  features,  variable  interest  features,  call  options  and default
provisions.   The  accounting  treatment  of  derivative  financial  instruments
requires that the Company recorded the derivatives and related warrants at their
fair  values  as of the  inception  date of the  Note  Agreement  (estimated  at
$2,419,719)  and at fair value as of each  subsequent  balance  sheet  date.  In
addition,  under  the  provisions  of EITF  Issue  No.  00-19,  "Accounting  for
Derivative  Financial  Instruments  Indexed  to, and  Potentially  Settled in, a
Company's  Own  Stock," as a result of entering  into the Notes,  the Company is
required to  classify  all other  non-employee  stock  options  and  warrants as
derivative  liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were  reclassified  as liabilities  from
additional  paid-in  capital  in the nine  months  ended June 30,  2006  totaled
$1,584,614. Any change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting  date. If the fair value of the  derivatives
is higher at the  subsequent  balance  sheet  date,  the  Company  will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the  subsequent  balance  sheet  date,  the Company  will record  non-operating,
non-cash income.  Conversion-related  derivatives were valued using the Binomial
Option  Pricing  Model with the  following  assumptions:  dividend  yield of 0%;
annual  volatility of 111 to 112%;  and risk free interest rate of 4.96 to 5.15%
as well as  probability  analysis  related to trading volume  restrictions.  The
remaining  derivatives  were valued using  discounted cash flows and probability
analysis. The derivatives are classified as long-term liabilities (see Note F).


                                      -23-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

New Accounting Pronouncements

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional  Asset Retirement  Obligations,  an interpretation of FASB Statement
No. 143," which  requires an entity to recognize a liability  for the fair value
of a conditional  asset  retirement  obligation when incurred if the liability's
fair value can be  reasonably  estimated.  The  Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
adopted  this  interpretation  from  January  1,  2006.  The  adoption  of  this
Interpretation  did not have a  material  impact on its  consolidated  financial
position, results of operations or cash flows.

In May 2005 the FASB issued Statement of Financial  Accounting  Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle,  unless
it is  impracticable  to  determine  either the  period-specific  effects or the
cumulative  effect of the  change.  SFAS 154 also  requires  that  retrospective
application of a change in accounting principle be limited to the direct effects
of the change.  Indirect effects of a change in accounting principle,  such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change,  should be recognized in the period of the accounting  change.  SFAS 154
also requires that a change in depreciation,  amortization,  or depletion method
for long-lived,  non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS 154 is effective for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after December 15, 2005. Early adoption is permitted for accounting  changes and
corrections  of  errors  made in  fiscal  years  beginning  after  the date this
Statement  is issued.  The  Company  adopted of this SFAS with its  restatements
included within.

On February 16, 2006 the Financial Accounting Standards Board (FASB) issued SFAS
155,  "Accounting  for  Certain  Hybrid  Instruments,"  which  amends  SFAS 133,
"Accounting for Derivative  Instruments and Hedging  Activities,"  and SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities."  SFAS 155  allows  financial  instruments  that have  embedded
derivatives  to be accounted for as a whole  (eliminating  the need to bifurcate
the  derivative  from its host) if the holder  elects to  account  for the whole
instrument on a fair value basis.  SFAS 155 also  clarifies  and amends  certain
other  provisions of SFAS 133 and SFAS 140. This  statement is effective for all
financial  instruments  acquired  or  issued  in fiscal  years  beginning  after
September  15,  2006.  The  Company  does not  expect its  adoption  of this new
standard  to have a  material  impact  on its  financial  position,  results  of
operations or cash flows.

In March 2006, the FASB issued FASB Statement No. 156,  Accounting for Servicing
of Financial  Assets - an amendment to FASB  Statement  No. 140.  Statement  156
requires that an entity recognize a servicing asset or servicing  liability each
time it undertakes an obligation to service a financial asset by entering into a
service  contract  under certain  situations.  The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not expect its
adoption  of this  new  standard  to have a  material  impact  on its  financial
position, results of operations or cash flows.

NOTE B - INTANGIBLE ASSETS AND AMORTIZATION

The Company has adopted  SFAS No. 142,  Goodwill  and Other  Intangible  Assets,
whereby the Company  periodically test its intangible assets for impairment.  On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment,  and write-downs
will be included in results from operations.

Biowell Technology, Inc.

On July 12, 2005, the Company  acquired  certain  intellectual  properties  from
Biowell  Technology,  Inc.  ("Biowell")  through  an  Asset  Purchase  Agreement
("Agreement")  in exchange  for 36 million  shares of the  Company's  restricted
common  stock  having  an  aggregate  fair  value  at the  date of  issuance  of
$24,120,000.   The  intangible   assets  acquired  consist  of  proprietary  DNA
anti-counterfeit  trade secrets  created by Biowell that are intended to protect
intellectual property from counterfeiting,  fraud, piracy, product diversion and
unauthorized intrusion.


                                      -24-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE B - INTANGIBLE ASSETS AND AMORTIZATION (continued)

The purchase price has been allocated as follows:

Amortizable intangible assets acquired are comprised of:

<TABLE>
<S>                                                       <C>
Developed core technologies                               $ 2,260,900
Developed product technologies                              7,170,000
                                                          -----------
Total amortizable intangible assets                       $ 9,430,900
Transaction costs                                          14,869,100
                                                          -----------
Total purchase price                                      $24,120,000
                                                          ===========
</TABLE>

In Process Research & Development

The Company  concluded as of the date of  acquisition,  the acquired  intangible
assets,  consisting of developed core and product  technologies had reached full
development  and that it was not the  intention of the  Company's  management to
utilize the asset in specific research and development  activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process  research and development ("IPR& D") projects
in place  related  to the  technology  acquired , nor any  future  research  and
development  activities planned.  Accordingly,  there is no charge to operations
during  the year  ended  September  30,  2005 for IPR&D in  connection  with the
acquisition of the assets.


Transaction costs

The  amount of the  purchase  price  that  could not be  allocated  to  acquired
identifiable  intangible  assets or IPR & D was  $14,689,100  and was charged to
operations  as a cost of the  transaction  during the year ended  September  30,
2005.



The identifiable intangible assets acquired and their carrying value at June 30,
2006 are:

<TABLE>
<CAPTION>
                                                                                             Weighted
                          Gross Carrying                                                     Average
                              Amount         Accumulated                     Residual      Amortization
                                             Amortization         Net          Value          Period
                                                                                             (Years)
<S>                           <C>               <C>           <C>                    <C>            <C>
Amortizable
 Intangible
 Assets:
Trade secrets and
developed technologies        $ 9,430,900       $ 1,347,271   $ 8,083,629            -                 7
Patents                            34,237            16,881        17,376            -                 5
                              -----------       -----------   -----------   -----------     ------------
Total
 Amortized
 Identifiable
 Intangible Assets            $ 9,465,137       $ 1,364,152   $  8,101,005           -              6.99
</TABLE>


Total amortization  expense charged to operations for the nine months ended June
30, 2006 and 2005 was $1,015,571and $7,748, respectively.


                                      -25-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES

Convertible notes payable as of June 30, 2006 are as follows:

<TABLE>
        <S>                                                                          <C>
        10%  Secured  Convertible  Notes  Payable  dated  March 8, 2006,  net of
        unamortized debt discount of $680,110 (see
        below)                                                                       $    819,890
        10% Secured  Convertible  Notes Payable dated May 2, 2006,
        net of unamortized debt discount of $395,158 (see below)
                                                                                          604,842
        10%  Secured  Convertible  Notes  Payable  dated June 15,  2006,  net of
        unamortized debt discount of $1,068,361 (see
        below)
                                                                                        1,881,639
                                                                                     $  3,306,371
                                                                                     ============
</TABLE>

10% Secured Convertible Promissory Notes dated March 8, 2006

On March 8, 2006, in connection with a private placement, the Company issued 10%
Secured  Convertible  Promissory  Notes in the  aggregate  principal  amount  of
$1,500,000 (the "Serial Notes") and warrants to purchase 3,000,000 shares of the
Company's common stock to accredited  investors.  The Serial Notes bear interest
at 10%,  mature on  September  7, 2007 and are  convertible  into the  Company's
common stock, at the holder's option, at fifty cents ($.50) per share during the
period from the date of issuance  (March 8, 2006) through March 7, 2007.  Should
the holder of the Serial Note elect not to convert to the Company's common stock
on or before March 7, 2007, the  outstanding  principal,  along with accrued and
unpaid  interest  automatically  converts to the  Company's  common  stock at an
amount  equal to 80% of the average bid price of the  Company's  common stock on
the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior to
conversion on the maturity date of September 7, 2007. The full principal  amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company  agreed to file a  registration  statement with
the SEC to effect the  registration of the shares of its common stock underlying
the Serial Notes and the warrants  within 30 days of the  effective  date of the
Company's pending Registration  Statement (SEC File 333 - 122848) being declared
effective.  The Company also agreed to use its reasonable  best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. If the Registration Statement is not filed and declared effective as
described above,  the Company will be required to pay liquidated  damages in the
form of cash to the holders of the Serial Notes, in an amount equal to 2% of the
unpaid  principal  balance per month if the above  deadlines are not met. In the
event of a default on the Serial  Notes,  the Serial Notes will bear interest at
twelve percent (12%) per annum until paid.

The warrants are exercisable  until five years from March 8, 2006 until March 7,
2011 at a price of $0.50 per  share.  The  Company  has the  right,  but not the
obligation, to call these warrants for $1.25 per share at the earlier of (i) one
year from  issuance or (ii) the date that shares of common stock  issuable  upon
conversion of the Serial Notes and exercise of the warrants are  registered  for
resale and the  Company's  common  stock  trades at or above $1.25 per share for
twenty (20)  consecutive  trading days. The Notes include certain  features that
are considered embedded derivative financial  instruments,  such as a variety of
conversion  options,  a variable interest rate feature,  events of default and a
variable liquidated damages clause.

The  initial  relative  fair value  assigned  to the  embedded  derivatives  was
$346,500.

In conjunction with the Notes, the Company issued warrants to purchase 3,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires  that the  Company  record the  warrants at their fair values as of the
inception date of the debt issuance, which totaled $512,100.

The Company  recorded the fair value of the derivatives  ($346,500) and warrants
($ 512,100) to debt discount,  aggregating $858,600,  which will be amortized to
interest  expense  over the term of the  Notes.  Amortization  of  $178,490  was
recorded for the nine months ended June 30, 2006.


                                      -26-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)

The market price of the Company's common stock significantly  impacts the extent
to which the Company may be required or may be  permitted  to convert the Serial
Notes into shares of the Company's  common stock.  The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the  principal  and interest  payments
then due on the Notes.

10% Secured Convertible Promissory Notes dated May 2, 2006

On May 2, 2006, in connection with a private  placement,  the Company issued 10%
Secured  Convertible  Promissory  Notes in the  aggregate  principal  amount  of
$1,000,000 (the "Serial Notes") and warrants to purchase 2,000,000 shares of the
Company's common stock to accredited  investors.  The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible  into the Company's  common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the date of issuance (May 2, 2006)  through May 2, 2007.  Should the holder
of the Serial  Note elect not to convert  to the  Company's  common  stock on or
before May 2, 2007,  the  outstanding  principal,  along with accrued and unpaid
interest automatically converts to the Company's common stock at an amount equal
to  80%  of  the  average  bid  price  of  the  Company's  common  stock  on the
Over-The-Counter  Bulletin  Board for a period  equal to ten (10) days  prior to
conversion on the maturity date of May 2, 2007. The full principal amount of the
Serial  Notes is due upon a default  under the terms of the Note  Agreement.  In
addition,  the Company  granted the Investors a security  interest in all of its
assets (see Note B). The Company  agreed to file a  registration  statement with
the SEC to effect the  registration of the shares of its common stock underlying
the Serial Notes and the warrants  within 30 days of the  effective  date of the
Company's pending Registration  Statement (SEC File 333 - 122848) being declared
effective.  The Company also agreed to use its reasonable  best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.

The warrants are exercisable until four years from May 2, 2007 until May 2, 2011
at a  price  of  $0.50  per  share.  The  Company  has  the  right,  but not the
obligation,  to call these  warrants  for $0.001 per share at the earlier of (i)
one year from  issuance and (ii) the date that shares of common  stock  issuable
upon  conversion of the Serial Notes and exercise of the warrants are registered
for resale and the  Company's  common  stock trades at and above $1.00 per share
for twenty (20)  consecutive  trading days. The Notes include  certain  features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.

The  initial  relative  fair value  assigned  to the  embedded  derivatives  was
$82,358.

In conjunction with the Notes, the Company issued warrants to purchase 2,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires  that the  Company  record the  warrants at their fair values as of the
inception date of the debt issuance, which totaled $373,600.

The Company  recorded the fair value of the  derivatives  ($82,358) and warrants
($373,600) to debt discount,  aggregating  $455,958,  which will be amortized to
interest  expense  over the  term of the  Notes.  Amortization  of  $60,800  was
recorded for the nine months ended June 30, 2006.

The market price of the Company's common stock significantly  impacts the extent
to which the Company may be required or may be  permitted  to convert the Serial
Notes into shares of the Company's  common stock.  The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the  principal  and interest  payments
then due on the Notes.


                                      -27-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)

10% Secured Convertible Promissory Notes dated June 15, 2006

On June 15, 2006, in connection with a private placement, the Company issued 10%
Secured  Convertible  Promissory  Notes in the  aggregate  principal  amount  of
$2,950,000 (the "Serial Notes") and warrants to purchase 5,900,000 shares of the
Company's common stock to accredited  investors.  The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible  into the Company's  common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the one years from the date of issuance  (June 15,  2006)  through June 15,
2007. Should the holder of the Serial Note elect not to convert to the Company's
common stock on or before June 15, 2007, the outstanding  principal,  along with
accrued and unpaid interest automatically converts to the Company's common stock
at an amount equal to 80% of the average bid price of the Company's common stock
on the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior
to conversion on the maturity date of June 15, 2007. The full  principal  amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company  agreed to file a  registration  statement with
the SEC to effect the  registration of the shares of its common stock underlying
the Serial Notes and the warrants  within 30 days of the  effective  date of the
Company's pending Registration  Statement (SEC File 333 - 122848) being declared
effective.  The Company also agreed to use its reasonable  best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.

The warrants are exercisable  until four years from June 15, 2007 until June 15,
2011 at a price of $0.50 per  share.  The  Company  has the  right,  but not the
obligation,  to call these  warrants  for $0.001 per share at the earlier of (i)
one year from  issuance and (ii) the date that shares of common  stock  issuable
upon  conversion of the Serial Notes and exercise of the warrants are registered
for resale and the  Company's  common  stock trades at and above $1.00 per share
for twenty (20)  consecutive  trading days. The Notes include  certain  features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.

The  initial  relative  fair value  assigned  to the  embedded  derivatives  was
$175,321.

In conjunction with the Notes, the Company issued warrants to purchase 5,900,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires  that the  Company  record the  warrants at their fair values as of the
inception date of the debt issuance, which totaled $929,840.

The Company  recorded the fair value of the derivatives  ($175,321) and warrants
($929,840) to debt discount,  aggregating $1,105,161, which will be amortized to
interest  expense  over the  term of the  Notes.  Amortization  of  $36,800  was
recorded for the nine months ended June 30, 2006.

The market price of the Company's common stock significantly  impacts the extent
to which the Company may be required or may be  permitted  to convert the Serial
Notes into shares of the Company's  common stock.  The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the  principal  and interest  payments
then due on the Notes.

$ 1,675,000 Convertible Notes

Convertible notes payable ("Bridge Unit Offering") in quarterly  installments of
interest only at 10% per annum,  secured by all assets of the Company and due on
the  earlier  of the 9 month  anniversary  date of the  initial  closing  of the
offering or the  completion of any equity  financing of $3,000,000 or more;  the
Company,  at its sole  discretion  may  prepay  principal  at any  time  without
penalty.  The Bridge Unit Offering Notes unpaid principal and accrued and unpaid
interest  were  converted to an aggregate of 4,988,051  shares of the  Company's
common  shares at a price  equal to  approximately  $. 33 per share  during  the
quarter ended March 31, 2005.


                                      -28-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)

$ 1,465,000 Convertible Notes

Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate  amount of $ 1,465,000 in a private  placement and exempt offerings to
sophisticated investors, net of costs and fees.

The  Convertible  Note's terms called for the debt to  automatically  convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.

The  Company  filed the  registration  statement  on  February  15, 2005 and the
Convertible  Notes were  converted to an  aggregate  of 2,930,000  shares of the
Company's common stock.

