UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549FORM 10-Qx
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2009ORo
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from
                     toCommission
      File Number: 33-17387Applied
      DNA Sciences, Inc.(Exact
      name of registrant as specified in its
charter)




Delaware
                    59-2262718(State
      or other jurisdiction of
                      incorporation
      or organization)
                    (I.R.S.
      Employer
                      Identification
      No.)25
      Health Sciences Drive, Suite 113Stony
      Brook, New York
                    11790(Address
      of principal executive offices)
                    (Zip
      Code)631-444-
      8090(Registrant’s
      telephone number, including area
code)




Indicate
      by check mark whether the registrant (1) has filed all reports
      required to be filed by Section 13 or 15(d) of the Securities
      Exchange Act of 1934 during the preceding 12 months (or for such
      shorter period that the registrant was required to file such reports), and
      (2) has been subject to such filing requirements for the past
      90 days.x Yes   oNoIndicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Web site, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of
      Regulation S-T (§232.405 of this chapter) during the preceding 12 months
      (or for such shorter period that the registrant was required to submit and
      post such files).o Yes 
      o
      NoIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See the definitions of “large accelerated filer”, “accelerated filer”, and
      “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
      one):




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




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




As
of August 13, 2009, the registrant had 274,891,570 shares of common stock
outstanding.







Applied
DNA Sciences, Inc.




Form 10-Q
for the Quarter Ended June 30, 2009




Table of
Contents


PagePart
      I - Financial InformationItem
      1 - Financial Statements
                        1Item
      2 - Management’s Discussion and Analysis or Plan of
      Operation
                        27Item
      3 - Quantitative and Qualitative Disclosures About Market
      Risk
                        38Item
      4 - Controls and Procedures
                        38Part
      II - Other InformationItem
      1 - Legal Proceedings
                        38Item
      1A - Risk Factors
                        39Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                        40Item
      3 - Defaults Upon Senior Securities
                        41Item
      4 - Submission of Matters to a Vote of Security
      Holders
                        41Item
      5 - Other Information
                        41Item
      6 - Exhibits
                        41Signatures







Part
I




Item
1 - Financial Statements




APPLIED
DNA SCIENCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


June
      30,
                    2009
                  
                  
                  September
      30,
                    2008(unaudited)ASSETSCurrent
      assets:Cash
                  
                  $
                  17,372
                  
                  
                  $
                  136,405Restricted
      Cash
                  
                  
                  —
                  
                  
                  
                  —Accounts
      Receivable
                  
                  
                  16,425
                  
                  
                  
                  75,150Prepaid
      expenses
                  
                  
                  322,800
                  
                  
                  
                  83,333Total
      current assets
                  
                  
                  356,597
                  
                  
                  
                  294,888Property,
      plant and equipment-net of accumulated depreciation of $191,645 and
      $147,132, respectively
                  
                  
                  19,217
                  
                  
                  
                  63,730Other
      assets:Deposits
                  
                  
                  8,322
                  
                  
                  
                  8,322Capitalized
      finance costs-net of accumulated amortization of $585,940 and $464,274,
      respectively
                  
                  
                  74,060
                  
                  
                  
                  113,226Intangible
      assets:Patents,
      net of accumulated amortization of $33,851 and $31,762, respectively (Note
      B)
                  
                  
                  406
                  
                  
                  
                  2,494Intellectual
      property, net of accumulated amortization and write off of $8,339,526 and
      $8,066,682, respectively (Note B)
                  
                  
                  1,091,374
                  
                  
                  
                  1,364,217Total
      Assets
                  
                  $
                  1,549,976
                  
                  
                  $
                  1,846,877LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities (Note C)
                  
                  $
                  940,692
                  
                  
                  $
                  12,821,171Convertible
      notes payable, net of unamortized discount of $420,720 and $486,726,
      respectively (Note D)
                  
                  
                  1,529,280
                  
                  
                  
                  3,063,274Total
      current liabilities
                  
                  
                  2,469,972
                  
                  
                  
                  15,884,445Commitments
      and contingencies (Note H)
                  
                  
                  —
                  
                  
                  
                  —Deficiency
      in Stockholders’ Equity (Note F)Preferred
      stock, par value $0.001 per share; 10,000,000 shares authorized; -0- and
      60,000 issued and outstanding as of June 30, 2009 and September 30,
      2008
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, par value $0.001 per share; 410,000,000 shares authorized;
      261,888,747 and 205,359,605 issued and outstanding as of June 30, 2009 and
      September 30, 2008, respectively
                  
                  
                  261,889
                  
                  
                  
                  205,359Additional
      paid in capital
                  
                  
                  140,803,386
                  
                  
                  
                  133,133,354Accumulated
      deficit
                  
                  
                  (141,985,271
                  )
                  
                  
                  (147,376,281
                  )Total
      deficiency in stockholders’ equity
                  
                  
                  (919,996
                  )
                  
                  
                  (14,037,568
                  )Total
      Liabilities and Deficiency in Stockholders’ Equity
                  
                  $
                  1,549,976
                  
                  
                  $
                  1,846,877




See the
accompanying notes to the unaudited condensed consolidated financial
statements  1




APPLIED
DNA SCIENCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF LOSSES


(unaudited)


Three
      Months Ended June 30,
                                      
                                      
                                      Nine
      Months Ended June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Sales
                                      
                                      $
                                      22,925
                                      
                                      
                                      $
                                      252,691
                                      
                                      
                                      $
                                      234,170
                                      
                                      
                                      $
                                      583,595Cost
      of sales
                                      
                                      
                                      (2,521
                                      )
                                      
                                      
                                      (50,489
                                      )
                                      
                                      
                                      (54,856
                                      )
                                      
                                      
                                      (124,493
                                      )Gross
      Profit
                                      
                                      
                                      20,404
                                      
                                      
                                      
                                      202,202
                                      
                                      
                                      
                                      179,314
                                      
                                      
                                      
                                      459,102Operating
      expenses:Selling,
      general and administrative
                                      
                                      
                                      982,945
                                      
                                      
                                      
                                      951,828
                                      
                                      
                                      
                                      5,430,490
                                      
                                      
                                      
                                      3,365,880Research
      and development
                                      
                                      
                                      28,306
                                      
                                      
                                      
                                      19,816
                                      
                                      
                                      
                                      131,695
                                      
                                      
                                      
                                      112,042Depreciation
      and amortization
                                      
                                      
                                      104,818
                                      
                                      
                                      