As  additional  consideration  for the purchase of the  Convertible  Notes,  the
Company  granted to the holders  warrants  entitling  it to  purchase  2,930,000
common  shares of the  Company's  common  stock at the price of $ .75 per share.
These  warrants  were  issued  in  February,  2005 and lapse if  unexercised  by
February,  2010. A registration  rights  agreement was executed in December 2004
and  consummated in February,  2005 requiring the Company to register the shares
of its common  stock  underlying  the  Convertible  Notes and  warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of  liquidated  damages of 3.5% of the  aggregate  Convertible  Note
financing per month if the stipulated  registration  deadlines were not met. The
liquidated  damages,  which  approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.

In  accordance  with  Emerging  Issues  Task Force Issue  98-5,  Accounting  for
Convertible  Securities  with a Beneficial  Conversion  Features or Contingently
Adjustable  Conversion Ratios ("EITF 98-5"),  the Company recognized an imbedded
beneficial  conversion  feature  present in the Convertible  Notes.  The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital.  The Company recognized and measured an aggregate
of  $1,465,000 of the  proceeds,  which is equal to the  intrinsic  value of the
imbedded  beneficial  conversion  feature,  to additional  paid-in capital and a
discount  against  the  Convertible  Notes.  Since the  Convertible  Notes  were
converted to the  Company's  common stock in December  2004,  the debt  discount
attributed to the  beneficial  conversion  feature of $ 1,465,000 was charged to
interest expense in its entirety during the six months ended March 31, 2005.

In conjunction  with raising capital through the issuance of Convertible  Notes,
the Company has issued a warrant in February,  2005 that has registration rights
for the  underlying  shares.  As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the  Company,  pursuant  to EITF 00-19,  "Accounting  for  Derivative  Financial
Instruments  Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the  warrants  at the date of  issuance  was  recorded as a warrant
liability on the balance sheet $23,148,214 and charged to operations as interest
expense.  Upon the  registration  statement being declared  effective,  the fair
value of the warrant on that date will be  reclassified  to equity.  The Company
initially  valued the warrants  using the  Black-Scholes  pricing model with the
following  assumptions:  (1) dividend  yield of 0%; (2) expected  volatility  of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.
In connection  with the  placement of the  $1,465,000  of  convertible  notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying  certain  previously issued and outstanding  warrants that were
not subject to a  registration  rights  agreement at the time the warrants  were
issued. These warrants consist of following:

     o     105,464  warrants  entitling the holder to purchase 105,464 shares of
           the  Company's  common  stock at the price of $ .10 per share.  These
           warrants were issued in July,  2004 and lapse if unexercised by July,
           2009.

     o     1,602,500  warrants entitling the holder to purchase 1,602,500 shares
           of the Company's common stock at the price of $ .60 per share.  These
           warrants  were issued in October,  2003 and lapse if  unexercised  by
           October, 2008.

As a result,  the Company is required to  classify  the  warrants as  derivative
liabilities  and mark then to market at each  reporting  date. The fair value of
the warrants that were subject to registration  reclassified as liabilities from
additional  paid in  capital  at March 31,  2005  totaled  $3,108,851.  Upon the
registration statement being declared effective,  the fair value of the warrants
on that date will be reclassified to equity.  The Company  initially  valued the
warrants using the Black-Scholes  pricing model with the following  assumptions:
(1) dividend  yield of 0%; (2) expected  volatility  of 148.66%,  (3)  risk-free
interest rate of 3.21%, and (4) expected life of 3 years.


                                      -29-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)

$ 7,371,000 Convertible Notes

In January and February,  2005, the Company sold an 10% convertible debenture in
the aggregate  amount of $7,371,000 in a private  placement and exempt offerings
to sophisticated investors, net of costs and fees.

The  Convertible  Note's terms called for the debt to  automatically  convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.

The  Company  filed the  registration  statement  on  February  15, 2005 and the
Convertible  Notes were  converted to an aggregate of  14,742,000  shares of the
Company's common stock.

As  additional  consideration  for the purchase of the  Convertible  Notes,  the
Company  granted to the holders  warrants  entitling  it to purchase  14,742,000
common  shares of the  Company's  common  stock at the price of $ .75 per share.
These warrants lapse if  unexercised  by February,  2010. A registration  rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock  underlying  the  Convertible  Notes and
warrants so as to permit the public  resale  thereof.  The  registration  rights
agreement  provided  for  the  payment  of  liquidated  damages  of  3.5% of the
aggregate  Convertible  Note financing per month if the stipulated  registration
deadlines were not met. The liquidated damages,  which approximate $ 257,985 per
month, may be paid, at the Company's option,  in cash or unregistered  shares of
the Company's common stock.

In  accordance  with  Emerging  Issues  Task Force Issue  98-5,  Accounting  for
Convertible  Securities  with a Beneficial  Conversion  Features or Contingently
Adjustable  Conversion Ratios ("EITF 98-5"),  the Company recognized an imbedded
beneficial  conversion  feature  present in the Convertible  Notes.  The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital.  The Company recognized and measured an aggregate
of $ 7,731,000 of the  proceeds,  which is equal to the  intrinsic  value of the
imbedded  beneficial  conversion  feature,  to additional  paid-in capital and a
discount  against  the  Convertible  Notes.  Since the  Convertible  Notes  were
converted  to the  Company's  common  stock in February,  2005,  2005,  the debt
discount  attributed  to the  beneficial  conversion  feature of $ 7,371,000 was
charged to interest  expense in its  entirety  during the six months ended March
31, 2005.

In conjunction  with raising capital through the issuance of Convertible  Notes,
the Company has issued warrants that have registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19,  "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance  was recorded as a warrant  liability on the balance  sheet
$23,148,214 and charged to operations as interest expense. Upon the registration
statement being declared  effective,  the fair value of the warrant on that date
will be reclassified to equity.  The Company initially valued the warrants using
the  Black-Scholes  pricing model with the following  assumptions:  (1) dividend
yield of 0%; (2) expected volatility of 152.59%,  (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.

NOTE D - CAPITAL STOCK

The Company is authorized to issue  10,000,000  shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of  common  stock,  with a  $0.001  par  value  per  share  as the  result  of a
shareholder  meeting  conducted on February 14, 2005.  Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares  with a par  value of $0.50.  In  February  2005,  the  Company  passed a
resolution  authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.

During the period  September 16, 2002 through  September  30, 2003,  the Company
issued 100,000 shares of common stock in exchange for  reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately  $1,000,  which represents the fair value of the services received
which did not differ materially from the value of the stock issued.


                                      -30-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE D - CAPITAL STOCK (continued)

In  October,  2002,  the Company  issued  10,178,352  shares of common  stock in
exchange for the previously  issued 100,000 shares to the Company's  founders in
connection with the merger with Prohealth Medical Technologies, Inc.

In October,  2002 the Company  canceled 100,000 shares of common stock issued to
the Company's founders.

During the fiscal year ended  September 30, 2003, the Company  issued  2,369,130
shares of common stock,  net of  cancellation  of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227,  net of
cancellation  of  $60,008,  which  represents  the fair  value  of the  services
received which did not differ materially from the value of the stock issued.

In November  2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.

In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing  agreement (see Note I). The Company valued the shares issued at
approximately $ .065 per share,  which  represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.

In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for  performance  by the counter party to earn the equity  instrument
was reached.  The Company valued the shares issued at approximately  $0.0001 per
share,  which  presents  the fair value of the services  received  which did not
differ materially from the value of the stock issued.

In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth  granted the Company an option to acquire up to 8,500,000 shares of
the  Company's  common stock in exchange  for $100,000  (see Note C). The option
expired on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired  7,500,000  common  shares under this  agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company  had an option  through  December  10,  2004 to  acquire  the  remaining
1,000,000 shares from the former  controlling owner in exchange for $11,500.  On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.

In September  2003,  the Company  issued  19,200 shares of common stock for cash
previously subscribed at $2.50 per share.

During the fiscal year ended  September  30, 2003,  the Company  issued  154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.

During the fiscal year ended  September  30,  2003,  the Company  issued  74,400
shares of common stock in exchange for cash at approximately $0.89 per share.

In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for  services.  The Company  valued the shares issued at the $15 par
value and recorded the value for services  when the shares were  converted  into
common shares as identified below.

During the fiscal year ended  September 30, 2004, the Company  issued  5,149,472
shares of common stock,  net of cancellation of 155,000 shares,  in exchange for
consulting services. The Company valued the shares issued at $8,787,315,  net of
cancellation  of  $408,575,  which  represents  the fair  value of the  services
received which did not differ materially from the value of the stock issued

During the fiscal year ended  September  30, 2004,  the Company  issued  340,500
shares of common stock for shares previously  subscribed at approximately  $2.04
per share.


                                      -31-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE D - CAPITAL STOCK (continued)

In March 2004, the Company  issued 55,000 of common stock for options  exercised
at $1.00 per share.

During the fiscal year ended  September 30 2004,  the Company  converted  15,000
preferred  shares  into  375,000  shares of  common  stock at $1.47 per share in
exchange for employee services valued at $549,750.

In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.

In September  2004, the Company issued 60,000  convertible  preferred  shares at
$25.00, in exchange for consulting services valued at $1,500,000.

During the fiscal year ended  September 30, 2005, the Company issued  11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting  and  employee  services.  The  Company  valued the shares  issued at
$13,008,371,  net of cancellation of $1,328,269, which represents the fair value
of the services  received which did not differ  materially from the value of the
stock issued

During the fiscal year ended  September 30, 2005, the Company  issued  1,500,000
shares of common stock for shares  previously  subscribed at approximately  $.54
per share.

During the fiscal year ended  September  30, 2005,  the Company  issued  267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share

During the fiscal year ended September 30, 2005, the Company retired  $1,796,057
of convertible notes payable for 5,363,809 shares of common stock. The Notes are
convertible into shares of common stock at a price of $0.34 per share.

During the fiscal year ended  September 30, 2005, the Company issued  14,442,000
shares of common  stock at $0.50 per share  pursuant  to the  exercise  terms of
notes  payable.  This  issuance is considered  exempt under  Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.

In October 2004,  the Company  issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.

In December 2004,  the Company  issued net 5,500,000  shares of common stock for
default  as per terms of notes  payable  for  $88,500.  Out of total,  3,500,000
shares were  retained in escrow on behalf of another  party for future  deferred
compensation.

In  February  2005,  the  Company in  exchange  for a related  party note in the
outstanding  principal  amount of $600,000 and as settlement  for certain claims
related thereto issued  1,500,000  shares of common stock using a price of $1.31
per share. (See note G)

In March,  2005,  the Company  granted an aggregate of 300,000  stock options to
employees  that vested  immediately.  The exercise  prices of the stock  options
granted  were below the fair value of the  Company's  common  stock at the grant
date.  Compensation  expense of $180,000 and $0 was charged to operations during
the period ended March 31, 2005 and 2004, respectively.

In June 2005, the Company  cancelled  300,000 stock options  previously  granted
valued at  $180,000.  In  accordance  with EITF  96-18 the  measurement  date to
determine fair value was the date at which a commitment  for  performance by the
counter party to earn the equity instrument was reached.  The Company valued the
shares  issued for  consulting  services at the rate which  represents  the fair
value of the services received which did not differ materially from the value of
the stock issued.


                                      -32-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE D - CAPITAL STOCK (continued)

In July 2005, the Company issued 36 million shares in exchange for  intellectual
property at approximately $0.67 per share for a total of $24,120,000.  The value
of the  acquired  intangible  assets was  established  at  $9,430,900,  with the
balance of the purchase price,  or $14,689,100,  charged to operations as a cost
of the transaction. (See Note B)

In 2005,  the  Company  issued  8,550,000  shares of its  common  stock  without
restriction to employees in exchange for services  rendered.  The Company valued
the  shares  issued at market  value and  charged  operations  in the period the
shares were issued.  The Company is investigating the circumstances  surrounding
the issuance of the shares and the possible  subsequent resale of certain of the
shares on the open market and the  possibility of violations of securities  laws
(see Note H).

In September  2005,  the Company issued  814,158  penalty  shares  pursuant to a
registration  rights  agreement.   In  connection  with  the  7,371,000  million
convertible  debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock  registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated  damages in shares of Company  stock  accruing at the rate of 3.5%
per month on the face value of the Notes for the month of July and August  2005.
The  Company  valued the shares  issued at  approximately  $0.62 per share for a
total of $502,672.

In September  2005,  the Company issued  391,224  penalty  shares  pursuant to a
registration  rights  agreement.   In  connection  with  the  7,371,000  million
convertible  debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock  registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated  damages in shares of Company  stock  accruing at the rate of 3.5%
per month on the face value of the Notes for the month of  September  2005.  The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.

In October,  2005, the Company issued 400,000 shares of common stock  subscribed
for cash at $0.50 per share for a total of  $200,000  pursuant to the terms of a
subscription  payable.  This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.

In October 2005,  the Company  issued 100,000 shares of common stock in exchange
for consulting  services.  The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000,  which  represents the fair value of the
services  received which did not differ  materially  from the value of the stock
issued.

In October 2005,  the Company  cancelled  350,000 shares  previously  issued for
services valued at $210,000.

In December,  2005, the Company issued 40,000 shares of common stock  subscribed
for cash at $0.50 per share for a total of  $20,000  pursuant  to the terms of a
subscription  payable.  This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.

For the fiscal year ended  September  30,  2005,  the Company  issued a total of
2,096,139  penalty  shares  pursuant  to a  registration  rights  agreement.  In
connection with the 7,371,000 million  convertible debt financing in the quarter
ended March 31, 2005, the Company was obligated to complete a stock registration
by July 2005. Since the  registration  statement was not effective by July 2005,
the  Company  paid the  required  $773,959  of  liquidated  damages in shares of
Company  stock  accruing  at the rate of 3.5% per month on the face value of the
Notes for the month of September  2005.  The Company valued the shares issued at
approximately $0.30 per share for a total of $773,959.  The Company continues to
accrue the penalties relating to the pending registration statement.

In  December  2005,  in  connection  with debt  financing,  the  Company  issued
5,500,000  warrants to purchase the Company's  common stock at an exercise price
of $0.50 for five years. The fair value attributable to the warrants of $563,750
was recorded as to current period  operations  with an offsetting  adjustment to
additional paid in capital.


                                      -33-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE D - CAPITAL STOCK (continued)

In January,  2006, the Company  cancelled  250,000 shares  previously issued for
services valued at $150,000.

In January 2006,  the Company  issued  2,096,139  penalty  shares  pursuant to a
registration  rights  agreement.   In  connection  with  the  7,371,000  million
convertible  debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock  registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated  damages in shares of Company  stock  accruing at the rate of 3.5%
per month on the face value of the Notes for the month of November  and December
2005. The Company valued the shares issued at approximately  $0.25 per share for
a total of $515,973.  The Company continues to accrue the penalties  relating to
the pending registration statement.

In February  2006, the Company issued 160,000 shares of common stock in exchange
for consulting  services.  The Company valued the shares issued at approximately
$0.17 per share for a total of $27,200,  which  represents the fair value of the
services  received which did not differ  materially  from the value of the stock
issued

In  February  2006,  the  Company  issued  3,800,000  shares of common  stock in
exchange  for  consulting  services.  The  Company  valued the shares  issued at
approximately $0.16 per share for a total of $608,000, which represents the fair
value of the services received which did not differ materially from the value of
the stock issued

In March,  2006,  the Company  cancelled  150,000 shares  previously  issued for
services valued at $120,000.


NOTE E - STOCK OPTIONS AND WARRANTS

Warrants

The  following  table  summarizes  the changes in warrants  outstanding  and the
related  prices  for  the  shares  of  the  Company's  common  stock  issued  to
non-employees  of the  Company.  These  warrants  were  granted  in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.