                                      109,555
                                      
                                      
                                      
                                      319,445
                                      
                                      
                                      
                                      324,603Total
      operating expenses
                                      
                                      
                                      1,116,069
                                      
                                      
                                      
                                      1,081,199
                                      
                                      
                                      
                                      5,881,630
                                      
                                      
                                      
                                      3,802,525NET
      LOSS FROM OPERATIONS
                                      
                                      
                                      (1,095,665
                                      )
                                      
                                      
                                      (878,997
                                      )
                                      
                                      
                                      (5,702,316
                                      )
                                      
                                      
                                      (3,343,423
                                      )Other
      income (Note C)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12,023,888
                                      
                                      
                                      
                                      —Interest
      expense, net
                                      
                                      
                                      (234,940
                                      )
                                      
                                      
                                      (649,722
                                      )
                                      
                                      
                                      (929,991
                                      )
                                      
                                      
                                      (1,643,727
                                      )Net
      income (loss) before provision for income taxes
                                      
                                      
                                      (1,330,605
                                      )
                                      
                                      
                                      (1,528,719
                                      )
                                      
                                      
                                      5,391,581
                                      
                                      
                                      
                                      (4,987,150
                                      )Income
      taxes (benefit)
                                      
                                      
                                      75
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      572
                                      
                                      
                                      
                                      —NET
      INCOME (LOSS)
                                      
                                      $
                                      (1,330,680
                                      )
                                      
                                      $
                                      (1,528,719
                                      )
                                      
                                      $
                                      5,391,009
                                      
                                      
                                      $
                                      (4,987,150
                                      )Net
      income (loss) per share-basic
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      (0.03
                                      )Net
      income (loss) per share-diluted
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      (0.03
                                      )Weighted
      average shares outstanding-Basic
                                      
                                      
                                      261,343,763
                                      
                                      
                                      
                                      192,749,058
                                      
                                      
                                      
                                      245,162,159
                                      
                                      
                                      
                                      188,818,049Diluted
                                      
                                      
                                      261,343,763
                                      
                                      
                                      
                                      192,749,058
                                      
                                      
                                      
                                      291,705,369
                                      
                                      
                                      
                                      188,818,049




See the
accompanying notes to the unaudited condensed consolidated financial
statements  2




APPLIED
DNA SCIENCES, INC


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(unaudited)


Nine
      months ended June 30,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  5,391,009
                  
                  
                  $
                  (4,987,150
                  )Adjustments
      to reconcile net loss to net used in operating activities:Depreciation
      and amortization
                  
                  
                  319,445
                  
                  
                  
                  324,603Reversal
      of accrued penalty charges
                  
                  
                  (12,023,888
                  )
                  
                  
                  —Fair
      value of vested options issued to officers, directors and
      employees
                  
                  
                  2,451,677
                  
                  
                  
                  —Fair
      value of warrants issued in exchange for services rendered
                  
                  
                  217,865
                  
                  
                  
                  —Amortization
      of capitalized financing costs
                  
                  
                  121,666
                  
                  
                  
                  321,587Amortization
      of debt discount attributable to convertible debentures
                  
                  
                  796,932
                  
                  
                  
                  1,375,876Common
      stock issued in exchange for services rendered
                  
                  
                  186,094
                  
                  
                  
                  1,040,000Change
      in assets and liabilities:Decrease
      (increase) in accounts receivable
                  
                  
                  58,725
                  
                  
                  
                  (89,483
                  )Decrease
      (increase) in prepaid expenses and deposits
                  
                  
                  160,533
                  
                  
                  
                  (8,083
                  )Increase
      (decrease) in accounts payable and accrued liabilities
                  
                  
                  483,408
                  
                  
                  
                  (387,383
                  )Increase
      in deferred expenses
                  
                  
                  —
                  
                  
                  
                  60,000Net
      cash used in operating activities
                  
                  
                  (1,836,533
                  )
                  
                  
                  (2,350,033
                  )Cash
      flows from investing activities:Decrease
      in restricted cash held in escrow
                  
                  
                  —
                  
                  
                  
                  399,920Acquisition
      (disposal) of property and equipment, net
                  
                  
                  —
                  
                  
                  
                  (22,500
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  —
                  
                  
                  
                  377,420Cash
      flows from financing activities:Net
      proceeds from issuance of convertible notes
                  
                  
                  1,717,500
                  
                  
                  
                  2,532,580Net
      cash provided by financing activities
                  
                  
                  1,717,500
                  
                  
                  
                  2,532,580Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (119,033
                  )
                  
                  
                  559,967Cash
      and cash equivalents at beginning of period
                  
                  
                  136,405
                  
                  
                  
                  25,185Cash
      and cash equivalents at end of period
                  
                  $
                  17,372
                  
                  
                  $
                  585,152Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during period for interest
                  
                  $
                  —
                  
                  
                  $
                  —Cash
      paid during period for taxes
                  
                  $
                  —
                  
                  
                  $
                  —Non-cash
      transactions:Fair
      value of vested options issued to officers, directors and
      employees
                  
                  $
                  2,451,677
                  
                  
                  $
                  —Fair
      value of warrants issued for services
                  
                  $
                  217,865
                  
                  
                  $
                  —Common
      stock issued for services
                  
                  $
                  586,094
                  
                  
                  $
                  1,040,000Common
      stock issued in exchange for previously incurred debt
                  
                  $
                  3,740,000
                  
                  
                  $
                  600,275




See the
accompanying notes to the unaudited condensed consolidated financial
statements  3




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES




General




The
accompanying interim condensed consolidated balance sheet as of June 30, 2009,
the condensed consolidated statements of losses for the three months and six
months ended June 30, 2009 and 2008, and the condensed consolidated statements
of cash flows for the six months ended June 30, 2009 and 2008 are unaudited and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and applicable rules and regulations of
the SEC for interim financial reporting. Accordingly, certain information and
footnote disclosures have been condensed or omitted pursuant to SEC rules that
would ordinarily be required by GAAP for complete financial
statements.




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, 2009 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2009. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto for the year ended September 30, 2008
included in the Company’s Annual Report on Form 10-K filed with the SEC on
December 16, 2008.




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. Effective December 17, 2008, the Company
reincorporated from the State of Nevada to the State of Delaware. During the
year ended September 30, 2007, the Company transitioned from a development stage
enterprise to an operating company. The Company is principally devoted to
developing DNA embedded biotechnology security solutions in the United States.
To date, the Company has generated minimum sales revenues from its services and
products; it 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, 2009, the
Company has accumulated losses of $141,985,271.