<TABLE>
<CAPTION>
                                             Warrants Outstanding                                            Exercisable
                                                  Remaining              Weighted           Weighted          Weighted
                             Number              Contractual              Average           Average            Average
        Exercise                                                         Exercise
         Prices           Outstanding            Life (Years)             Price           Exercisable      Exercise Price
     ================    ==============    ========================   ===============    ==============   =================
        <S>               <C>                     <C>                   <C>               <C>                <C>
          $0.10                105,464              3.01                  $0.10                105,464         $0.10
          $0.20                  5,000              2.39                  $0.20                  5,000         $0.20
          $0.50             16,450,000              4.63                  $0.50              8,550,000         $0.50
          $0.55              9,000,000              1.97                  $0.55              9,000,000         $0.55
          $0.60              9,132,000              2.88                  $0.60              9,132,000         $0.60
          $0.70                950,000              1.39                  $0.70                950,000         $0.70
          $0.75             17,727,000              3.25                  $0.75             17,727,000         $0.75
          $1.00                100,000               .30                  $1.00                100,000         $1.00
                         --------------                                                  --------------
                            53,469,464                                                      45,569,464
                         ==============                                                  ==============
</TABLE>


                                      -34-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE E - STOCK OPTIONS AND WARRANTS (continued)

Transactions involving warrants are summarized as follows:

<TABLE>
<CAPTION>
                                             Number of            Weighted
                                              Shares              Average
                                                                  Price Per
                                                                    Share
<S>                                        <C>                     <C>
Balance, September 30, 2003                       383,500                $1.38
Granted                                         4,574,753                 0.58
Exercised                                         (88,000)                1.00
Canceled or expired                                     -                    -
                                          ----------------    -----------------
Balance, September 30, 2004                     4,870,253                $0.63
Granted                                        32,873,000                 0.71
Exercised                                        (142,500)                0.34
Canceled or expired                              (731,289)                0.65
                                          ----------------    -----------------
Balance, September 30, 2005                    36,869,464                 0.67
Granted                                        16,600,000                 0.51
Exercised                                               -                    -
Canceled or expired                                     -                    -
                                          ----------------    -----------------
 Outstanding at June 30, 2005                  53,469,464                $0.61
                                          ================    =================
</TABLE>

In the nine months ended June 30, 2006, the Company granted  5,500,000  warrants
to holders of the Company's  $550,000 notes payable with a $0.50 exercise price.
As the  contract  must be settled by the delivery of  registered  shares and the
delivery of the registered shares is not controlled by the Company,  pursuant to
EITF 00-19,  "Accounting for Derivative  Financial  Instruments  Indexed to, and
Potentially  Settled in, a Company's Own Stock",  the fair value of the warrants
at the date of issuance was recorded as a warrant  liability of  $1,758,900  and
charged to operations as interest expense. Upon the registration statement being
declared  effective,  the  fair  value  of the  warrants  on that  date  will be
reclassified  to equity.  The Company  initially  valued the warrants  using the
Black-Scholes pricing model with the following assumptions:  (1) dividends yield
of 0%; (2) expected volatility of 156.19%, (3) risk-free interest rate of 4.35%,
and (4) expected life of 5 years.

In the nine months ended June 30, 2006, the Company granted 200,000  warrants as
settlement  to bridge  financing  with a $0.70  exercise  price and a three year
life. The fair value of the warrants of $43,098 was charged to operations.

In the nine months ended June 30, 2006, the Company granted 10,900,000  warrants
to holders of the Company's convertible notes (See Note C). The warrants have an
exercise price of $0.50 per with a five year life. Under certain conditions,  as
described in Note C, the Company as the option to redeem these warrants.

In accordance with SFAS 133  "Accounting for Derivative  Instruments and Hedging
Activities",  the Company  revalued  the  warrants as of June 30, 2006 using the
Black-Scholes option pricing model. The difference between the fair value of the
warrants as of June 30, 2006 and the  previous  valuation  as of July,  2005 has
been recorded as a gain on revaluation of warrant liability, and included in the
accompanying consolidated financial statements (see Note F)


                                      -35-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE F - DEBT DERIVATIVE AND WARRANT LIABILITY

In accordance with SFAS 133  "Accounting for Derivative  Instruments and Hedging
Activities  and EITF 00-19  "Accounting  for  Derivative  Financial  Instruments
Indexed to, and  Potentially  Settled in, a  Company's  Own Stock",  the Company
accounted  for  identified  embedded  derivatives  and  warrants to purchase its
common  stock  that  provide  for  the  payment  of  liquidated  damages  if the
stipulated registration deadlines were not met as liabilities.

As of the  date of this  filing,  the  registration  statement  has not yet been
declared  effective  by the SEC.  The Company  determined  the fair value of the
embedded  derivatives  and valued the warrants  using the  Black-Scholes  option
pricing model.  Assumptions  regarding the life were one to five years, expected
dividend  yield of 0%, a risk  free rate of 5.1 to 5.21%,  and a  volatility  of
154.43%.  The determined value of both the warrants and the underlying  embedded
derivatives as of June 30, 2006 was $5,698,286. The net change in the fair value
of the  derivative  and  warrant  liability  values from March 31, 2006 has been
recorded as a gain from change in debt derivative and warrant liabilities in the
consolidated condensed statement of operations.

NOTE G- RELATED PARTY TRANSACTIONS

At June 30, 2006, notes payable are as follows:

<TABLE>
        <S>                                                                                        <C>
        4%  Convertible  Note  Payable,  unsecured,  to related party and due August 1,
        2005;  currently  in  default.  Note  holder  has the  option to covert  unpaid
        principal  together with any accrued and unpaid  interest to 180,000  shares of
        the Company's common stock.                                                                $ 410,429
</TABLE>

In February,  2005 the Company issued 1,500,000 shares of its restricted  common
stock to a Company  officer and Director in exchange for $600,000 of  previously
incurred debt. The debt was in the form of a promissory note.

The  Company  valued  the  shares at $1.31 per share for a total of  $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference  between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000  or  $1,365,000  has been  charged to current
period interest expense.

The Company's officers have advanced funds to the Company for travel related and
working capital purposes. No formal repayment terms or arrangements exist. There
were no advances due at June 30, 2006.

On July 15, 2005,  the Company  entered into a consulting  agreement with Timpix
International  Limited  ("Timpix") for the  consulting  services of three former
Biowell employees, Drs. Jun-Jei Sheu, Ben Liang and Johnson Chen. The consulting
agreement is for the shorter of two years, or until all of the consultants  have
obtained a visa to work in the United States and execute  employment  agreements
with the Company.  The consulting  agreement shall  automatically  renew for one
year periods until terminated. Pursuant to the consulting agreement, the Company
is obligated to pay $47,000 per month, which is apportioned at $20,000 per month
for Mr.  Sheu,  $15,000  per month for Mr.  Liang and  $12,000 per month for Mr.
Chen. In the event that either of Messrs.  Sheu,  Liang or Chen becomes employed
by us,  the  monthly  consulting  fee  shall  be  reduced  accordingly.  We have
negotiated an agreement in principle to restructure  the  Consulting  Agreement,
whereby,  fees owed to  Timpix  from July  2005  through  December  2005 will be
waived,  and salaries for each of the three consultants will be reduced starting
January 1, 2006.

In July 2005, the Company entered into a license agreement with Biowell, whereby
the  Company  granted  Biowell  an  exclusive  license  to  sell,   market,  and
sub-license the Company's  products in selected Asian  countries.  The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing  technology that may be developed for the
marketplace  as long as the license  agreement  remains in effect.  In the event
that Biowell shall  sub-license  the products  within its  territories,  Biowell
shall pay the Company 50% of all fees,  payments  or  consideration  or any kind
received in connection with the grant of the sublicense.  Biowell is required to
pay a  royalty  of 10% on all net sales  made and is  required  to meet  certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through June 30, 2006 totaled $20,532.


                                      -36-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE G- RELATED PARTY TRANSACTIONS (continued)

On March 29, 2006,  and April 13,  2006,  the Company  borrowed  $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, Ltd., ("BioCogent"),  an
entity controlled by the Company's President and Chief Executive Officer.  These
loans  were due and  payable  upon  the  earlier  to  occur of (1) the  close of
business on June 30,  2006,  or (2) the closing of the  issuance and sale by the
Company of its securities for gross proceeds of at least  $250,000.  These loans
were paid in full as of June 30, 2006.

NOTE H - COMMITMENTS AND CONTINGENCIES

Employment and Consulting Agreements

The Company has consulting agreements with outside contractors,  certain of whom
are also Company stockholders. The Agreements are generally month to month.

On July 15, 2005,  we entered into a  consulting  agreement  with Timpix for the
consulting  services of three former Biowell  employees,  Drs. Jun-Jei Sheu, Ben
Liang and  Johnson  Chen.  The  consulting  agreement  is for the shorter of two
years,  or until  all of the  consultants  have  obtained  a visa to work in the
United  States  and  execute  employment  agreements  with us.  Such  consulting
agreement  shall  automatically  renew for one year  periods  until  terminated.
Pursuant to the consulting  agreement,  we shall pay $47,000 per month, which is
apportioned  at $20,000 per month for Mr. Sheu,  $15,000 per month for Mr. Liang
and $12,000 per month for Mr.  Chen.  In the event that either of Messrs.  Sheu,
Liang or Chen  becomes  employed  by us,  the  monthly  consulting  fee shall be
reduced accordingly. We have negotiated an agreement in principle to restructure
the Consulting  Agreement,  whereby,  fees owed to Timpix from July 2005 through
December  2005 will be waived,  and salaries  for each of the three  consultants
will be reduced starting January 1, 2006.

Litigation

On or about  November  24,  2004,  Oceanic  Consulting,  S.A.  filed a complaint
against  the  Company  in the  Superior  Court  of the  State of New  York.  The
Complaint  alleges a breach of contract.  The Company and the Plaintiff  settled
the dispute and the Company recorded the settlement amount as of June 30, 2006.

On or about January 10, 2005, Stern & Co. filed a complaint  against the Company
in the United States  District Court for the Southern  District of New York. The
Complaint alleges a breach of contract.  Subsequent to the date of the financial
statements,  the Company and the  Plaintiff  settled the dispute and the Company
have recorded the settlement amount as of June 30, 2006.

On April 29, 2005, Crystal Research Associates,  LLC obtained a default judgment
against us for $13,000 in the Superior  Court of New Jersey,  Middlesex  County.
The Company settled this matter in May 2006.

On or about  January 12,  2006,  James Paul Brown,  a former  consultant  to the
Company filed a complaint against the Company in the Superior Court of the State
of  California.  The Complaint  alleges a breach of contract.  Subsequent to the
date of the  financial  statements,  the Company and the  Plaintiff  settled the
dispute and the Company have recorded the settlement amount as of June 30, 2006.

In January  2006, a former  employee of the Company  filed a complaint  alleging
wrongful  termination  against  the  Company.  The  former  employee  is seeking
$230,000 in damages.  The Company  believes that it has meritorious  defenses to
the  plaintiff's  claims and intends to  vigorously  defend  itself  against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a  material  adverse  effect on the  Company's  consolidated  financial
position or results of operations.


                                      -37-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE H - COMMITMENTS AND CONTINGENCIES (continued)

Litigation (continued)

On or about April 4, 2006,  the Company  filed a  complaint  against  Paul Reep,
Adrian  Butash,  John Barnett,  Chanty  Cheang,  Jaime Cardona  (former  Company
employees  and  officers),  and  Angela  Wiggins  ( a former  consultant  to the
Company)  in the  United  States  District  Court for the  Central  District  of
California  . The Company  has asked the court to make a judicial  determination
that an agreement, which the Company did not authorize and which is the basis of
previously  disclosed  litigation  against  the  Company by Paul Reep,  a former
employee  of the  Company,  and a new action  filed by former  employees  of the
Company as set forth in the subsequent paragraph,  is invalid and unenforceable.
This matter is in its early stages.

On or about April 17, 2006,  former  employees of the Company  filed a complaint
against the Company and certain of its current  officers  and  Directors  in Los
Angeles  County  Superior  Court.  The  Complaint  alleges a breach of contract,
violations  of  California  Labor Code and wrongful  termination  and is seeking
$950,000 in specified  damages,  plus fees and costs.  The  complaint  alleges a
breach of contract. The Company believes that it has meritorious defenses to the
plaintiff's   claims  and  intends  to  vigorously  defend  itself  against  the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a  material  adverse  effect on the  Company's  consolidated  financial
position or results of operations.

The Company is subject to other legal proceedings and claims, which arise in the
ordinary  course of its  business.  Although  occasional  adverse  decisions  or
settlements may occur, the Company  believes that the final  disposition of such
matters  should not have a material  adverse  effect on its financial  position,
results of operations or liquidity.

Registration of Company's Shares of Common Stock

Until the Company successfully  completes its pending registration  statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Notes C and F).
In connection  with the $ 1,465,000  and $ 7,371,000  million  convertible  debt
financing  during the  quarters  ended  December  31,  2004 and March 31,  2005,
respectively,   ,  the  Company  was  obligated  to  deliver  registered  shares
underlying the  convertible  notes and warrants by July 2005 (see Note C). Since
the  registration  was not effective by July 2005, the Company has been accruing
and  charging  to  operations  the  stipulated  liquidated  damages in shares of
Company  stock  accruing  at the rate of 3.5% per month on the face value of the
previously issued convertible notes. During the nine months ended June 30, 2006,
the Company has paid and charged to operations penalties of $773,958 in the form
of unregistered  shares of its common stock to the former note holders,  and has
accrued and charged to operations an additional  $1,547,910  representing unpaid
penalties as of June 30, 2006


                                      -38-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE H - COMMITMENTS AND CONTINGENCIES (continued)

Matters Voluntarily Reported to the SEC and Securities Act Violations

We previously disclosed that we were investigating the circumstances surrounding
certain  issuances of 8,550,000 shares to employees and consultants in July 2005
(see  Note G),  and  have  engaged  our new  outside  counsel  to  conduct  this
investigation.  We have  voluntarily  reported  our  current  findings  from the
investigation  to the SEC,  and we have agreed to provide  the SEC with  further
information  arising  from the  investigation.  We believe  that the issuance of
8,000,000  shares to employees in July 2005 was  effectuated  by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors.  These former  officers  received a total of
3,000,000 of these shares.  In addition,  it appears that the  8,000,000  shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly  issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance  with the Securities Act of 1933, as amended.  Our  investigation  is
continuing.  The members of our management who  effectuated  the stock issuances
that are being examined in the  investigation  no longer work for us. We believe
that  we  may  incur   significant   costs  and  expenses  in  continuing   this
investigation.  In the event that any of the exemptions from  registration  with
respect  to the  issuance  of the  Company's  common  stock  under  federal  and
applicable state securities laws were not available,  the Company may be subject
to claims by federal and state regulators for any such violations.  In addition,
if any  purchaser  of the  Company's  common  stock  were to  prevail  in a suit
resulting from a violation of federal or applicable  state  securities laws, the
Company  could be liable to return  the  amount  paid for such  securities  with
interest thereon, less the amount of any income received thereon, upon tender of
such securities,  or for damages if the purchaser no longer owns the securities.
As of the date of these  financial  statements,  the Company is not aware of any
alleged  specific  violation  or the  likelihood  of any claim.  There can be no
assurance that litigation  asserting such claims will not be initiated,  or that
the Company would prevail in any such litigation.

The  Company is unable to  predict  the extent of its  ultimate  liability  with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings,  settlements, judgments and investigations,  claims and changes
in this matter could have a material  adverse effect on the Company's  financial
condition and operating results


                                      -39-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)


NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS

The accompanying  financial  statements for the three and nine months ended June
30, 2006 have been restated for the purpose of  correcting  errors in accounting
for and the  disclosing  the  issuance by the Company of warrants to acquire the
Company's common stock.

Accordingly,  the Company  restated the  financial  statements as of and for the
three and nine  months  ended June 30,  2006 by  disclosing  the effect of these
errors in this Form 10-QSB/A.