The
consolidated financial statements include the accounts of the Company, and its
wholly-owned subsidiaries Applied DNA Operations Management, Inc., APDN
(B.V.I.), Inc. and Applied DNA Sciences Europe Limited. Significant
inter-company transactions have been eliminated in consolidation.




Estimates




The
preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.




Cash
Equivalents




For the
purpose of the accompanying consolidated financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.


4




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Accounts
Receivable




The
Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company’s estimate of the allowance for doubtful
accounts will change. At June 30, 2009, the Company has deemed that no allowance
for doubtful accounts was necessary.




Revenue
Recognition




Revenues
are derived from research, development, qualification and production testing for
certain commercial products. Revenue from fixed price testing contracts is
generally recorded upon completion of the contracts, which are generally
short-term, or upon completion of identifiable contractual tasks. At the time
the Company enters into a contract that includes multiple tasks, the Company
estimates the amount of actual labor and other costs that will be required to
complete each task based on historical experience. Revenues are recognized which
provide for a profit margin relative to the testing performed. Revenue relative
to each task and from contracts which are time and materials based is recorded
as effort is expended. Billings in excess of amounts earned are deferred. Any
anticipated losses on contracts are charged to income when identified. To the
extent management does not accurately forecast the level of effort required to
complete a contract, or individual tasks within a contract, and the Company is
unable to negotiate additional billings with a customer for cost over-runs, the
Company may incur losses on individual contracts. All selling, general and
administrative costs are treated as period costs and expensed as
incurred.




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) collectability 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 collectability 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, 2009, the Company’s
deferred revenue was $-0-.




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.


5




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Income
Taxes




The
Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.




In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, treatment of interest and penalties, and disclosure of such
positions. Effective October 1, 2007, the Company adopted the provisions of FIN
48, as required. As a result of implementing FIN 48, there has been no
adjustment to the Company’s consolidated financial statements and the adoption
of FIN 48 did not have a material effect on the Company’s consolidated financial
statements for the nine month period ended June 30, 2009.




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, 2009 and
September 30, 2008 property and equipment consist of:


June
      30,
                        2009
                        (unaudited)
                      
                      
                      September
      30,
                        2008Computer
      equipment
                      
                      $
                      27,404
                      
                      
                      $
                      27,404Lab
      equipment
                      
                      
                      77,473
                      
                      
                      
                      77,473Furniture
                      
                      
                      105,985
                      
                      
                      
                      105,985210,862
                      
                      
                      
                      210,862Accumulated
      Depreciation
                      
                      
                      (191,645
                      )
                      
                      
                      (147,132
                      )Net
                      
                      $
                      19,217
                      
                      
                      $
                      63,730




Impairment
of Long-Lived Assets




The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undiscounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to
sell.


6




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Comprehensive
Income




The
Company does not have any items of comprehensive income in any of the periods
presented.




Segment
Information




The
Company adopted Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (“SFAS No. 131”). SFAS
No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision- making group, in making decisions how to allocate
resources and assess performance. The information disclosed herein, materially
represents all of the financial information related to the Company’s single
principal operating segment.




Net
loss per share




In
accordance with SFAS No. 128, “Earnings
per Share”, the basic loss per share is computed by dividing loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding as if the potential common shares
had been issued and if the additional common shares were dilutive. For the three
months and nine months ended June 30, 2009 and 2008, common equivalent shares
are excluded from the computation of the diluted loss per share as their effect
would be anti-dilutive. Fully diluted shares outstanding were 346,727,437 and
291,705,369 for the three months ended June 30, 2009, respectively and
258,132,892 and 254,201,883 for the three and nine months ended June 30, 2008,
respectively.




Stock
Based Compensation




On
December 16, 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based
Payment” which is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB opinion No.
25, “Accounting
for Stock Issued to Employees”, and amends SFAS No. 95, “Statement
of Cash Flows”. Generally, the approach in SFAS No. 123(R) is similar to
the approach described in SFAS No. 123. However, SFAS No. 123(R) 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. The effective date for our application
of SFAS No. 123(R) is September 1, 2006. Management elected to apply SFAS No.
123(R) commencing on that date.




As more
fully described in Note G below, the Company granted an aggregate of 38,670,000
and -0- stock options during the nine month periods ended June 30, 2009 and
2008, respectively to employees and directors of the Company under a
non-qualified employee stock option plan.


7




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




As of
June 30, 2009, 44,330,000 non-qualified employee stock options were outstanding
with 24,495,000 shares vested and exercisable.




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 high 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,
2009, allowance for doubtful receivable was $0.




Research
and Development




The
Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board’s Statement of Financial Accounting
Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and development costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company incurred
research and development expenses of $28,306 and $131,695 for the three and nine
month periods ended June 30, 2009, respectively and $19,816 and $112,042 for the
three and nine month periods ended June 30, 2008, respectively.




Reclassifications




Certain
reclassifications have been made in prior year’s financial statements to conform
to classifications used in the current year.




Advertising




The
Company follows the policy of charging the costs of advertising to expense as
incurred. The Company charged to operations $797 and $36,347 for the three and
nine month periods ended June 30, 2009, respectively and $35,643 and $47,007 as
advertising costs for the three and nine month periods ended June 30, 2008,
respectively.




Intangible
Assets




The
Company amortized its intangible assets using the straight-line method over
their estimated period of benefit. The estimated useful life for patents is five
years while intellectual property uses a seven year useful life.




We
periodically evaluate the recoverability of intangible assets and take into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that impairment exists. All of our intangible assets are
subject to amortization.


8




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Fair
Values




In the
first quarter of fiscal year 2008, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) as
amended by FASB Statement of Position (FSP) FAS 157-1 and FSP FAS 157-2. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure. FSP FAS 157-2 delays, until the
first quarter of fiscal year 2009, the effective date for SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company adopted SFAS No. 157 effective January 1,
2008 for all financial assets and liabilities as required.




SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which
prioritizes the valuation inputs into three broad levels.




There are
three general valuation techniques that may be used to measure fair value, as
described below:




Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. Prices may
be indicated by pricing guides, sale transactions, market trades, or other
sources;




Cost
approach – Based on the amount that currently would be required to replace the
service capacity of an asset (replacement cost); and




Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about the future amounts
(includes present value techniques and option-pricing models). Net present value
is an income approach where a stream of expected cash flows is discounted at an
appropriate market interest rate.