For both the three and nine months  ended June 30, 2006  Condensed  Consolidated
Income Statement restatement is to:

-          Reclass  fair  value of  previously  issued  warrants  from  interest
           expense to additional paid in capital of $1,584,614
-          Adjust  for fair  value of  warrants  issued  to  Additional  Paid in
           Capital

The changes in reported amounts are summarized in the following  reconciliations
of the Company's  restatement of the Condensed  Consolidated Balance sheet as of
June 30, 2006:

<TABLE>
<CAPTION>
                                                                       (As restated)        (As reported)
                   <S>                                                    <C>                   <C>
                   ASSETS                                                 $  11,693,826         $  11,693,826
                                                                          ==============        ==============

                   LIABILITIES      AND      DEFICIENCY     IN
                   STOCKHOLDERS' EQUITY

                   Total current liabilities                                  5,091,278             5,091,278
                   Debt derivative and warrant liabilities                    5,698,286             5,698,286
                   Convertible notes payable                                  3,306,371             3,306,371

                   Deficiency in Stockholders' Equity:
                   Preferred stock                                                    6                     6
                   Common stock                                                 118,582               118,582
                   Common stock subscription                                   (200,000)             (200,000)
                   Additional paid in capital                                81,997,006            81,860,606
                   Deficit   accumulated   during  development              (84,317,703)          (84,181,303)
                   stage                                                  --------------        --------------
                   Total   Liabilities   and   Deficiency   in            $  11,693,826         $  11,693,826
                   Stockholders' Equity                                   ==============        ==============
</TABLE>

The changes in reported amounts are summarized in the following  reconciliations
of the Company's  restatement of the Condensed  Consolidated Income Statement as
of June 30, 2006:

-          Adjust for effect of warrant valuation change of $4,355,942  reported
           in previous restated 10-QSB

-          Adjustment for  reclassification  of initial  valuation of previously
           issued warrants from interest expense to additional paid in capital

-          Increase in selling and administration costs of $386,739


                                      -40-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)


NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                              For the Three Months Ended June      For the Nine Months Ended June 30,
                                                          30, 2006                                2006
                                                (As Restated)     (As Reported)       (As Restated)        (As Reported)
<S>                                          <C>                 <C>                 <C>                 <C>
NET LOSS FROM OPERATIONS                     $     (1,914,530)   $     (1,527,791)   $     (5,484,519)   $     (6,051,530)
Net    gain/(loss)   on   revaluation   of
warrant liability                                   3,493,961           2,337,263          14,250,621          18,606,563
Other income (expense)                                  8,483               8,483              17,976              17,976
Interest income (expense)                            (826,827)           (826,827)         (3,177,229)         (9,117,785)
                                             -----------------   -----------------   -----------------   -----------------

Net Income (Loss)                            $        761,087    $         (5,611)   $      5,606,849    $      3,458,485
                                             =================   =================   =================   =================
Net income (loss) per common share-basic     $           0.01    $          (0.00)   $           0.05    $           0.03
                                             =================   =================   =================   =================
Net Income (Loss) per common share-diluted   $           0.01    $            N/A    $           0.03    $           0.02
                                             =================   =================   =================   =================
Weighted average shares outstanding-basic         118,582,385         116,483,044         115,852,521         115,852,521
Weighted           average          shares
outstanding-Diluted                               177,501,849         116,533,352         181,716,985         181,716,985
</TABLE>

The resulting effect to the Cash Flow restatement is to:

-          Increase profit for the nine months ended June 30, 2006 by $1,584,614
           as described above

The changes in reported amounts are summarized in the following  reconciliations
of the Company's  restatement  of the Condensed  Consolidated  Statement of Cash
Flows for the nine month period ended June 30, 2006.

Consistent  with  the  original  summary   presentation,   the  following  is  a
reconciliation  of  the  Company's  restatement  of the  Condensed  Consolidated
Statement  of Cash Flows for the  periods  ended  March 31,  2006.  See the full
Condensed  Consolidated  Statement of Cash Flows for the periods ended March 31,
2006 for additional details.


                                      -41-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)


NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                        For the Nine Months Ended June 30,
                                                       2006
                                          (As Restated)      (As Reported)
<S>                                     <C>                <C>
Cash    Flows     from     operating
activities:
Net income                              $   5,606,849      $   3,458,485
Summary of  adjustments to reconcile
net  loss  to  net  cash  (used  in)
operating activities:

Change  in  fair  value  of  warrant
liabilities                               (14,250,521)       (10,118,917)
Other  operating  activities  -  see
Cash Flow statement for full details        7,516,049          4,353,766
                                        --------------     --------------
Net   cash   (used   in)   operating
activities                                 (2,306,666)        (2,306,666)

Cash    flows     from     investing
activities:
- see Cash Flow  statement  for full
details
Net   cash   (used   in)   investing
activities                                    (35,851)           (35,851)
Cash    flows     from     financing
activities:
- see Cash Flow  statement  for full
details
Proceeds from loans                         4,242,500          4,242,500
                                        --------------     --------------
Net  cash   provided  by   financing
activities
Increase (decrease) in cash and cash
equivalents                                 1,899,983          1,899,983
Cash    and    cash     equivalents,           31,190
beginning of period
                                              31,1901            31,1901
                                        --------------     --------------
Cash  and cash  equivalents,  end of    $   1,931,173  $       1,931,173
period
                                        $      77,715  $          77,715
                                        ==============     ==============
</TABLE>


                                      -42-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE J - RESTATEMENT OF JUNE 30 2005 QUARTERLY FINANCIAL STATEMENTS

The accompanying  financial  statements for the three and nine months ended June
30, 2005 has been  restated to present the effects of  revaluing  the  Company's
warrants.

Accordingly,  the Company  restated the  financial  statements as of and for the
three and nine  months  ended June 30,  2005 by  disclosing  the effect of these
errors in this Form 10-QSB.

For both the three and nine months  ended June 30, 2005  Condensed  Consolidated
Income   Statement   restatement  is  to:
-          Increase Selling, General and Administrative for compensation expense
           by $54,951.
-          Reflect a net loss on the  revaluation of warrants of $6,648,237 as a
           result of  reclassifying  warrants from equity to a liability for the
           nine months ended June 30, 2005 as well as the period  September  16,
           2002  through June 30,  2005.  A net gain on the  adjustment  to fair
           value of the warrants of  $5,679,175  for the three months ended June
           30, 2005.
-          Net loss  increased by $6,648,237  for the nine months ended June 30,
           2005 as a result of the combination of factors  described  above. Net
           loss for the  three  months  ended  June  30,  2005  was  reduced  by
           $5,624,224 to a Net Income of $2,851,151.

The changes in reported amounts are summarized in the following  reconciliations
of the Company's  restatement of the Condensed  Consolidated Income Statement as
of June 30, 2005.

<TABLE>
<CAPTION>
                          For the Three Months Ended June 30,     For the Nine Months Ended June 30,
                                          2005                                   2005
                              (As Restated)     (As Reported)       (As Restated)     (As Reported)
<S>                       <C>                  <C>               <C>                 <C>
Operating Expenses:
Selling    general   and
administrative            $        1,865,631   $     2,659,727   $      24,188,882   $    22,236,607
Research and development              88,870            88,870             345,958           345,958
Depreciation         and
amortization                           3,160             3,160              15,187            15,187
                          -------------------  ----------------  ------------------  ----------------

Total Operating Expenses           1,957,661         2,751,757          24,550,027        22,597,752
                          -------------------  ----------------  ------------------  ----------------
Operating Loss                    (1,957,661)       (2,751,757)        (24,550,027)      (22,597,752)
Net    gain/(loss)    on
revaluation  of  warrant
liability                          5,679,175                 -          16,454,929                 -
Other income (expense)                   241               241               3,415             3,415
Interest          income
(expense)                            (21,557)          (21,557)        (32,373,143)       (9,224,929)
                          -------------------  ----------------  ------------------  ----------------

Net Income (Loss)         $        3,700,198   $    (2,773,073)  $     (40,464,827)  $   (31,819,266)
                          ===================  ================  ==================  ================
Net  income  (loss)  per
common share-basic        $             0.06   $         (0.04)  $           (0.83)  $         (0.65)
                          ===================  ================  ==================  ================
Weighted  average shares          66,308,115        66,298,115          48,810,559        48,806,398
outstanding-basic
Net   income  per  common
share-fully diluted       $             0.04
                          ===================
Weighted  average  shares
outstanding-fully diluted        109,223,832
</TABLE>


                                      -43-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE I - RESTATEMENT OF JUNE 30, 2005 QUARTERLY FINANCIAL STATEMENTS (continued)

The result of the Cash Flow restatement is to:
-          Increase  loss for the nine  months June 30,  2005 by  $8,645,561  as
           described above
-          Reflect  the   $12,086,901   warrant   valuation   and  the  $100,000
           compensation expense revision within operating activities
-          Reflect $849,460 in common stock, subscription and Additional Paid in
           Capital  revisions - see the summarized  Other  Operating  Activities
           items within operating activities below
-          Net  cash  flow  from  operating  activities  decreased  by  $749,640
           primarily   as  a  result  of  equity   revisions   involving   stock
           subscriptions as described in the above balance sheet restatement
-          Net cash flow from  financing  activities  increased by $749,640 as a
           result of the combination of factors  described  above. See preceding
           comment.

The changes in reported amounts are summarized in the following  reconciliations
of the Company's  restatement  of the Condensed  Consolidated  Statement of Cash
Flows for the nine month period ended June 30, 2005.

Consistent with the original summary presentation, following is a reconciliation
of the Company's  restatement  of the Condensed  Consolidated  Statement of Cash
Flows for the periods ended June 30, 2005. See the full  Condensed  Consolidated
Statement  of Cash  Flows for the  periods  ended June 30,  2005 for  additional
details.

<TABLE>
<CAPTION>
                                  For the Nine Months Ended June 30, 2005
                                       (As Restated)       (As Reported)
<S>                               <C>                    <C>
Cash   Flows   from   operating
activities:

Net   loss    from    operating
activities                        $       (40,464,827)   $     (31,819,266)
Summary   of   adjustments   to
reconcile  net loss to net cash
(used in) operating activities:

Change   in   fair   value   of
warrant liabilities                         6,693,285                    -

Other  operating  activities  -
see  Cash  Flow  statement  for
full details                               25,784,772           20,920,732
                                  --------------------   ------------------
Net cash  (used  in)  operating
activities                                 (7,986,770)         (10,898,534)
                                  --------------------   ------------------

Cash   flows   from   investing
activities:
- see Cash Flow  statement  for
full details
Net cash  (used  in)  investing
activities                                     (4,347)             (37,638)
                                  --------------------   ------------------
</TABLE>


                                      -44-
<PAGE>

                           APPLIED DNA SCIENCES, INC.
                          (A DEVELOPMENT STAGE COMPANY)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  JUNE 30, 2006
                                   (Unaudited)

NOTE I - RESTATEMENT OF JUNE 30, 2005 QUARTERLY FINANCIAL STATEMENTS (continued)


<TABLE>
<CAPTION>
                                    For the Nine Months Ended June 30, 2005
                                       (As Restated)          (As Reported)
                                    -----------------------------------------
<S>                                     <C>                   <C>
Cash   flows    from    financing
activities:
- see  Cash  Flow  statement  for
full details
Proceeds from loans                            9,181,750           12,126,805
                                        -----------------     ----------------
Net cash  provided  by  financing
activities
Increase  (decrease)  in cash and
cash
equivalents                                    1,190,633            1,190,633
Cash   and   cash    equivalents,
beginning of year                                  1,832                1,832
                                        -----------------     ----------------
Cash  and cash  equivalents,  end
of year                                 $      1,192,465      $     1,192,465
                                        =================     ================
</TABLE>


                                      -45-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

         The  following  discussion  should  be read  in  conjunction  with  our
Consolidated  Financial Statements and Notes thereto,  included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended,  including  statements using
terminology such as "can", "may", "believe",  "designated to", "will", "expect",
"plan",  "anticipate",  "estimate",  "potential" or "continue",  or the negative
thereof or other comparable terminology regarding beliefs,  plans,  expectations
or intentions  regarding  the future.  You should read  statements  that contain
these words carefully because they:

    o    discuss our future expectations;

    o    contain   projections   of   our future results of operations or of our
         financial condition; and

    o    state other "forward-looking" information.

         We believe it is important to communicate  our  expectations.  However,
forward  looking  statements  involve  risks and  uncertainties  and our  actual
results and the timing of certain  events  could  differ  materially  from those
discussed  in  forward-looking  statements  as  a  result  of  certain  factors,
including those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus.  All  forward-looking  statements and risk factors  included in this
document are made as of the date hereof, based on information available to us as
of the date thereof,  and we assume no obligations to update any forward-looking
statement or risk factor, unless we are required to do so by law.

                               PLAN OF OPERATIONS

Sales and Marketing

We believe our revenues will come from three sources:

    o    direct sales to manufacturers, distributors, and/or retailers;

    o    sales through our OEM relationships; and

    o    authentication (laboratory) services.

We employ a multi-tier sales and marketing  strategy involving our marketing and
sales staff working together with high-level  contacts in target  industries and
our OEM base.  We are  attempting to develop  strategic  alliances and marketing
partners by setting up alliances  with Biowell  Technology,  Inc.'s  ("Biowell")
technology partners,  granting licenses to existing  anti-counterfeit  suppliers
and partner with industry leaders for intellectual property development.

We are cognizant that no technology exists today to enable someone in the street
to  ascertain,  at the point of  purchase,  whether an expensive  product,  or a
child's foodstuff,  or pharmaceutical  product is genuine, worth the money being
paid and safe to use or  ingest.  No brand  owner is able to  rapidly  determine
whether a product is real of fake.  Many  multi-billion  dollar  brands  have no
technology to protect  against  counterfeiting,  to detect its occurrence and to
interdict or  prosecute  the  counterfeiter.  No company has the  capability  to
determine with forensic  certainty that it is subject to attack.  Such companies
remain seriously exposed to product liability,  loss of consumer  confidence and
loss of revenues. Governments have no rapid detection system to determine at the
point of entry, inspection or seizure whether products are real or fake. A major
thrust  of our  marketing  efforts  is to  work  with  consumer  groups,  media,
corporate  officers,  government  departments,  customs,  insurers and others to
bring home the message that, in a world of criminality and terrorism,  no-one is
safe.

Business Strategy and Approach

We have established  integrated business operations addressing and servicing the
needs  of the  global  security  marketplace  on the  part of  corporations  and
governments for; anti-counterfeiting,  fraud prevention, product authentication,
brand protection, supply chain management and protection.

Intellectual Property Development, Product Operations & Partnerships

We have proprietary DNA security technology, and develop security solutions that
protect corporate and intellectual  property from counterfeiting,  fraud, piracy
and      product       diversion      using      botanical     DNA     as     an


                                      -46-
<PAGE>

encrypted/code molecule that can be embedded in inks, paper, substrates,liquids,
textiles,  thread, plastics,holograms and microchips.

We produce security solutions  customized to our customer's needs. We market and
sell DNA  anti-counterfeit  and fraud prevention  solutions that integrate into,
and layer with,  existing  security  solutions.  These DNA security features are
integrated  at the  original  equipment  manufacturer  level  with  ink,  paper,
liquids,  thread  and  hologram  producers,  who in  turn  sell/supply  finished
security   products  such  as  primary  and  secondary   product  packaging  for
pharmaceuticals,  beauty products, textiles, currency, passports, ID cards, etc.
We have strict  protocols for  specifying,  integrating,  testing,  shipping and
confirming the presence of DNA in any given product.

We plan to develop new product lines that will address  specific new  challenges
in the  security  marketplace,  and bring these  advances to target  industries,
customers and countries.

Additionally, we will identify strategic partnerships and co-marketing ventures,
and licensees to work with us to develop,  market and sell our  biotechnological
security  products.  This  will  include  sub-licensing  the  technology  to key
partners  in specific  sectors  with an  established  base of  customers.  These
partners  will be able to enhance  their  product  lines and client  services by
adding  our  technology  to the  existing  security  matrix  in their  products,
providing an enhanced solution to deter fraud and counterfeiting.

Management Strategy


We  anticipate  a period of rapid  change as we begin  commercialization  of the
products now available  subsequent signing of our licenses with Biowell, (b) the
establishment  of our  prototyping  labs at the State  University of New York at
Stony Brook ("Stony Brook  University"),  and (c) the  availability  of products
that have recently been commercialized in Asia by Biowell.


We have  organized  our resources to manage our  commercialization  effectively,
optimizing  the  delivery  of  new   prototypes  for  customers,   and  managing
outsourcing  especially  through  our  OEMs.  Our  Chief  Executive  Officer  is
responsible  for  the  strategic  direction,   coordinating  with  our  overseas
technology  partner Biowell,  scientific  development,  operations and corporate
governance,  business  development  and sales,  including  relations with US and
foreign  government  agencies,  developing  business  relationships  with target
corporations and OEM's, and securing  revenues.  Our Controller and acting Chief
Financial  Officer  cover overall  financial  management,  financial  reporting,
corporate  administration  and investors  relations.  Our  marketing  department
develops strategic awareness of our technologies across target industry sectors,
their associated media and lobbying companies and liaises with regulatory bodies
(EPA,  FDA, etc) and industry  associations  (CTFA,  PHARMA,  etc). Our Chairman
oversees the  operations  of Biowell,  including  the  development  of all Asian
territorial  sales  that are  subject to royalty  payments  due to us.  Both our
Chairman and our Strategic Technology Development Officer manage the development
of core  DNA  sciences  for  current  and  future  applications.  Our  Strategic
Technology  Development  Officer is principally engaged in the productization of
DNA  markers  for  specific   industry   applications,   and  for  liaison  with
corresponding  scientists  from our  principal  OEM  partners,  e.g.,  petroleum
markers, chemical markers, markers for precious stones,  DNA-encrypted inks, DNA
markers for the pharmaceutical industry, etc.

Consultant & Enforcement Operations

As nations are threatened by terrorism and corporations try to prevent corporate
fraud, counterfeiting,  product diversion and industrial espionage, the need for
secure  anti-counterfeiting and identification systems increases. Our technology
can provide important and cost-effective  support for local,  state, and federal
governments  as  well as  corporations  doing  business  with  highly  sensitive
information or products  susceptible  to  counterfeit.  Our  anti-counterfeiting
technology can be used for the following types of  identification  and important
government documents:

    o    Passports

    o    Green cards

    o    Visas

    o    Driver's licenses


                                      -47-
<PAGE>

    o    Social Security cards

    o    Student visas

    o    Military ID's

    o    Other important Identity cards and official documents

We intend to work in collaboration with Biowell and other security organizations
in order to continue to market and sell new product lines derived from,  but not
limited to, DNA technology.  Improving prototyping and detection capabilities is
an ongoing  commitment  and is  currently  underway in the Biowell labs and will
continue in the U.S. at our new  facilities  established at the Long Island High
Technology Incubator (LIHTI) at Stony Brook University.  We are also looking for
opportunities  to  collaborate  with  universities  to  develop  a new  line  of
detection  technologies  that will provide  faster and more  convenient  ways to
authenticate DNA. We are continuously  attempting to incorporate our DNA markers
with  various  products  for new  applications.  We believe  that we will obtain
commercial  revenues  for  these  efforts  within  12-24  months,   although  no
assurances  can  be  given  that  we  will  ever  generate  such  revenues.  Our
prototyping laboratory will customize "off-the-shelf" products for new customers
on a  case-by-case  basis.  These new products are  typically  newly  configured
labels, inks or packing elements.  We have identified several options for remote
detection and faster detection methodologies.

We will consult with our clients on a total security  service  offering;  how to
protect  their brands,  intellectual  property,  products and physical  security
access and how to reduce risk exposure,  product liability  exposure and product
recall liabilities.  We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection,  interdiction,  deterrence and
prosecution of counterfeiters  and related crimes,  through our  subcontractors,
sub-licensees and security industry collaborative partners.

International Sub-License Operations

Developing  Technology  - We have an  in-depth  understanding  of DNA  microchip
design  and   applications.   We  will   jointly   develop   DNA-holograms   and
DNA-Hologram-RFID  devices,  DNA-inks,  DNA-dyes  and  DNA-security  labels with
leading original equipment manufacturers in these specialist fields.

We will utilize our existing relationships and develop new ones to introduce our
anti-counterfeiting  technology to generate  business.  Each industry has unique
requirements and needs for their anti-counterfeit  solutions, and we believe our
DNA technology  will provide maximum  security  technologies.  For example,  our
smart packaging  solutions with DNA security markers in ink, paper and holograms
has  widespread   application  in  packaging  for  pharmaceuticals,   cosmetics,
automotive markets,  passports,  ID's and currency.  Our proprietary  technology
offers  immediate  and  affordable  detection  and security for their brands and
products.

Strong Technology  Alliances - Our technology can also provide advanced security
dimensions to:

    o    Electronics   security:   access and physical/plant security (biometric
         security cards enhanced with DNA)

    o    Security Holograms (DNA enhanced)

    o    Security papers and printing

    o    Holograms (DNA holograms)

    o    Other security-related products and systems

Law Enforcement  Expertise - The resources of our collaborative  partners in the
security  industry  include  former  federal  law  enforcement,   security,  and
intelligence  officers  who  provide us with  extensive  contacts  and  hands-on
experience in:

    o    Intellectual property investigation

    o    Counter-intelligence

    o    Personal security services

    o    Anti-counterfeit technologies


                                      -48-
<PAGE>

    o    Secure communications and data management

Critical Accounting Policies

         Financial  Reporting  Release No. 60, published by the SEC,  recommends
that all companies include a discussion of critical  accounting policies used in
the  preparation  of their  financial  statements.  While all these  significant
accounting policies impact our financial condition and results of operations, we
view certain of these policies as critical.  Policies  determined to be critical
are those  policies that have the most  significant  impact on our  consolidated
financial  statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.

         We believe that given current facts and  circumstances,  it is unlikely
that applying any other  reasonable  judgments or estimate  methodologies  would
cause a material  effect on our  consolidated  results of operations,  financial
position or liquidity for the periods presented in this report.

    The accounting policies identified as critical are as follows:

    o    Equity issued with registration rights

    o    Warrant liability

    o    Fair value of intangible assets

Equity Issued with Registration Rights

         In connection with placement of our  convertible  notes and warrants to
certain  investors  during the fiscal  quarter  ended March 31, 2005, we granted
certain  registration rights that provide for liquidated damages in the event of
failure  to  timely  perform  under the  agreements.  Although  these  notes and
warrants do not provide for net-cash  settlement,  the  existence of  liquidated
damages provides for a defacto net-cash settlement option. Therefore, the common
stock underlying the notes and warrants subject to such liquidated  damages does
not meet  the  tests  required  for  shareholders'  equity  classification,  and
accordingly   has  been  reflected   between   liabilities  and  equity  in  the
accompanying  consolidated  balance sheet until such time as the  conditions are
eliminated.

Warrant Liability

         In connection with the placement of certain debt instruments during the
fiscal quarter ended June 30, 2005, as described  above, we issued  freestanding
warrants.  Although  the  terms of the  warrants  do not  provide  for  net-cash
settlement, in certain circumstances, physical or net-share settlement is deemed
to not be within our control  and,  accordingly,  we are required to account for
these  freestanding  warrants as a derivative  financial  instrument  liability,
rather than as shareholders' equity.

         The warrant  liability is  initially  measured and recorded at its fair
value,  and is then re-valued at each reporting  date,  with changes in the fair
value  reported as non-cash  charges or credits to earnings.  For  warrant-based
derivative financial instruments, the Black-Scholes option pricing model is used
to value the warrant liability.

         The  classification of derivative  instruments,  including whether such
instruments  should be recorded as liabilities  or as equity,  is re-assessed at
the  end  of  each  reporting  period.  Derivative  instrument  liabilities  are
classified  in the balance sheet as current or  non-current  based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date.

         We do not use derivative  instruments to hedge  exposures to cash flow,
market, or foreign currency risks.

Fair Value of Intangible Assets

         We have adopted SFAS No. 142,  Goodwill  and Other  Intangible  Assets,
whereby we periodically test our intangible assets for impairment.  On an annual
basis,  and when  there is  reason  to  suspect  that  their  values  have  been
diminished or impaired, these assets are tested for impairment,  and write-downs
will be included in results from operations.


                                      -49-
<PAGE>

         On July 12, 2005,  we acquired  certain  intellectual  properties  from
Biowell through an Asset Purchase Agreement in exchange for 36 million shares of
our  restricted  common  stock  having an  aggregate  fair  value at the date of
issuance of $24.12  million.  The value of the  acquired  intangible  assets was
$9,430,900,  with the balance of the purchase price, or $14,689,100,  charged to
operations as a cost of the transaction.

Use of Estimates

         In  preparing  financial   statements  in  conformity  with  accounting
principles  generally  accepted in the United  States of America,  management is
required to make estimates and assumptions  that affect the reported  amounts of
assets and liabilities  and the disclosure of contingent  assets and liabilities
at the date of the  financial  statements  and revenue and  expenses  during the
reporting  period.  The most  significant  estimates relate to the estimation of
percentage  of  completion  on  uncompleted  contracts,  valuation of inventory,
allowance for doubtful  accounts and estimated  life of customer  lists.  Actual
results could differ from those estimates.

Revenues

         From our inception on September 16, 2002, we did not generate  material
revenues from operations. We have, however, generated $0.019 million in sales of
our products for the three months ended June 30, 2006. Our cost of sales for the
same period was $0.016 million netting us a gross profit of $0.003  million.  We
believe we will not generate  material  revenues from  operations in the current
fiscal year as we transition  from a development  stage  enterprise to an active
growth stage company,  although no assurances can be given that we will generate
any additional revenues from operations.

Costs and Expenses

Selling, General and Administrative

         Selling,  general  and  administrative  expenses  for the for the three
month  period  ended June 30, 2006  compared  to same  period in 2005  decreased
$284,664 or 15% to $1.581 million from $2.715 million. For the nine months ended
June 30, 2006,  selling,  general and administrative  expenses decreased $19.798
million or 82% to $4.391 million from $24.189 million in the prior period. These
deceases are due to  non-recurring  financing and related costs  incurred in the
prior year.

Research and Development

         Research and  development  expenses for the three months ended June 30,
2006 decreased $88,870 or 100% to $-0- from $88,870 the same period in 2005. For
the nine months ended June 30, 2006, research and development  expenses deceased
$270,682  million or 78.3% to $75,276 from $345,958  million for the same period
in 2005. Prior year's costs were primarily due to startup of collaboration  with
The Center for Biotechnology at Stony Brook University.

Depreciation and Amortization

         In the  three  month  period  ended  June 30,  2006,  depreciation  and
amortization  increased  $333,664 for the period  compared to the same period in
2005 from $3,160 to  $336,824.  For the nine month  period  ended June 30, 2006,
depreciation  and  amortization  increased $1.006 million to $1.021 million from
the same period last year of $15,187.  In the year ended  September 30, 2005, we
capitalized   $9.431  million   related  to  an   intellectual   property  asset
acquisition.  As a result, we recorded  amortization expense totaling $1,010,454
for the nine month period ended June 30, 2006  compared to no  intangible  asset
amortization  in the nine months ended June 30,  2005.  We estimate a seven year
useful life that commenced during the fourth fiscal quarter of 2005.

Total Operating Expenses

         Total  operating  expenses  during the three and nine months ended June
30, 2006 decreased to $1.918 million from $1.958 million and $5.488 million from
$24.550  million,  respectively as a result of the combination of factors listed
above.

Other income/loss

         Gain on revaluation of warrant and debt derivative  liability the three
month period ended June 30, 2006 deceased  $2.185 million to $3.494 million from
$5.679     million     for     the     same    period    last     year.  For the


                                      -50-
<PAGE>

nine month  period ended   June 30, 2006, the gain on revaluation of warrant and
debt derivative  liability   decreased 2.204 million to $14.251 from $16.455 the
prior same period.

Interest Expenses

         Interest  expense  for the  three  month  period  ended  June 30,  2006
increased $805,270 to $826,827 from $21,557 for the same period in 2005. For the
nine month period ended June 30, 2006;  interest  decreased  $29.200  million to
$3.177  million from $32.373  million in same period 2005. The increase in three
months ended June 30, 2006 is a result of additional financing costs incurred in
the current period.  The decease in the current nine month period ended June 30,
2006 is a result of a net reduction  finance  related  costs  incurred the prior
period in 2005 as compared to the current period.

Net Income (loss)

         Net income for the three month  period month period ended June 30, 2006
decreased  $2.939  million to $0.761  million  from $3.701  million for the same
period last year. For the nine months ended June 30, 2006, net income  increased
$46.072 to a net income of $5.607  million from a same period prior year loss of
$40.465.These  changes  are a result of the  combination  of  factors  described
above.

Liquidity and Capital Resources


         Our  liquidity  needs  originate  from  working  capital  requirements,
indebtedness   payments  and  research  and  development   expenditure  funding.
Historically,  we have  financed our  operations  through the sale of equity and
convertible debt as well as borrowings from various credit sources.


         In fiscal 2005, we completed two private placements of convertible debt
and associated warrants. In December,  2004 we issued and sold $1.465 million in
aggregate principal amount of promissory notes,  convertible at $0.50 per share,
and associated  warrants to purchase up to 2,930,000 shares of our common stock,
exercisable  at $0.75 per share for three years from their date of issuance,  to
13  investors  (the  "December  2004  Placement").   Each  promissory  note  was
automatically  convertible  into shares of our common  stock at a price of $0.50
per share upon the closing of a subsequent  private placement by us for at least
$1 million.  In January and February of 2005, we issued and sold $7.371  million
in  aggregate  principal  amount of 10% Secured  Convertible  Promissory  Notes,
convertible  at $0.50 per share,  and  associated  warrants  to  purchase  up to
14,742,000 shares of our common stock, exercisable at $0.75 per share until five
years from their date of issuance,  to 61 investors  (the  "January and February
2005  Placement").  Upon the closing of the January and February 2005  Offering,
the notes issued in the December 2005 Placement  automatically converted into an
aggregate of 2,930,000  shares of our common stock,  and upon the filing of this
registration statement on February 15, 2005, the notes issued in the January and
February 2005 Placement  automatically converted into an aggregate of 14,742,000
shares of our common stock.  Additional private placements in fiscal 2005 raised
$243,000. We also received proceeds of $60,000 from the exercise of a warrant to
purchase  100,000  shares of our common stock in fiscal 2005. The $9.135 million
in gross proceeds from these private  placements and warrant exercises were used
to  fund  commissions,   fees  and  expenses  associated  with  the  placements,
consultants and public reporting costs, salaries and wages, royalties,  research
and development,  facility costs as well as general working capital needs. Since
the conversion  price of the notes issued in the December 2005 Placement and the
January and February 2005 Placement was less than the market price of our common
stock at the time these notes were issued,  we  recognized a charge  relating to
the  beneficial  conversion  feature of these notes  during the quarter in which
they are issued.


                                      -51-
<PAGE>

         In the nine  month  period  ended June 30,  2006,  we  completed  three
additional  private placements of convertible debt and associated  warrants.  On
November 3, 2005, we issued and sold a promissory  note in the principal  amount
of  $550,000  to Allied  International  Fund,  Inc.  ("Allied").  Allied in turn
financed a portion of the making of this loan by borrowing $450,000 from certain
persons,  including  $100,000  from James A.  Hayward,  a director and our Chief
Executive Officer.  The terms of the promissory note provided that we issue upon
the  funding of the note  warrants to  purchase  5,000,000  shares of our common
stock at an exercise price of $0.50 per share to certain  persons  designated by
Allied.  On November 9, 2005,  we issued nine warrants to Allied and eight other
persons to purchase an aggregate  of 5,500,000  shares of our common stock at an
exercise price of $0.50 per share. These warrants included a warrant to purchase
1,100,000  shares that was issued to James A. Hayward,  a director and our Chief
Executive Officer.  We paid $55,000 in cash to VC Arjent,  Ltd. for its services
as the placement agent with respect to this placement. All principal and accrued
but unpaid interest under the promissory note was paid in full shortly after the
closing of and from the proceeds of a private placement we completed on March 8,
2006. On March 8, 2006,  we issued and sold an aggregate of 30 units  consisting
of (i) a $50,000  principal amount secured  convertible  promissory note bearing
interest at 10% per annum and convertible at $0.50 per share, and (ii) a warrant
to purchase 100,000 shares of our common stock at an exercise price of $0.50 per
share,  for  aggregate  gross  proceeds  of $1.5  million.  The units  were sold
pursuant to  subscription  agreements by and between each of the  purchasers and
Applied DNA Operations  Management,  Inc., a Nevada  corporation  and our wholly
owned subsidiary (our  "Subsidiary").  The $2.050 million in gross proceeds from
these first two offerings  were held by our  Subsidiary for our benefit and used
to fund commissions,  fees and expenses associated with the placements, to repay
the  outstanding   promissory   note  described  above  plus  accrued   interest
thereunder,  to fund financing  fees,  consultants and public  reporting  costs,
salaries and wages,  research  and  development,  facility  costs as well as and
general  working capital needs. On March 24, 2006, we commenced an offering (the
"Offshore  Offering") of up to 140 units,  at a price of $50,000 per unit, for a
maximum  offering of $7 million for sale to  "accredited  investors" who are not
"U.S. persons." The units being sold as part of the Offshore Offering consist of
(i) a $50,000 principal amount secured  convertible  promissory note, and (ii) a
warrant to purchase  100,000  shares of our common stock at a price of $0.50 per
share.  On May 2, 2006, we closed on the first tranche of the Offshore  Offering
in which we sold 20 units for aggregate  gross proceeds of  $1,000,000.  We paid
Arjent  Limited  $375,000 in  commissions,  fees and  expenses  from these gross
proceeds.  On June 15,  2006,  we completed  the second  tranche of the Offshore
Offering in which we sold 59 units for aggregate  gross  proceeds of $2,950,000.
We paid Arjent  Limited  $442,500 in  commissions,  fees and expenses from these
gross proceeds.  Additionally, we are obligated to issue 2,400,000 shares of our
Company's  common stock to Arjent at $0.001 per share;  substantially  less than
the market price of $0.20 at the time of the obligation.