Financial
assets and liabilities are valued using either level 1 inputs based on
unadjusted quoted market prices within active markets or using level 2 inputs
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain debt, fair value is based on present value
techniques using inputs derived principally or corroborated from market data.
Using level 3 inputs using management’s assumptions about the assumptions market
participants would utilize in pricing the asset or liability. In the Company’s
case, this entailed assumptions used in pricing models for note discounts.
Valuation techniques utilized to determine fair value are consistently
applied.




The
following table sets forth the Company’s assets and liabilities as of June 30,
2009 and September 30, 2008 which are measured at fair value on a recurring
basis by level within the fair value hierarchy. As required by SFAS No. 157,
these are classified based on the lowest level of input that is significant to
the fair value measurement:


Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      Assets
      at
                        fair
      valueConvertible
      notes payable-net, June 30, 2009
                      
                      $
                      —
                      
                      
                      $
                      1,529,280
                      
                      
                      $
                      —
                      
                      
                      $
                      1,529,280Convertible
      notes payable-net, September 30, 2008
                      
                      $
                      —
                      
                      
                      $
                      3,063,274
                      
                      
                      $
                      —
                      
                      
                      $
                      3,063,274




9




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Recent
accounting pronouncements




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No.
51” (“SFAS No. 160”), which will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity within the consolidated balance sheets.
SFAS No. 160 is effective as of the beginning of the first fiscal year beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company does
not expect the adoption of SFAS No. 160 in 2009 will have a material effect on
its consolidated financial position, results of operations or cash
flows.




In
December 2007, the FASB ratified the consensus in Emerging Issues Task Force
(EITF) Issue No. 07-1, “Accounting
for Collaborative Arrangements” (EITF 07-1). EITF 07-1 defines
collaborative arrangements and requires collaborators to present the result of
activities for which they act as the principal on a gross basis and report any
payments received from (made to) the other collaborators based on other
applicable authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational and consistent
accounting policy is to be elected. EITF 07-1 also provides for disclosures
regarding the nature and purpose of the arrangement, the entity’s rights and
obligations, the accounting policy for the arrangement and the income statement
classification and amounts arising from the agreement.




EITF 07-1
will be effective for fiscal years beginning after December 15, 2008, which will
be the Company’s fiscal year 2009, and will be applied as a change in accounting
principle retrospectively for all collaborative arrangements existing as of the
effective date. The Company does not expect the adoption of EITF 07-1in 2009
will have a material effect on its consolidated financial position, results of
operations or cash flows.




In June
2008, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue
07-5, “Determining
whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own
Stock.” This issue addresses whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which is the first part of the
scope exception in paragraph 11(a) of SFAS No. 133, for purposes of determining
whether the instrument should be classified as an equity instrument or accounted
for as a derivative instrument. The provisions of EITF Issue No. 07-5 are
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and will be applied retrospectively through a cumulative
effect adjustment to retained earnings for outstanding instruments as of that
date. The Company is assessing the potential effect of the adoption of EITF
07-05 on its consolidated financial position, results of operations or cash
flows.




In March
2008, the FASB” issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities - an amendment to FASB
Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. The Company does not expect
the adoption of SFAS No. 161 will have a material effect on its consolidated
financial position, results of operations or cash flows.


10




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




In May
2008, the FASB issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).
SFAS No. 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy). SFAS No. 162 will become
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The Company does not
expect the adoption of SFAS No. 162 will have a material effect on its
consolidated financial position, results of operations or cash
flows.




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not expect the adoption of FSP APB 14-1 will have a
material effect on its consolidated financial position, results of operations or
cash flows.




In May
2008, the FASB issued FASB Statement No. 163, “Accounting
for Financial Guarantee Insurance Contracts”, which clarifies how FASB
Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies
to financial guarantee insurance contracts issued by insurance enterprises. The
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2008, including interim periods in that year. The Company
does not expect the adoption of SFAS 163 will have a material effect on its
consolidated financial position, results of operations or cash
flows.




In June
2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” Under the FSP, unvested share-based payment
awards that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. The FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. The Company does not
expect the adoption of FSP EITF No. 03-6-1 will have a material effect on its
consolidated financial position, results of operations or cash
flows.




In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” This position clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. It also reaffirms the notion of
fair value as an exit price as of the measurement date. This position was
effective upon issuance, including prior periods for which financial statements
have not been issued. The adoption had no impact on the Company’s consolidated
financial statements.


11




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




In
December 2008, the FASB issued FSP 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets”, which is effective
for fiscal years ending after December 15, 2009. FSP 132(R)-1 requires
disclosures about fair value measurements of plan assets that would be similar
to the disclosures about fair value measurements required by SFAS 157. The
Company is assessing the potential effect of the adoption of FSP 132(R)-1 on its
consolidated financial position or results of operations.




In
December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, “Disclosures
about Transfers of Financial Assets and Interests in Variable Interest
Entities.” The FSP requires extensive additional disclosure by public
entities with continuing involvement in transfers of financial assets to
special-purpose entities and with variable interest entities (VIEs), including
sponsors that have a variable interest in a VIE. This FSP became effective for
the first reporting period ending after December 15, 2008. The Company does not
expect the adoption will have a material impact on the Company’s consolidated
financial statements.




In
January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue No.
EITF 99-20-1, “Amendments
to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No.
99-20-1”). FSP EITF No. 99-20-1 amends the impairment guidance in EITF Issue No.
99-20, “Recognition
of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests that Continue to be Held by a Transferor in Securitized
Financial Assets” to achieve more consistent determination of whether an
other-than-temporary impairment has occurred. The Company adopted FSP EITF No.
99-20-1 and it did not have a material impact on the consolidated financial
statements.




In April
2009, the Financial Accounting Standards Board (“FASB”) issued the following new
accounting standards:


FASB
      Staff Position FAS No. 157-4,Determining Whether a Market Is Not Active and a Transaction Is Not
      Distressed, (“FSP FAS No. 157-4”) provides guidelines for making
      fair value measurements more consistent with the principles presented in
      SFAS No. 157. FSP FAS No. 157-4 provides additional authoritative guidance
      in determining whether a market is active or inactive and whether a
      transaction is distressed. It is applicable to all assets and liabilities
      (i.e., financial and non-financial) and will require enhanced
      disclosures.FASB
      Staff Positions FAS No. 115-2, FAS 124-2, and EITF No. 99-20-2,
      Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP
      FAS No. 115-2, FAS No. 124-2, and EITF No. 99-20-2”) provides additional
      guidance to provide greater clarity about the credit and noncredit
      component of another-than-temporary impairment event and to more
      effectively communicate when an other-than-temporary impairment event has
      occurred. This FSP applies to debt securities.FASB
      Staff Position FAS No. 107-1 and APB No. 28-1, Interim Disclosures about
      Fair Value of Financial Instruments, (“FSP FAS No. 107-1 and APB No.
      28-1”) amends FASB Statement No. 107, Disclosures about Fair Value of
      Financial Instruments, to require disclosures about fair value of
      financial instruments in interim as well as in annual financial
      statements. This FSP also amends APB Opinion No. 28, Interim Financial
      Reporting, to require those disclosures in all interim financial
      statements.




These
standards are effective for periods ending after June 15, 2009. The Company is
evaluating the impact that these standards will have on its consolidated
financial statements.


12




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.




NOTE
B - ACQUISITION OF INTANGIBLE ASSETS




The
Company has adopted SFAS No. 142, “Goodwill
and Other Intangible Assets”, whereby the Company periodically tests 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.




The
identifiable intangible assets acquired and their carrying value at June 30,
2009 is:


Trade
      secrets and developed technologies (Weighted average life of 7
      years)
                  
                  $
                  9,430,900Patents
      (Weighted average life of 5 years)
                  
                  
                  34,257Total
      Amortized identifiable intangible assets-Gross carrying
    value:
                  
                  $
                  9,465,157Less:Accumulated
      Amortization
                  
                  
                  (2,718,366
                  )Impairment
      (See below)
                  
                  
                  (5,655,011
                  )Net:
                  
                  $
                  1,091,780Residual
      value:
                  
                  $
                  0




During
the year ended September 30, 2006 the Company’s management performed an
evaluation of its intangible assets (intellectual property) for purposes of
determining the implied fair value of the assets at September 30, 2006. The test
indicated that the recorded remaining book value of its intellectual property
exceeded its fair value for the year ended September 30, 2006, as determined by
discounted cash flows. As a result, upon completion of the assessment,
management recorded a non-cash impairment charge of $5,655,011, net of tax, or
$0.05 per share during the year ended September 30, 2006 to reduce the carrying
value of the patents to $2,091,800. Considerable management judgment is
necessary to estimate the fair value. Accordingly, actual results could vary
significantly from management’s estimates.




Total
amortization expense charged to operations for the three and nine months ended
June 30, 2009 was $91,294 and $274,932, respectively; $93,482 and $277,787 for
the three and nine months ended June 30, 2008, respectively.


13




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




Accounts
payable and accrued liabilities at June 30, 2009 are as follows:


Accounts
      payable
                        
                        $
                        751,605Accrued
      consulting fees
                        
                        
                        102,500Accrued
      interest payable
                        
                        
                        74,411Accrued
      salaries payable
                        
                        
                        12,176Total
                        
                        $
                        940,692




Registration
Rights Liquidated Damages




In
private placements in November and December, 2003, December, 2004, and January
and February, 2005, the Company issued secured convertible promissory notes and
warrants to purchase the Company’s common stock. Pursuant to the terms of a
registration rights agreement, the Company agreed to file a registration
statement to be declared effective by the SEC for the common stock underlying
the notes and warrants in order to permit public resale thereof. The
registration rights agreement provided for the payment of liquidated damages if
the stipulated registration deadlines were not met. The liquidated damages are
equal to 3.5% per month of the face amount of the notes, which equals $367,885,
with no limitations. During the year ended September 30, 2008, the SEC declared
effective the Company’s registration statement with respect to the common stock
underlying the notes and warrants. As of June 30, 2009, the Company concluded
that the payment of liquidated damages under these commitments were not
probable. Accordingly, the Company reversed the accrued expenses for the
potential liquidated damages of $12,023,888 as other income in the statement of
operations during the nine months ended June 30, 2009.




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES




Convertible
notes payable as of June 30, 2009 are as follows:


Secured
      Convertible Note Payable dated July 31, 2008, net of unamortized debt
      discount of $9,761 (see below)
                                                  
                                                  
                                                  140,239Secured
      Convertible Note Payable dated October 21, 2008, net of unamortized debt
      discount of $93,558 (see below)
                                                  
                                                  
                                                  406,442Secured
      Convertible Note Payable dated January 29, 2009, net of unamortized debt
      discount of $41,708 (see below)
                                                  
                                                  
                                                  108,292Secured
      Convertible Note Payable dated February 27, 2009, net of unamortized debt
      discount of $37,066 (see below)
                                                  
                                                  
                                                  162,934Secured
      Convertible Note Payable dated March 30, 2009, net of unamortized debt
      discount of $72,480 (see below)
                                                  
                                                  
                                                  177,520Secured
      Convertible Note Payable dated April 14, 2009, net of unamortized debt
      discount of $97,833 (see below)
                                                  
                                                  
                                                  202,167Secured
      Convertible Note Payable dated June 22, 2009, net of unamortized debt
      discount of $43,725 (see below)
                                                  
                                                  
                                                  206,275Secured
      Convertible Note Payable dated June 30, 2009, net of unamortized debt
      discount of $24,589 (see below)
                                                  
                                                  
                                                  125,4111,529,280Less
      current portion
                                                  
                                                  
                                                  (1,529,280
                                                  )$
                                                  —




14




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




10%
Secured Convertible Promissory Note dated July 31, 2008




On July
31, 2008, the Company issued a $150,000 convertible promissory note due July 31,
2009 with interest at 10% per annum due upon maturity. The note is convertible
at any time prior to maturity, at the holder’s option, into shares of our common
stock at a price equal to the greater of (i) 50% of the average price of our
common stock for the ten trading days prior to the date of the notice of
conversion or (ii) at $0.0549483 per share, which is equal to a 30% discount to
the average volume, weighted average price of our common stock for the ten
trading days prior to issuance. At maturity, the note, including any accrued and
unpaid interest, is automatically convertible at $0.0549483 per share. The
Company has granted the noteholder a security interest in all the Company’s
assets.