         On March 29,  2006 and April 13,  2006,  we  borrowed  $200,000  in the
aggregate,  at a rate of 7.5%  per  annum,  from  BioCogent,  Ltd.,  a New  York
corporation  ("BioCogent")  whose President and Chief Executive Officer and sole
stockholder  is James A. Hayward,  one of our directors and our Chief  Executive
Officer.  These loans are due and  payable  upon the earlier to occur of (1) the
close of business on June 30, 2006,  or (2) the closing of the issuance and sale
of our securities for gross proceeds of at least $250,000. The proceeds from the
loans were used for  general  corporate  purposes.  The note issued on March 29,
2006 was repaid with  interest in May,  2006.  The note issued on April 13, 2006
was repaid with interest in June, 2006.


         Substantially  all of the real  property used in our business is leased
under operating lease agreements.


         As of June 30, 2006, we had a working  capital  deficit of  $2,982,927.
For the nine months  ended June 30,  2006,  we generated a net cash flow deficit
from  operating  activities of $2,306,666  consisting  primarily of year to date
income of $5.043  million net with a non cash gain on  repricing of warrants and
debt derivatives of $14.251 million.. Non cash equity adjustments totaling a net
$1,611,008  included $606,850 in expensed warrants issued in connection with the
November, 2005 financing,  $710,200 in net stock issued for consulting services,
$773,958 in penalty stock issued pursuant to the  registration  rights agreement
from the  private  placement  in January and  February,  2005,  and  $480,000 in
cancelled  shares  for  services   previously   rendered.   Finally,   non  cash
depreciation and amortization  including  amortization of capitalized  financing
costs totaled  $1,268,437  while net assets and liabilities  decreased by $1.606
million.  Cash  used in  investing  activities  totaled  $35,851  primarily  for
increased  furniture  and  equipment   acquired.   Cash  provided  by  financing
activities  for the nine months ended June 30,  2006resulted  from the financing
discussed above of $4.243 million.


                                      -52-
<PAGE>

              As of June  30,  2006,  we had  $3,306,371  in  outstanding  notes
payable.  Please see Note C in our unaudited financial  statements for the terms
of such  notes  payable.  We  expect  capital  expenditures  to total  less than
$200,000  during  the 2006  fiscal  year.  Our  primary  investments  will be in
laboratory equipment to support prototyping and our authentication services.


         We have raised  capital to meet our working  capital needs in the past,
and will likely require  additional  financing within the next 9 months in order
to meet our  current  and  projected  cash flow  deficits  from  operations  and
development.  We have  sufficient  funds to conduct our  operations  for several
months,  but not for 9 months or longer.  We presently do not have any available
credit, bank financing or other readily available external sources of liquidity.
Financing  transactions  may include the issuance of equity or debt  securities,
obtaining credit facilities, or other financing mechanisms. However, the trading
price of our common  stock,  a  downturn  in the U.S.  or global  stock and debt
markets  and other  reasons  could make it more  difficult  to obtain  financing
through the issuance of equity  securities  or borrowing.  Further,  if we issue
additional  equity or convertible debt  securities,  stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges  senior  to  those  of  existing  holders  of our  common  stock.  If
additional  financing is not available or is not available on acceptable  terms,
this could have a material adverse effect on our business, results of operations
liquidity and financial condition.


         Our registered  independent certified public accountants have stated in
their report dated October 21, 2005, that we have incurred  operating  losses in
the last two  years,  and that we are  dependent  upon  management's  ability to
develop profitable operations.  These factors among others may raise substantial
doubt about our ability to continue as a going concern.

         In connection with the January and February 2005 Placement,  we granted
the  investors   registration  rights.   Pursuant  to  the  registration  rights
agreement,  if we did not file the registration  statement by February 15, 2005,
or if we did not have the registration statement declared effective on or before
June 15, 2005, we are obligated to pay liquidated  damages in the amount of 3.5%
per month of the face  amount of the notes,  which  equals  $257,985,  until the
registration  statement is declared effective.  At our option,  these liquidated
damages can be paid in cash or restricted  shares of our common stock.  Thus far
we have  decided to pay the  liquidated  damages in common  stock,  although any
future payments of liquidated damages may, at our option, be made in cash. If we
decide to pay the  liquidated  damages in cash,  we would be required to use our
limited working capital and potentially  raise additional funds. If we decide to
pay the  liquidated  damages  in shares of common  stock,  the  number of shares
issued would depend on our stock price at the time that payment is due. Based on
the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our
common stock on July 15, 2005, August 15, 2005,  September 15, 2005, October 17,
2005, November 15, 2005 and December 15, 2005,  respectively,  we issued a total
of 3,807,375 shares of common stock in liquidated  damages from August,  2005 to
January,  2006.  The issuance of shares upon payment of liquidated  damages will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock..  Liquidated damages in the form of common
stock were paid for the period  from June 15,  2005 to  December  15,  2005.  We
believe that we have no enforceable obligation to pay further liquidated damages
since the shares we agreed to register  for resale are eligible for resale under
Rule  144 of the  Securities  Act of  1933,  as  amended,  and  such  continuing
liquidated  damages  are  grossly   inconsistent  with  actual  damages  to  the
purchasers  of the notes and warrants.  However,  we are seeking to confirm this
position by obtaining the waiver and release of the holders of these  securities
of further  liquidated  damages.  If these  persons do not waive and release and
successfully  bring a claim against us with respect to such liquidated  damages,
it could result in a  significant  decrease in our  liquidity  or assets,  which
could result in the reduction or  termination  of our  business.  As of June 30,
2006 we have accrued $1,547,910 in penalties representing the further liquidated
damages  associated with our failure to file the  registration  statement by the
deadline and have included this amount in accounts payable and accrued expenses.

Matters Voluntarily Reported to the SEC and Securities Act Violations

         During the months of March,  May,  July and  August  2005,  we issued a
total  of  8,550,000  shares  of our  common  stock  to  certain  employees  and
consultants  pursuant to the 2005  Incentive  Stock Plan. We engaged our outside
counsel  to  conduct  an  investigation  of the  circumstances  surrounding  the
issuance  of these  shares.  On April 26,  2006,  we  voluntarily  reported  the
findings from this  investigation to the SEC, and agreed to provide the SEC with
further information arising from the investigation. We believe that the issuance
of 8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval    of    our     board    of    directors.  These   former     officers


                                      -53-
<PAGE>

received a total of 3,000,000 of these shares. In addition,  it appears that the
8,000,000  shares issued   in July 2005, as well as an additional 550,000 shares
issued   to    employees   and   consultants in March, May and August 2005, were
improperly issued without a restrictive legend stating that the shares could not
be resold legally except in compliance  with the  Securities  Act  of  1933,  as
amended.   The  Company's   investigation  is  continuing.  The  members  of the
Company's management who effectuated the stock issuances that are being examined
in the investigation no longer work for the Company. The Company believes it may
incur   significant   costs  and expenses in connection with this investigation.
Further,  these shares were not registered  under the Securities Act of 1933, or
the securities  laws of any state, and we believe that  certain of these  shares
may have been sold on the open market,  though we have been unable to  determine
the   magnitude   of   such sales. In addition, if violations of securities laws
occurred in connection with the resale of certain of these shares, the employees
and  consultants   or  persons who purchased shares from them may have rights to
have   their   purchase   rescinded or other claims  against us for violation of
securities    laws,    which could harm our business, results of operations, and
financial condition.

Off-Balance Sheet Arrangements

         We do not have any off-balance sheet arrangements.

Product Research and Development

         As a result of the recent financings,  we anticipate expending $200,000
of available cash towards  research and development  activities  during the next
twelve (12) months.

Acquisition of Plant and Equipment and Other Assets

         We do not  anticipate  the  sale of any  material  property,  plant  or
equipment during the next 12 months. We do not anticipate the acquisition of any
material property, plant or equipment during the next 12 months.

Number of Employees

         From our  inception  through the period  ended June 30,  2006,  we have
mainly relied on the services of outside consultants for services.  We currently
have five employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive  salaries to future  employees.  We
anticipate that it may become  desirable to add additional full and or part time
employees to discharge  certain  critical  functions  during the next 12 months.
This  projected  increase in personnel is dependent upon our ability to generate
revenues and obtain sources of financing.  There is no guarantee that we will be
successful in raising the funds  required or generating  revenues  sufficient to
fund the  projected  increase  in the number of  employees.  As we  continue  to
expand, we will incur additional cost for personnel.

Going Concern

         The financial  statements included in this filing have been prepared in
conformity with generally  accepted  accounting  principles that contemplate our
continuance  of as a going  concern.  Our cash position may be inadequate to pay
all of the costs associated with testing,  production and marketing of products.
Management  intends to use borrowings and security sales to mitigate the effects
of its cash  position,  however  no  assurance  can be given that debt or equity
financing,  if and when required will be available.  The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be necessary should
we be unable to continue existence.

Trends, Risks and Uncertainties

         We have sought to identify  what we believe to be the most  significant
risks to our business,  but we cannot predict whether, or to what extent, any of
such risks may be realized  nor can we  guarantee  that we have  identified  all
possible risks that might arise. Investors should carefully consider all of such
risk factors  before  making an  investment  decision with respect to our common
stock.

                                  RISK FACTORS

         Much of the information  included in this quarterly  report includes or
is based upon estimates, projections or other "forward-looking statements". Such
forward-looking  statements  include any projections or estimates made by us and
our  management  in  connection  with  our  business  operations.   While  these
forward-looking  statements,  and any assumptions upon which they are based, are
made in good faith and reflect our


                                      -54-
<PAGE>

current judgment   regarding the direction of  our business, actual results will
almost   always   vary,   sometimes materially, from any estimates, predictions,
projections, assumptions or other future performance suggested herein.

         Such  estimates,  projections  or  other  "forward-looking  statements"
involve various risks and uncertainties as outlined below. We caution the reader
that  important  factors in some cases have affected  and, in the future,  could
materially  affect actual results and cause actual results to differ  materially
from  the  results  expressed  in  any  such  estimates,  projections  or  other
"forward-looking statements".

         Our common shares are  considered  speculative.  Prospective  investors
should consider carefully the risk factors set out below.

RISKS RELATING TO OUR BUSINESS


We have a Short Operating History, a Relatively New Business Model, and Have Not
Produced  Significant  Revenues.  This Makes it Difficult to Evaluate Our Future
Prospects and Increases the Risk That We Will Not Be Successful.


         We have a short  operating  history  with our current  business  model,
which involves the marketing,  sale and  distribution of  embedded-DNA  security
products based on technologies  that we acquired in July 12, 2005 from, and that
are  manufactured for us by, Biowell  Technology,  Inc. We first derived revenue
from this model in the second calendar quarter of 2006, which was insignificant.
Prior to the July 12, 2005 acquisition,  our operations consisted principally of
providing  marketing and business  development  services to Biowell  Technology,
Inc. As a result,  we have very limited operating history for you to evaluate in
assessing our future  prospects.  We are in the process of transitioning  from a
developmental  stage to a early-stage  growth  enterprise.  Our operations since
inception  have  not  produced  significant   revenues,   and  may  not  produce
significant  revenues in the near term, or at all, which may harm our ability to
obtain  additional  financing  and may require us to reduce or  discontinue  our
operations.  If we create revenues in the future,  prior to our  introduction of
any new products, we will derive all such revenues from the sale of embedded-DNA
security products, which is an immature industry. You must consider our business
and  prospects in light of the risks and  difficulties  we will  encounter as an
early-stage  company in a new and rapidly evolving industry.  We may not be able
to successfully address these risks and difficulties,  which could significantly
harm our business, operating results, and financial condition.


We Have a History Of Losses Which May  Continue,  and Which May Harm Our Ability
to Obtain Financing and Continue Our Operations.


         We generated a net income of $5,606,849 for the nine-month period ended
June 30, 2006,  $64,824,755  loss for the fiscal year ended  September 30, 2005,
and  $19,358,259  loss for the fiscal year ended  September 30, 2004.  These net
losses have principally been the result of the various costs associated with our
selling,  general  and  administrative  expenses  as  we  commenced  operations,
acquired,  developed and validated  technologies and began marketing activities,
and our interest, warrant and derivative expenses relating to notes and warrants
we issued to obtain  financing.  Our  operations  are  subject  to the risks and
competition  inherent in a company  moving from the  development  stage to a new
growth enterprise.  We may not generate  sufficient  revenues from operations to
achieve or sustain  profitability  on a quarterly,  annual or any other basis in
the future. Our revenues and profits,  if any, will depend upon various factors,
including  whether our  existing  products or any new  products we develop  will
achieve any level of market  acceptance.  If we continue  to incur  losses,  our
accumulated deficit will continue to increase,  which might significantly impair
our ability to obtain additional financing.  As a result, our business,  results
of operations and financial condition would be significantly  harmed, and we may
be required to reduce or terminate our operations.

If We Are Unable to Obtain  Additional  Funding Our Business  Operations Will be
Harmed  or  Discontinued,   and  If  We  Do  Obtain  Additional   Financing  Our
Shareholders May Suffer Substantial Dilution.


                                      -55-
<PAGE>

         We believe that our existing  capital  resources will enable us to fund
our operations until  approximately  April, 2007. We believe we will be required
to seek  additional  capital  to  sustain  or expand  our  prototype  and sample
manufacturing, and sales and marketing activities, and to otherwise continue our
business  operations  beyond that date.  We have no  commitments  for any future
funding,  and may not be able to obtain additional  financing or grants on terms
acceptable  to  us,  if at  all,  in the  future.  If we are  unable  to  obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations.  Additionally, while a reduction
in our business  operations  may prolong our ability to operate,  that reduction
would harm our ability to implement our business strategy.  If we can obtain any
equity  financing,  it may involve  substantial  dilution  to our then  existing
shareholders.


Our Independent Auditors Have  Expressed Substantial  Doubt About Our Ability to
Continue   As   a  Going Concern,  Which May Hinder Our Ability to Obtain Future
Financing.


         In their report dated October 21, 2005, our independent auditors stated
that our  financial  statements  for the year  ended  September  30,  2005  were
prepared assuming that we would continue as a going concern,  and that they have
substantial  doubt  about  our  ability  to  continue  as a going  concern.  Our
auditors' doubts are based on our incurring net losses of $89,924,553 during the
period from  September  16, 2002 (date of  inception)  to September 30, 2005. We
continue to experience net operating losses.  Our ability to continue as a going
concern is subject to our ability to generate a profit and/or  obtain  necessary
funding from outside sources, including by the sale of our securities, obtaining
loans  from   financial   institutions,   or   obtaining   grants  from  various
organizations or governments, where possible. Our continued net operating losses
and our auditors'  doubts  increase the difficulty of our meeting such goals and
our efforts to continue as a going concern may not prove successful.


If Our Existing  Products are not Accepted by Potential  Customers or We Fail to
Introduce  New  Products,  Our  Business,  Results of  Operations  and Financial
Condition Will be Harmed.


There has been  limited or no market  acceptance  of our  embedded-DNA  security
products to date. Some of the factors that will affect whether we achieve market
acceptance of our products include:

    o    availability, quality and price relative to competitive products;

    o    customers' opinions of the products' utility;

    o    ease of use;

    o    consistency with prior practices;

    o    scientists' opinions of the products' usefulness;

    o    citation of the product in published research; and

    o    general trends in anti-counterfeit and security products' research.


The expenses or losses  associated with the continued lack of market  acceptance
of our  products  will  harm  our  business,  operating  results  and  financial
condition.


         Rapid technological  changes and frequent new product introductions are
typical  for the  markets  we serve.  Our future  success  may depend in part on
continuous,  timely  development  and  introduction of new products that address
evolving market  requirements.  We believe successful new product  introductions
may provide a significant  competitive  advantage because customers invest their
time in selecting and learning to use new products,  and are often  reluctant to
switch products. To the extent we fail to introduce new and innovative products,
we may lose any  market  share we then have to our  competitors,  which  will be
difficult or impossible to regain.  Any inability,  for  technological  or other
reasons,  to  successfully  develop and introduce new products  could reduce our
growth rate or damage our business.  We may experience delays in the development
and introduction of products. We may not keep pace with the rapid rate of change
in  anti-counterfeiting  and security products'  research,  and any new products
acquired or developed by us may not meet the  requirements of the marketplace or
achieve market acceptance.


We Need to  Expand  Our  Sales,  Marketing  and  Support  Organizations  and Our
Distribution Arrangements to Increase Market Acceptance of Our Products.


                                      -56-
<PAGE>

         We currently have few sales,  marketing,  customer  service and support
personnel  and will need to increase  our staff to generate a greater  volume of
sales and to  support  any new  customers  or the  expanding  needs of  existing
customers.  The employment  market for sales,  marketing,  customer  service and
support personnel in our industry is very competitive, and we may not be able to
hire the kind and  number of sales,  marketing,  customer  service  and  support
personnel we are targeting.  Our inability to hire qualified  sales,  marketing,
customer service and support personnel may harm our business,  operating results
and financial  condition.  We do not currently  have any  arrangements  with any
distributors  and we may not be able to enter into  arrangements  with qualified
distributors  on  acceptable  terms  or at all.  If we are not  able to  develop
greater distribution capacity, we may not be able to generate sufficient revenue
to support our operations.


A  Manufacturer's  Inability or  Willingness to Produce Our Goods on Time and to
Our Specifications Could Result in Lost Revenue and Net Losses.


         Though we manufacture our own prototypes and samples,  we do not own or
operate any  manufacturing  facilities and depend upon independent third parties
for the manufacture of all of our products to our specifications.  The inability
of a  manufacturer  to ship orders of our products in a timely manner or to meet
our quality  standards could cause us to miss the delivery date  requirements of
our customers  for those items,  which could result in  cancellation  of orders,
refusal to accept  deliveries  or a reduction in purchase  prices,  any of which
could harm our business by  resulting  in decreased  revenues or net losses upon
sales of products, if any sales could be made.


If We Need to Replace Manufacturers, Our Expenses Could Increase,   Resulting in
Smaller Profit Margins.


         We compete  with other  companies  for the  production  capacity of our
manufacturers and import quota capacity.  Some of these competitors have greater
financial and other  resources  than we have,  and thus may have an advantage in
the  competition  for production and import quota  capacity.  If we experience a
significant  increase  in  demand,  or if our  existing  manufacturers  must  be
replaced,  we will need to establish new relationships  with another or multiple
manufacturers.   We  cannot  assure  you  that  this   additional   third  party
manufacturing  capacity  will be  available  when  required  on  terms  that are
acceptable  to  us  or  terms  similar  to  those  we  have  with  our  existing
manufacturers, either from a production standpoint or a financial standpoint. We
do not have long-term contracts with our manufacturers, and our manufacturers do
not  produce  our  products  exclusively.  Should we be forced  to  replace  our
manufacturers,  we may  experience an adverse  financial  impact,  or an adverse
operational  impact,  such as  being  forced  to pay  increased  costs  for such
replacement  manufacturing  or delays  upon  distribution  and  delivery  of our
products  to our  customers,  which  could  cause us to lose  customers  or lose
revenues because of late shipments.


If a Manufacturer Fails to Use Acceptable Labor Practices,  We Might Have Delays
in  Shipments or Face Joint  Liability  for  Violations,  Resulting in Decreased
Revenue and Increased Expenses.


         While we require our independent manufacturers to operate in compliance
with  applicable  laws and  regulations,  we have no control over their ultimate
actions.  While our internal and vendor  operating  guidelines  promote  ethical
business  practices  and our  staff and  buying  agents  periodically  visit and
monitor the operations of our independent manufacturers, we do not control these
manufacturers or their labor practices.  The violation of labor or other laws by
our  independent  manufacturers,  or by one of our  licensing  partners,  or the
divergence  of  an  independent  manufacturer's  or  licensing  partner's  labor
practices from those generally  accepted as ethical in the United States,  could
interrupt,  or  otherwise  disrupt the  shipment  of finished  products to us or
damage our  reputation.  Any of these,  in turn,  could have a material  adverse
effect on our financial condition and results of operations, such as the loss of
potential revenue and incurring additional expenses.


Failure to License New Technologies  Could Impair Sales of Our Existing Products
or Any New Product Development We Undertake in the Future.


                                      -57-
<PAGE>

         To generate  broad  product  lines,  it is  advantageous  to  sometimes
license  technologies  from third parties rather than depend  exclusively on the
development efforts of our own employees. As a result, we believe our ability to
license new technologies from third parties is and will continue to be important
to our  ability to offer new  products.  In  addition,  from time to time we are
notified or become  aware of patents  held by third  parties that are related to
technologies  we are selling or may sell in the future.  After a review of these
patents, we may decide to seek a license for these technologies from these third
parties. There can be no assurance that we will be able to successfully identify
new  technologies  developed  by  others.  Even if we are able to  identify  new
technologies of interest, we may not be able to negotiate a license on favorable
terms, or at all. If we lose the rights to patented  technology,  we may need to
discontinue selling certain products or redesign our products, and we may lose a
competitive advantage.  Potential competitors could license technologies that we
fail to license and  potentially  erode our market  share for certain  products.
Intellectual   property   licenses  would   typically   subject  us  to  various
commercialization,  sublicensing,  minimum payment, and other obligations. If we
fail to comply with these  requirements,  we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons beyond our control,  and we may not receive significant  indemnification
from  a  licensor   against   third  party  claims  of   intellectual   property
infringement.


Our Failure To Manage Our Growth In Operations and  Acquisitions  of New Product
Lines and New Businesses Could Harm our Business.


Any growth in our  operations,  if any, will place a  significant  strain on our
current  management  resources.  To manage such growth, we would need to improve
our:

    o    operations and financial systems;

    o    procedures and controls; and

    o    training and management of our employees.


         Our future growth,  if any, may be  attributable to acquisitions of new
product  lines  and  new  businesses.   Future  acquisitions,   if  successfully
consummated,  would likely create increased working capital requirements,  which
would  likely  precede  by  several  months  any  material  contribution  of  an
acquisition  to  our  net  income.  Our  failure  to  manage  growth  or  future
acquisitions  successfully  could  seriously harm our operating  results.  Also,
acquisition   costs  could  cause  our  quarterly   operating  results  to  vary
significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.


         Although we currently only have operations within the United States, if
we were to acquire an international  operation;  we would face additional risks,
including:

    o    difficulties   in   staffing,   managing  and integrating international
         operations due to language, cultural or other differences;

    o    different or conflicting regulatory or legal requirements;

    o    foreign currency fluctuations; and

    o    diversion of significant time and attention of our management.


If We Are Unable   to Retain  the Services of Messrs. Sheu, Hayward or Liang,
We May Not Be Able to Continue Our Operations.


         Our success depends to a significant extent upon the continued  service
of Dr. Jun-Jei Sheu,the Chairman of our Board of Directors; Dr. James A.Hayward,
our   Chief  Executive  Officer;  and Dr.  Benjamin  Liang,  our  Secretary  and
Strategic Technology Development Officer. We do not have  employment  agreements
with Drs. Sheu,  Hayward or Liang.  Loss of the services of Drs.  Sheu,  Hayward
or   Liang   could  significantly  harm our business,  results of operations and
financial  condition.  We do not maintain  key-man insurance on the life of Drs.
Sheu, Hayward or Liang.


Failure   to  Attract and Retain Qualified Scientific, Production and Managerial
Personnel Could Harm Our Business.


                                      -58-
<PAGE>

         Recruiting and retaining qualified  scientific and production personnel
to manage and perform prototype,  sample, and product  manufacturing is critical
to our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although  we believe we have been and will be able to attract  and retain  these
personnel,  there  is  no  assurance  that  we  will  be  able  to  continue  to
successfully  attract qualified personnel.  In addition,  our desired growth and
expansion  into areas and activities  requiring  additional  expertise,  such as
clinical testing,  government approvals,  production, and marketing will require
the addition of new  management  personnel  and the  development  of  additional
expertise by existing  management  personnel.  The failure to attract and retain
these personnel or,  alternatively,  to develop this expertise  internally would
adversely  harm our business since our ability to conduct  business  development
and manufacturing will be reduced or eliminated, resulting in lower revenues. We
generally do not enter into  employment  agreements  requiring  our employees to
continue in our employment for any period of time.


The DNA Security Technology  Industry is Very Competitive,  and We may be Unable
to Continue to Compete Effectively in this Industry in the Future.


         We are  engaged in a segment of the DNA  security  technology  industry
that is highly  competitive.  We  compete  with  many  other  suppliers  and new
competitors  continue to enter the market. Many of our competitors,  both in the
United States and elsewhere,  also work with major pharmaceutical,  chemical and
biotechnology  companies,  and many of them have  substantially  greater capital
resources, marketing experience,  research and development staff, and facilities
than we do. Any of these companies could succeed in developing products that are
more  effective  than the  products  that we have or may develop and may be more
successful  than us in  producing  and  marketing  their  products.  Some of our
competitors in the  anti-counterfeiting  and fraud  protection space that we are
aware  of  include:  Authentix,  InkSure,  DNA  Technologies,  Inc.,  Art  Guard
International,  Theft Protection Systems,  Tracetag and November AG. Although it
is difficult to determine  the total size of the markets in which we operate and
other market data because  companies are secretive  about what security  methods
they utilize and how much they spend on such measures,  we have  determined that
approximate annual sales by some of our competitors have been as follows:


        InkSure - $1 million
        DNA Technologies, Inc. - $22.6 million
        November AG - $5.8 million


We expect this competition to continue and intensify in the future.  Competition
our markets is primarily driven by:

    o    product performance, features and liability;

    o    price;

    o    timing of product introductions;

    o    ability   to   develop,   maintain and protect proprietary products and
         technologies;

    o    sales and distribution capabilities;

    o    technical support and service;

    o    brand loyalty;

    o    applications support; and

    o    breadth of product line.


If a competitor develops superior  technology or cost-effective  alternatives to
our products, our business,  financial condition and results of operations could
be significantly harmed.


Our Intellectual Property Rights Are Valuable, and Any Inability to Protect Them
Could Reduce the Value of Our Products, Services and Brand.


                                      -59-
<PAGE>

         Our patents, trademarks, trade secrets, copyrights and all of our other
intellectual  property rights are important assets for us. There are events that
are  outside  of our  control  that pose a threat to our  intellectual  property
rights  as  well  as to  our  products  and  services.  For  example,  effective
intellectual  property protection may not be available in every country in which
our products and services are distributed.  The efforts we have taken to protect
our  proprietary  rights may not be  sufficient or  effective.  Any  significant
impairment of our  intellectual  property  rights could harm our business or our
ability to compete.  Protecting our  intellectual  property rights is costly and
time  consuming.  Any  increase  in the  unauthorized  use  of our  intellectual
property  could make it more  expensive  to do business  and harm our  operating
results. Although we seek to obtain patent protection for our innovations, it is
possible  we may not be able to  protect  some of these  innovations.  Given the
costs of  obtaining  patent  protection,  we may choose  not to protect  certain
innovations that later turn out to be important. There is always the possibility
that the scope of the  protection  gained from one of our issued patents will be
insufficient  or deemed  invalid  or  unenforceable.  We also  seek to  maintain
certain intellectual property as trade secrets. The secrecy could be compromised
by third parties, or intentionally or accidentally by our employees, which would
cause us to lose the competitive advantage resulting from these trade secrets.


Intellectual Property Litigation Could Harm Our Business.


         Litigation regarding patents and other intellectual  property rights is
extensive  in the  biotechnology  industry.  In  the  event  of an  intellectual
property  dispute,  we may be forced to litigate.  This litigation could involve
proceedings   instituted  by  the  U.S.  Patent  and  Trademark  Office  or  the
International  Trade  Commission,  as well as  proceedings  brought  directly by
affected  third  parties.  Intellectual  property  litigation  can be  extremely
expensive,  and  these  expenses,  as well  as the  consequences  should  we not
prevail, could seriously harm our business.


         If a third party claims an intellectual property right to technology we
use, we might need to  discontinue an important  product or product line,  alter
our products  and  processes,  pay license  fees or cease our affected  business
activities.  Although  we might under  these  circumstances  attempt to obtain a
license to this intellectual  property, we may not be able to do so on favorable
terms,  or at all.  Furthermore,  a third  party  may  claim  that we are  using
inventions  covered by the third  party's  patent  rights and may go to court to
stop us from engaging in our normal operations and activities,  including making
or selling our product  candidates.  These  lawsuits are costly and could affect
our results of operations  and divert the attention of managerial  and technical
personnel.  A court may decide that we are infringing the third party's  patents
and would order us to stop the activities covered by the patents. In addition, a
court may order us to pay the other party damages for having  violated the other
party's  patents.  The  biotechnology  industry has produced a proliferation  of
patents,  and it is not always  clear to industry  participants,  including  us,
which patents cover various types of products or methods of use. The coverage of
patents is subject to  interpretation by the courts,  and the  interpretation is
not always  uniform.  If we are sued for patent  infringement,  we would need to
demonstrate  that our  products  or methods of use  either do not  infringe  the
patent claims of the relevant  patent and/or that the patent claims are invalid,
and we may  not be  able to do  this.  Proving  invalidity,  in  particular,  is
difficult  since it  requires  a showing  of clear and  convincing  evidence  to
overcome the presumption of validity enjoyed by issued patents.


         Because some patent applications in the United States may be maintained
in secrecy  until the patents are issued,  because  patent  applications  in the
United States and many foreign  jurisdictions  are typically not published until
eighteen  months  after  filing,  and  because  publications  in the  scientific
literature often lag behind actual discoveries, we cannot be certain that others
have  not  filed  patent  applications  for  technology  covered  by  our or our
licensor's  issued patents or pending  applications  or that we or our licensors
were the first to invent the technology. Our competitors may have filed, and may
in the future file, patent applications covering technology similar to ours. Any
such patent  application  may have  priority over our or our  licensors'  patent
applications  and could further  require us to obtain  rights to issued  patents
covering  such  technologies.  If another party has filed a United States patent
application  on  inventions  similar to ours, we may have to  participate  in an
interference  proceeding  declared  by the United  States  Patent and  Trademark
Office to determine  priority of invention  in the United  States.  The costs of
these  proceedings  could be  substantial,  and it is possible that such efforts
would be unsuccessful,  resulting in a loss of our United States patent position
with respect to such inventions.


                                      -60-
<PAGE>

         Some of our  competitors  may be able to  sustain  the costs of complex
patent  litigation more effectively than we can because they have  substantially
greater resources.  In addition, any uncertainties resulting from the initiation
and  continuation of any litigation  could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.


Accidents Related to Hazardous Materials Could Adversely Affect Our Business.


Some of our  operations  require  the  controlled  use of  hazardous  materials.
Although we believe our safety procedures  comply with the standards  prescribed
by  federal,  state,  local  and  foreign  regulations,  the risk of  accidental
contamination  of property or injury to individuals  from these materials cannot
be completely  eliminated.  In the event of an accident,  we could be liable for
any damages that result,  which could seriously  damage our business and results
of operations.


Potential   Product   Liability   Claims Could Affect Our Earnings and Financial
Condition.


         We face a potential risk of liability  claims based on our products and
services,  and we have faced such claims in the past.  We  currently do not have
any product  liability  coverage but are attempting to obtain  coverage which we
will believe to be adequate. We cannot assure,  however, that we will be able to
obtain or maintain this insurance at reasonable cost and on reasonable terms. We
also cannot assure that this insurance, if obtained, will be adequate to protect
us against a product  liability  claim,  should  one arise.  In the event that a
product liability claim is successfully brought against us, it could result in a
significant  decrease in our  liquidity  or assets,  which  could  result in the
reduction or termination of our business.


Litigation   Generally   Could   Affect   Our Financial Condition and Results of
Operations.


         We  generally  may be subject to claims made by and required to respond
to  litigation  brought by  customers,  former  employees,  former  officers and
directors,  former  distributors  and sales  representatives,  and  vendors  and
service  providers.  We have faced such claims and litigation in the past and we
cannot assure that we will not be subject to claims in the future.  In the event
that a claim is successfully brought against us, considering our lack of revenue
and the losses our business  has  incurred for the period from our  inception to
June 30, 2006,  this could result in a significant  decrease in our liquidity or
assets, which could result in the reduction or termination of our business.


Our  Failure  to  File a  Registration  Statement  Could  Affect  Our  Financial
Condition and Results of Operations.


         In June 2005, we engaged Trilogy Capital Partners, Inc. ("Trilogy") and
Joff Pollon  ("Pollon") as  consultants.  In connection  with that engagement we
issued to Trilogy a warrant to purchase  7,500,000 shares of our common stock at
a price of $0.55 per share and Joff  Pollon  ("Pollon")  a warrant  to  purchase
1,500,000  shares of our  common  stock at a price of $0.55 per  share.  We also
agreed  to file a  registration  statement  with  the  Securities  and  Exchange
Commission  ("SEC") with respect to the shares underlying such warrants no later
than the earlier to occur of: (i) 15 days  following  the  effectiveness  of the
registration  statement of which this prospectus forms a part, or (ii) September
15, 2005. As of the date hereof we have not filed a registration  statement with
respect to the shares of our common stock underlying such warrants. In the event
that a claim is successfully  brought by the holders of such warrants against us
with respect to this matter,  it could result in a  significant  decrease in our
liquidity or assets,  which could result in the reduction or  termination of our
business.