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
embedded beneficial conversion feature present in the note. 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 $91,655 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




In
connection with the placement of the note the Company issued non-detachable
warrants granting the holder the right to acquire 300,000 shares of the
Company’s common stock at $0.50 per share. The warrants expire five years from
the issuance. In accordance with Emerging Issues Task Force Issue 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments (“EITF – 0027”), the
Company recognized the value attributable to the warrants in the amount of
$23,268 to additional paid in capital and a discount against the note. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
5 years, an average risk free interest rate of 3.259%, a dividend yield of 0%,
and volatility of 152.00%. The debt discount attributed to the value of the
warrants issued is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($91,655) and warrants ($23,268) to debt discount, aggregating $114,923,
which will be amortized to interest expense over the term of the Notes.
Amortization of $28,652 and $85,956 was recorded for the three and nine month
periods ended June 30, 2009, respectively.




10%
Secured Convertible Promissory Note dated October 21, 2008




On
October 21, 2008, the Company issued a $500,000 related party convertible
promissory note to a related party due October 21, 2009 with interest at 10% per
annum due upon maturity. The note is convertible at any time prior to maturity,
at the holder’s option, into shares of our common stock at a price equal to the
greater of (i) 50% of the average price of our common stock for the ten trading
days prior to the date of the notice of conversion or (ii) at $0.02617152 per
share, which is equal to a 30% discount to the average volume, weighted average
price of our common stock for the ten trading days prior to issuance. At
maturity, the note, including any accrued and unpaid interest, is automatically
convertible at $0.02617152 per share. The Company has granted the noteholder a
security interest in all the Company’s assets.


15




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




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
embedded beneficial conversion feature present in the note. 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 $279,188 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




In
connection with the placement of the note the Company issued non-detachable
warrants granting the holder the right to acquire 1,000,000 shares of the
Company’s common stock at $0.50 per share. The warrants expire five years from
the issuance. In accordance with Emerging Issues Task Force Issue 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments (“EITF – 0027”), the
Company recognized the value attributable to the warrants in the amount of
$34,104 to additional paid in capital and a discount against the note. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
5 years, an average risk free interest rate of 1.86%, a dividend yield of 0%,
and volatility of 207.46%. The debt discount attributed to the value of the
warrants issued is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($279,188) and warrants ($34,104) to debt discount, aggregating
$313,292, which will be amortized to interest expense over the term of the
Notes. Amortization of $78,108 and $219,733 was recorded for the three and nine
month periods ended June 30, 2009, respectively.




10%
Secured Convertible Promissory Note dated January 29, 2009




On
January 29, 2009, the Company issued a $150,000 related party convertible
promissory note to a related party due January 29, 2010 with interest at 10% per
annum due upon maturity. The note is convertible at any time prior to maturity,
at the holder’s option, into shares of our common stock at a price equal to the
greater of (i) 50% of the average price of our common stock for the ten trading
days prior to the date of the notice of conversion or (ii) at $0.033337264 per
share, which is equal to a 20% discount to the average volume, weighted average
price of our common stock for the ten trading days prior to issuance. At
maturity, the note, including any accrued and unpaid interest, is automatically
convertible at $0.033337264 per share. The Company has granted the noteholder a
security interest in all the Company’s assets.




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
embedded beneficial conversion feature present in the note. 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 $61,974 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.


16




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




In
connection with the placement of the note the Company issued non-detachable
warrants granting the holder the right to acquire 300,000 shares of the
Company’s common stock at $0.50 per share. The warrants expire five years from
the issuance. In accordance with Emerging Issues Task Force Issue 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments (“EITF – 0027”), the
Company recognized the value attributable to the warrants in the amount of
$9,498 to additional paid in capital and a discount against the note. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
5 years, an average risk free interest rate of 1.87%, a dividend yield of 0%,
and volatility of 150.55%. The debt discount attributed to the value of the
warrants issued is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($61,974) and warrants ($9,498) to debt discount, aggregating $71,472,
which will be amortized to interest expense over the term of the Notes.
Amortization of $17,819 and $29,764 was recorded for the three and nine month
periods ended June 30, 2009, respectively.




10%
Secured Convertible Promissory Note dated February 27, 2009




On
February 27, 2009, the Company issued a $200,000 related party convertible
promissory note to a related party due February 27,2010 with interest at 10% per
annum due upon maturity. The note is convertible at any time prior to maturity,
at the holder’s option, into shares of our common stock at a price equal to the
greater of (i) 50% of the average price of our common stock for the ten trading
days prior to the date of the notice of conversion or (ii) at $0.046892438 per
share, which is equal to a 20% discount to the average volume, weighted average
price of our common stock for the ten trading days prior to issuance. At
maturity, the note, including any accrued and unpaid interest, is automatically
convertible at $0.046892438 per share. The Company has granted the noteholder a
security interest in all the Company’s assets.




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
embedded beneficial conversion feature present in the note. 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 $55,905 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($55,905) will be amortized to interest expense over the term of the
Notes. Amortization of $13,938 and $18,839 was recorded for the three and nine
month periods ended June 30, 2009, respectively.


17




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




10%
Secured Convertible Promissory Note dated March 30, 2009




On March
30, 2009, the Company issued a $250,000 related party convertible promissory
note to a related party due March 30, 2010 with interest at 10% per annum due
upon maturity. The note is convertible at any time prior to maturity, at the
holder’s option, into shares of our common stock at a price equal to the greater
of (i) 50% of the average price of our common stock for the ten trading days
prior to the date of the notice of conversion or (ii) at $0.043239467 per share,
which is equal to a 20% discount to the average volume, weighted average price
of our common stock for the ten trading days prior to issuance. At maturity, the
note, including any accrued and unpaid interest, is automatically convertible at
$0.043239467 per share. The Company has granted the noteholder a security
interest in all the Company’s assets.




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
embedded beneficial conversion feature present in the note. 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 $96,905 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($96,905) will be amortized to interest expense over the term of the
Notes. Amortization of $24,160 and $24,425 was recorded for the three and nine
month periods ended June 30, 2009, respectively.




10%
Secured Convertible Promissory Note dated April 14, 2009




On April
14, 2009, the Company issued a $300,000 convertible promissory note due April
14, 2010 with interest at 10% per annum due upon maturity. The note is
convertible at any time prior to maturity, at the holder’s option, into shares
of our common stock at a price equal to the greater of (i) 50% of the average
price of our common stock for the ten trading days prior to the date of the
notice of conversion or (ii) at $0.070756456 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance. At maturity, the note, including any
accrued and unpaid interest, is automatically convertible at $0.070756456 per
share. The Company has granted the noteholder a security interest in all the
Company’s assets.




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
embedded beneficial conversion feature present in the note. 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 $123,990 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.


18




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($123,990) will be amortized to interest expense over the term of the
Notes. Amortization of $26,157 was recorded for the three and nine month periods
ended June 30, 2009.