We are  Obligated to Pay  Liquidated  Damages As a Result of Our Failure to Have
this Registration  Statement  Declared Effective Prior to June 15, 2005, and any
Payment of  Liquidated  Damages  Will Either  Result in Depletion of Our Working
Capital or Issuance of Shares of Common Stock Which Would Cause  Dilution to Our
Existing Shareholders.


                                      -61-
<PAGE>

         Pursuant to the terms of our private  placement  that closed in January
and February 2005, if we did not have a registration  statement  registering the
shares underlying the convertible  notes and warrants  declared  effective on or
before June 15, 2005, we are obligated to pay  liquidated  damages in the amount
of 3.5% per month of the face amount of the notes, which equals $257,985,  until
the  registration  statement  is  declared  effective.   At  our  option,  these
liquidated damages can be paid in cash or restricted shares of our common stock.
Thus far we have decided to pay the liquidated damages in common stock, although
any future payments of liquidated  damages may, at our option,  be made in cash.
If we decide to pay such liquidated damages in cash, we would be required to use
our limited working capital and potentially raise additional funds. If we decide
to pay the  liquidated  damages in shares of common stock,  the number of shares
issued would depend on our stock price at the time that payment is due. Based on
the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our
common stock on July 15, 2005, August 15, 2005,  September 15, 2005, October 17,
2005, November 15, 2005 and December 15, 2005,  respectively,  we issued a total
of 3,806,240 shares of common stock in liquidated  damages from August,  2005 to
January,  2006.  The issuance of shares upon payment of liquidated  damages will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock.

         Liquidated damages in the form of common stock were paid for the period
from June 15, 2005 to December 15, 2005. We believe that we have no  enforceable
obligation  to pay  further  liquidated  damages  since the  shares we agreed to
register for resale are eligible for resale under Rule 144 of the Securities Act
of 1933,  as  amended,  and  such  continuing  liquidated  damages  are  grossly
inconsistent  with actual  damages to the  purchasers of the notes and warrants.
However,  we are seeking to confirm this  position by  obtaining  the waiver and
release of the holders of these  securities of further  liquidated  damages.  If
these persons do not waive and release and successfully bring a claim against us
with  respect  to such  liquidated  damages,  it could  result in a  significant
decrease in our  liquidity  or assets,  which could  result in the  reduction or
termination of our business.  As of June 30, 2006 we have accrued  $1,547,910 in
penalties  representing  the  further  liquidated  damages  associated  with our
failure to file the  registration  statement by the  deadline and have  included
this amount in accounts payable and accrued expenses.


Matter Voluntarily Reported to the Securities and Exchange Commission

         During the months of March,  May,  July and  August  2005,  we issued a
total  of  8,550,000  shares  of our  common  stock  to  certain  employees  and
consultants  pursuant to the 2005  Incentive  Stock Plan. We engaged our outside
counsel  to  conduct  an  investigation  of the  circumstances  surrounding  the
issuance  of these  shares.  On April 26,  2006,  we  voluntarily  reported  the
findings from this  investigation to the SEC, and agreed to provide the SEC with
further information arising from the investigation. We believe that the issuance
of 8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of our board of directors.  These former  officers  received a total of
3,000,000 of these shares.  In addition,  it appears that the  8,000,000  shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly  issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance  with  the  Securities  Act  of  1933,  as  amended.   The  Company's
investigation  is  continuing.  The  members  of the  Company's  management  who
effectuated the stock issuances that are being examined in the  investigation no
longer work for the Company. The Company believes it may incur significant costs
and expenses in connection with this investigation.  Further,  these shares were
not registered  under the Securities Act of 1933, or the securities  laws of any
state,  and we believe  that  certain of these  shares may have been sold on the
open  market,  though we have been unable to  determine  the  magnitude  of such
sales. In addition, if violations of securities laws occurred in connection with
the resale of certain of these shares,  the employees and consultants or persons
who purchased shares from them may have rights to have their purchase  rescinded
or other claims  against us for violation of securities  laws,  which could harm
our business, results of operations, and financial condition.

There Are a Large Number of Shares  Underlying Our Options and Warrants That May
be Available for Future Sale and the Sale of These Shares May Depress the Market
Price of Our Common Stock and Will Cause Immediate and  Substantial  Dilution to
Our Existing Stockholders.

         As of June 30, 2006, we had  118,582,385  shares of common stock issued
and  outstanding  and  outstanding  options  and  warrants  to  purchase  in the
aggregate  approximately  57,129,464  shares of common stock.  All of the shares
issuable  upon  exercise  of  our  options  and  warrants  may be  sold  without
restriction.  The sale of these shares may adversely  affect the market price of
our common  stock.  The issuance of shares


                                      -62-
<PAGE>

upon exercise of options and warrants will    cause  immediate  and  substantial
dilution  to the  interests of other stockholders since the selling stockholders
may convert and sell the full amount issuable on exercise.

If We Fail to Remain Current on Our Reporting Requirements,  We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of  Broker-Dealers  to
Sell Our Securities and the Ability of Stockholders to Sell Their  Securities in
the Secondary Market.

         Companies trading on The Over The Counter Bulletin Board ("OTC Bulletin
Board"),  such  as  us,  must  be  reporting  issuers  under  Section  12 of the
Securities  Exchange  Act of 1934,  as  amended,  and must be  current  in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting  requirements,
we could be  removed  from the OTC  Bulletin  Board.  As a  result,  the  market
liquidity for our securities  could be severely  adversely  affected by limiting
the  ability  of  broker-dealers  to sell  our  securities  and the  ability  of
stockholders to sell their securities in the secondary market. Prior to May 2001
and new  management,  we were delinquent in our reporting  requirements,  having
failed to file our quarterly and annual  reports for the years ended 1998 - 2000
(except the quarterly  reports for the first two quarters of 1999). We have been
current in our reporting requirements for the last six years, however, there can
be no  assurance  that in the future we will always be current in our  reporting
requirements.

Our  Common  Stock is  Subject  to the  "Penny  Stock"  Rules of the SEC and the
Trading Market in Our  Securities is Limited,  Which Makes  Transactions  in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.

         The SEC has adopted Rule 15g-9 which  establishes  the  definition of a
"penny stock," for the purposes  relevant to us, as any equity security that has
a market  price of less than $5.00 per share or with an  exercise  price of less
than  $5.00 per  share,  subject  to  certain  exceptions.  For any  transaction
involving a penny stock, unless exempt, the rules require:

    o    that a broker or dealer approve a person's account for transactions  in
         penny stocks; and

    o    the broker or dealer receive from the investor a written agreement   to
         the transaction, setting forth the identity and quantity of the   penny
         stock to be purchased.

    o    In order to approve a   person's   account   for  transactions in penny
         stocks,  the broker or dealer must:

    o    obtain   financial  information and investment experience objectives of
         the person; and

    o    make a reasonable  determination  that the transactions in penny stocks
         are suitable for that person and the person has  sufficient   knowledge
         and  experience  in financial  matters to be capable of  evaluating the
         risks of transactions in penny stocks.

         The broker or dealer must also deliver,  prior to any  transaction in a
penny stock, a disclosure  schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:

    o    sets forth the basis on which the broker or dealer made the suitability
         determination; and

    o    that the broker or dealer received a signed, written agreement from the
         investor prior to the transaction.

         Generally,  brokers  may be less  willing  to execute  transactions  in
securities  subject to the "penny stock" rules.  This may make it more difficult
for  investors  to dispose of our common stock and cause a decline in the market
value of our stock.

         Disclosure  also has to be made about the risks of  investing  in penny
stocks  in  both  public  offerings  and in  secondary  trading  and  about  the
commissions payable to both the broker-dealer and the registered representative,
current  quotations for the securities and the rights and remedies  available to
an  investor  in cases of fraud in penny stock  transactions.  Finally,  monthly
statements  have to be sent  disclosing  recent price  information for the penny
stock held in the account and information on the limited market in penny stocks.


                                      -63-
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30,  2006,  our  management  carried  out an  evaluation,  under  the
supervision of our Chief Executive  Officer and Chief  Financial  Officer of the
effectiveness  of the design and operation of our system of disclosure  controls
and  procedures  pursuant to the Securities and Exchange Act, Rule 13a-15(e) and
15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive
officer and chief financial officer  concluded that our disclosure  controls and
procedures are not effective to provide reasonable assurance that information we
are  required to disclose in reports  that we file or submit  under the Exchange
Act is recorded,  processed,  summarized  and  reported  within the time periods
specified in SEC rules and forms,  and that such  information is not accumulated
and  communicated to our management,  including our chief executive  officer and
chief financial  officer,  as appropriate,  to allow timely decisions  regarding
required  disclosure.  Please see the subsection  "Significant  Deficiencies  In
Disclosure Controls And Procedures Or Internal Controls" below.

Changes in internal controls

Except as  described  below,  there were no changes in  internal  controls  over
financial  reporting that occurred during the period covered by this report that
have materially  affected,  or are reasonably likely to materially  effect,  our
internal  control over financial  reporting.  As described below, as a result of
our evaluation of our disclosure controls and procedures as of June 30, 2006, we
determined  that our controls and procedures are not effective and subsequent to
the period of this report, began to implement changes to our internal controls.

Significant   Deficiencies   In   Disclosure Controls And Procedures Or Internal
Controls

As previously  reported,  on July 11, 2005,  we determined  there were errors in
accounting for the valuation of equity consulting  service  transactions  during
the  January  through  March 2005 time  period.  The  valuation  resulted in the
overstatement of  approximately  $2.9 million in services  provided.  The errors
were  discovered in connection  with a comment raised by the SEC in their review
and comment on our  registration  statement on Form SB-2. The SEC requested that
we  provided  additional  disclosure  regarding  issuances  of  common  stock to
non-employees  in  exchange  for  services.  Upon  reviewing  and  updating  our
disclosure, we discovered our errors. During the quarter ended June 30, 2006, we
implemented  the  following  changes in our internal  controls to resolve  these
weaknesses and deficiencies:

Establish and maintain a separate binder of all board authorized  activities and
a binder with forward looking  "budget" of anticipated or contemplated  activity
for each of the following:

    o    shares issued for services;

    o    shares issued for employees;

    o    warrant exercises;

    o    option exercises;

    o    authorized shares and warrant re-pricing;

    o    shares issued in exchange for debt; and

    o    upcoming ESOP grants and exercises;

    o    require    the   signature   of  the principal executive and accounting
         officers for all issuances of securities;

    o    require monthly review of share issuances compared to binders; and

    o    authorize  our transfer agent to handle and track all warrants and ESOP
         grants.

We believe  that these  actions  will  correct  the  material  deficiencies  and
significant weaknesses in our controls and procedures.


                                      -64-
<PAGE>

                           PART II--OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

From  time to time,  we may  become  involved  in  various  lawsuits  and  legal
proceedings which arise in the ordinary course of business.  However, litigation
is subject to inherent  uncertainties,  and an adverse  result in these or other
matters  may  arise  from  time to time  that may harm our  business.  Except as
described  below,  we are currently not aware of any such legal  proceedings  or
claims that we believe will have,  individually or in the aggregate,  a material
adverse affect on our business, financial condition or operating results.


Paul Reep v. Applied DNA Sciences, Inc., Case No.: BC345702


         Plaintiff Paul Reep, a former  employee,  commenced this action against
us in the  Superior  Court  for the Sate of  California  for the  County  of Los
Angeles on January 10, 2006. Paul Reep asserts eight causes of action for breach
of  contract,  breach  of  an  oral  agreement,   negligent   misrepresentation,
interference with prospective business advantages, defamation, fraud, accounting
and constructive  trust,  unjust enrichment.  The relief sought includes damages
and  attorneys'  fees. We dispute all of the  allegations  of this complaint and
intend to vigorously  defend this mater.  In this matter we have asked the court
to make a judicial  determination that an agreement,  which we did not authorize
and which is the basis of  previously  disclosed  litigation  against us by Paul
Reep, our former employee, and a new action filed by our former employees as set
forth in the subsequent  paragraphs is invalid and unenforceable.  The court has
stayed all  proceedings  in this matter  pending the  resolution of the parallel
federal case, Applied DNA Sciences Inc. v. Reep, et al., discussed below.


Applied DNA Sciences, Inc. v. Paul Reep, Adrian Butash, John Barnett, Chanty


         Cheang,  Jaime Cardona,  and Angela Wiggins,  Case No. CV06-2027 RGK We
filed this  action  against  the  defendants,  Paul Reep,  Adrian  Butash,  John
Barnett,  Chanty Cheang,  Jaime Cardona, and Angela Wiggins on April 4, 2006, in
the United States District Court for the Central District of California. In this
matter  we have  asked  the  court  to  make a  judicial  determination  that an
agreement,  which we did not  authorize  and  which is the  basis of  previously
disclosed  litigation  against us by Paul Reep, our former employee,  is invalid
and unenforceable. This matter is in its early stages.


Barnett, et al. v. Applied DNA Sciences, et al., Case No.: BC 350904

         Plaintiffs    John D. Barnett,  Jr.,  Adrian Butash,  Jaime A. Cardona,
and Chanty  Cheang,  our former  employees,  filed suit  against us, Applied DNA
Operations   Management,  Inc., APDN (B.V.I.), Inc., Peter Brocklesby,  James A.
Hayward, and Jun-Jei Sheu in Los   Angeles   County  Superior Court on April 17,
2006. The  complaint  alleges  causes of action for breach of written  contract,
breach of  oral contract,  fraud,  violations of the California  Labor Code, and
wrongful  termination.  We dispute all of the allegations of this  complaint and
intend to vigorously defend this matter.

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

         On May 2, 2006, we closed on the first tranche of the Offshore Offering
in which we sold 20 units for aggregate  gross proceeds of  $1,000,000.  On June
15, 2006, we completed the second  tranche of the Offshore  Offering in which we
sold 59 units for aggregate  gross proceeds of $2,950,000.  The units being sold
consist of (i) a $50,000  principal amount secured  convertible  promissory note
and (ii) a warrant to purchase  100,000 shares of our common stock at a price of
$0.50 per share. These issuances are considered exempt under Regulation S of the
Securities Act of 1933.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


                                      -65-
<PAGE>

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

None.


ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS


4.1      Form of  Subscription  Agreement,  filed as   an exhibit to the current
         report   on   Form   8-K  filed with the  Commission on May 5, 2006 and
         incorporated herein by reference.


4.9      Form of 10%  Secured    Convertible    Promissory   Note of Applied DNA
         Sciences,  Inc., filed as an exhibit to the current report on  Form 8-K
         filed   with   the Commission on May 5, 2006 and incorporated herein by
         reference.


4.10     Form of Warrant  Agreement of Applied DNA Sciences,  Inc.,  filed as an
         exhibit to the current  report on Form 8-K filed with the Commission on
         May 5, 2006 and incorporated herein by reference.


10.4     Form of Registration  Rights  Agreement of Applied DNA Sciences,  Inc.,
         filed as an exhibit to the current report on Form 8-K   filed  with the
         Commission on May 5, 2006 and incorporated herein by reference.


31.1     Certification  of Chief Executive  Officer  pursuant to Rule 13a-14 and
         Rule  15d-14(a),  promulgated  under the Securities and Exchange Act of
         1934, as amended.


31.2     Certification  of Chief Financial  Officer  pursuant to Rule 13a-14 and
         Rule 15d 14(a),  promulgated  under the Securities and  Exchange Act of
         1934, as amended.


32.1     Certification pursuant to 18 U.S.C. Section 1350,  as adopted  pursuant
         to Section  906 of the  Sarbanes-Oxley  Act of  2002 (Chief   Executive
         Officer).


32.2     Certification pursuant to 18 U.S.C. Section 1350,  as adopted  pursuant
         to Section  906 of the    Sarbanes-Oxley   Act of 2002 (Chief Financial
         Officer).


                                      -66-
<PAGE>

                                   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 DNA SCIENCES, INC.

Date:  October 10, 2006                By: /s/  JAMES A. HAYWARD
                                       -----------------------------------------
                                       James A. Hayward
                                       Chief Executive  Officer  (Principal
                                       Executive  Officer, Principal  Financial
                                       Officer and Principal Accounting Officer)











                                       -67-