10%
Secured Convertible Promissory Note dated June 22, 2009




On June
22, 2009, the Company issued a $250,000 convertible promissory note due June 22,
2010 with interest at 10% per annum due upon maturity. The note is convertible
at any time prior to maturity, at the holder’s option, into shares of our common
stock at a price equal to the greater of (i) 50% of the average price of our
common stock for the ten trading days prior to the date of the notice of
conversion or (ii) at $0.110279774, which is equal to a 20% discount to the
average volume, weighted average price of our common stock for the ten trading
days prior to issuance. At maturity, the note, including any accrued and unpaid
interest, is automatically convertible at $0.110279774 per share. The Company
has granted the noteholder a security interest in all the Company’s
assets.




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
embedded beneficial conversion feature present in the note. 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 $44,705 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($44,705) will be amortized to interest expense over the term of the
Notes. Amortization of $980 was recorded for the three and nine month periods
ended June 30, 2009.




10%
Secured Convertible Promissory Note dated June 30, 2009




On June
30, 2009, the Company issued a $150,000 related party convertible promissory
note to a related party due June 30, 2010 with interest at 10% per annum due
upon maturity. The note is convertible at any time prior to maturity, at the
holder’s option, into shares of our common stock at a price equal to the greater
of (i) 50% of the average price of our common stock for the ten trading days
prior to the date of the notice of conversion or (ii) at $0.103059299 per share,
which is equal to a 20% discount to the average volume, weighted average price
of our common stock for the ten trading days prior to issuance. At maturity, the
note, including any accrued and unpaid interest, is automatically convertible at
$0.103059299 per share. The Company has granted the noteholder a security
interest in all the Company’s assets.


19




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




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
embedded beneficial conversion feature present in the note. 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 $24,657 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the note. The debt discount attributed to the beneficial
conversion feature is amortized over the note’s maturity period (one year) as
interest expense.




The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($24,657) will be amortized to interest expense over the term of the
Notes. Amortization of $68 was recorded for the three and nine month periods
ended June 30, 2009.




NOTE
E - RELATED PARTY TRANSACTIONS




The
Company’s current and former officers and shareholders have advanced funds to
the Company for travel related and working capital purposes. No formal repayment
terms or arrangements existed. There were no advances due at June 30,
2009.




During
the nine months ended June 30, 2009, the Company’s Chief Executive Officer, or
entities controlled by the Company’s Chief Executive Officer, had advanced funds
to the Company in the amount of $1,250,000 in the form of convertible promissory
notes for working capital purposes (see Note D).




During
the three and nine month periods ended June 30, 2009, the Company had sales of
$-0- and $5,000 (or 0% and 2.4% of total sales), respectively, to an entity of
which the Company’s Chief Executive Officer is the President.




During
the three and nine month periods ended June 30, 2008, the Company had sales of
$-0-, respectively, to an entity of which the Company’s Chief Executive Officer
is the President.




NOTE
F - CAPITAL STOCK




The
Company is authorized to issue 410,000,000 shares of common stock, with a $0.001
par value per share.In
addition, the Company is authorized to issue 10,000,000 shares of preferred
stock with a $0.001 par value per share.  20




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
F - CAPITAL STOCK (continued)




Preferred
and Common Stock Transactions During the Nine Months Ended June 30,
2009:




During
the nine months ended June 30, 2009, the Company issued 43,427,574 shares of
common stock in exchange for convertible notes and accrued
interest.




In
January 2009, the Company issued 10,000,000 shares of common stock for
consulting services. The Company valued the shares issued at approximately $0.04
per share, which represents the fair value of the shares at the date of
issuance.




In
February 2009, the Company issued 101,568 shares of common stock in pursuant to
a settlement agreement. The Company valued the shares issued at approximately
$0.06 per share or $6,094, which represents the fair value of the shares at the
date of issuance.




In March
2009, the Company issued 3,000,000 shares of common stock in settlement of
litigation. The Company valued the shares issued at approximately $0.06 per
share or $180,000, which represents the fair value of the shares at the date of
issuance.




NOTE
G - 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.


Exercise
                            Prices
                          
                          
                          Number
                            Outstanding
                          
                          
                          Warrants
                            Outstanding
                            Remaining
                            Contractual
                            Life
      (Years)
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted
                            Average
                            Exercisable
                          
                          
                          Exercisable
                            Weighted
                            Average
                            Exercise
      Price$
                          0.06
                          
                          
                          
                          2,000,000
                          
                          
                          
                          4.64
                          
                          
                          $
                          0.06
                          
                          
                          
                          2,000,000
                          
                          
                          $
                          0.06$
                          0.07
                          
                          
                          
                          200,000
                          
                          
                          
                          0.71
                          
                          
                          $
                          0.07
                          
                          
                          
                          200,000
                          
                          
                          $
                          0.07$
                          0.09
                          
                          
                          
                          16,400,000
                          
                          
                          
                          2.17
                          
                          
                          $
                          0.09
                          
                          
                          
                          16,400,000
                          
                          
                          $
                          0.09$
                          0.10
                          
                          
                          
                          1,605,464
                          
                          
                          
                          3.50
                          
                          
                          $
                          0.10
                          
                          
                          
                          1,605,464
                          
                          
                          $
                          0.10$
                          0.50
                          
                          
                          
                          27,150,000
                          
                          
                          
                          2.36
                          
                          
                          $
                          0.50
                          
                          
                          
                          24,850,000
                          
                          
                          $
                          0.50$
                          0.60
                          
                          
                          
                          6,623,500
                          
                          
                          
                          .21
                          
                          
                          $
                          0.60
                          
                          
                          
                          6,623,500
                          
                          
                          $
                          0.60$
                          0.75
                          
                          
                          
                          14,797,000
                          
                          
                          
                          0.60
                          
                          
                          $
                          0.75
                          
                          
                          
                          14,797,000
                          
                          
                          $
                          0.7568,775,964
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          66,475,964


21




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES




Transactions
involving warrants are summarized as follows:


Number
                        of
                        Shares
                      
                      
                      Weighted
                        Average
                        Price
                        Per
                        ShareBalance,
      September 30, 2007
                      
                      
                      82,434,464
                      
                      
                      $
                      0.43Granted
                      
                      
                      7,200,000
                      
                      
                      
                      0.50Exercised
                      
                      
                      (2,500,000
                      )
                      
                      
                      (0.09
                      )Canceled
      or expired
                      
                      
                      (23,153,500
                      )
                      
                      
                      (0.41
                      )Outstanding
      at September 30, 2008
                      
                      
                      63,980,964
                      
                      
                      $
                      0.46Granted
                      
                      
                      5,000,000
                      
                      
                      
                      0.20Exercised
                      
                      
                      —
                      
                      
                      
                      —Canceled
      or expired
                      
                      
                      (205,000
                      )
                      
                      
                      (0.69
                      )Balance,
      June 30, 2009
                      
                      
                      68,775,964
                      
                      
                      $
                      0.44




During
the nine month period ended June 30, 2009, the Company issued an aggregate of
1,300,000 warrants in conjunction with convertible debt (see Note
D).




On
February 20, 2009, the Company issued warrants to purchase 2,000,000 shares of
its common stock at $0.06 per share for four years in consideration for
services. The fair value of $121,303 was charged to current period operations.
The fair value of the warrants were determined using the Black-Scholes Option
Pricing method based on the following assumptions: Dividend yield: -0-%;
volatility: 203.14%; risk free rate: 1.81%, expected term: 4 years.




On March
16, 2009, the Company issued warrants to purchase 200,000 shares of its common
stock at $0.07 per share for three years in consideration for services. The fair
value of $6,464 was charged to current period operations. The fair value of the
warrants were determined using the Black-Scholes Option Pricing method based on
the following assumptions: Dividend yield: -0-%; volatility: 170.72%; risk free
rate: 0.69%, expected term: 3 years.




On March
27, 2009, the Company issued a warrant to purchase 1,500,000 shares of its
common stock at $0.10 per share for four years in settlement of litigation. The
fair value of $90,098 was charged to current period operations. The fair value
of the warrants were determined using the Black-Scholes Option Pricing method
based on the following assumptions: Dividend yield: -0-%; volatility: 207.01%;
risk free rate: 1.79%, expected term: 4 years.


22




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES (continued)




Employee
Stock Options




The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company’s common stock issued to employees of the
Company under a non-qualified employee stock option plan:


Options
      Outstanding
                  
                  Options
      ExercisableExercise
                    Prices
                  
                  Number
                    Outstanding
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                    (Years)
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Number
                    Exercisable
                  
                  Weighted
                    Average
                    Exercise
                    Price$
                  0.68
                  
                  
                  3,660,000
                  
                  
                  0.25
                  
                  $
                  0.68
                  
                  
                  3,660,000
                  
                  $
                  0.680.07
                  
                  
                  1,000,000
                  
                  
                  4.65
                  
                  
                  0.07
                  
                  
                  —
                  
                  
                  0.070.09
                  
                  
                  2,000,000
                  
                  
                  2.17
                  
                  
                  0.09
                  
                  
                  2,000,000
                  
                  
                  0.090.11
                  
                  
                  37,670,000
                  
                  
                  3.97
                  
                  
                  0.11
                  
                  
                  18,835,000
                  
                  
                  0.1144,330,000
                  
                  
                  
                  
                  $
                  0.16
                  
                  
                  24,495,000
                  
                  $
                  0.13




Transactions
involving stock options issued to employees are summarized as
follows:


Number
      of
                              Shares
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
      Per
                              ShareOutstanding
      at October 1, 2007
                            
                            
                            5,660,000
                            
                            
                            $
                            0.47Granted
                            
                            
                            —
                            
                            
                            
                            —Exercised
                            
                            
                            —
                            
                            
                            
                            —Cancelled
      or expired
                            
                            
                            —
                            
                            
                            
                            —Outstanding
      at September 30, 2008
                            
                            
                            5,660,000
                            
                            
                            $
                            0.47Granted
                            
                            
                            38,670,000
                            
                            
                            
                            0.11Exercised
                            
                            
                            —
                            
                            
                            
                            —Canceled
      or expired
                            
                            
                            —
                            
                            
                            
                            —Outstanding
      at June 30, 2009
                            
                            
                            44,330,000
                            
                            
                            $
                            0.16




Amendment
to the 2005 Incentive Stock Plan and Recent Equity Award Grants




On June
17, 2008, the Board of Directors adopted an amendment to the 2005 Incentive
Stock Plan that will increase the total number of shares of common stock
issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000
shares to a total of 100,000,000 shares, subsequently approved by the
stockholders at the 2008 annual meeting of stockholders in December 2008. In
connection with the share


23




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES (continued)




On
February 27, 2009, the Company granted 1,000,000 options to purchase its common
stock at $0.07 over five years with vesting at 25% per year beginning at the
first anniversary. The fair value, determined using the Black Scholes Option
Pricing Model with the following assumptions utilized: Dividend yield: -0-%,
volatility: 205.19%; risk free rate: 1.84%; expected life: 5 years.




The
Company recorded $303,559 and $2,451,677 as stock compensation expense for the
three and nine month periods ended June 30, 2009 for the vesting portion of all
employee options outstanding.




Operating
Lease Commitments




The
Company leases office space under an operating lease in Stony Brook, New York
for its corporate use, expiring in October 2009. In November 2005, the Company
vacated the Los Angeles facility to relocate to the Stony Brook, New York
address.




Total
lease rental expense for the three and nine month periods ended on June 30,
2009 was $20,275 and $60,279, respectively.




Total
lease rental expense for the three and nine month periods ended on June 30,
2008 was $20,387 and $57,808, respectively.




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.




Litigation




From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. 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 that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.


24




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES (continued)




Intervex,
Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York Index
No.08-601219):




Intervex,
Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008
related to a claim for breach of contract. In March 2005, we entered into a
consulting agreement with Intervex, which provided for, among other things, a
payment of $6,000 per month for a period of 24 months, or an aggregate of
$144,000. In addition, the consulting agreement provided for the issuance by us
to Intervex of a five-year warrant to purchase 250,000 shares of our common
stock with an exercise price of $.75. Intervex asserts that we owe them 17
payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon,
and a warrant to purchase 250,000 shares of our common stock. We have
counterclaimed for compensatory and punitive damages, restitution, attorneys’
fees and costs, interest and other relief the court deems proper. We intend to
vigorously defend against the claims asserted against us.




Matters
Voluntarily Reported to the SEC and Securities Act Violations




We
previously disclosed that we investigated the circumstances surrounding certain
issuances of 8,550,000 shares to employees and consultants in July 2005, and
engaged 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. The members of our management who
effectuated the stock issuances that are being examined in the investigation no
longer work for us. 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.


25




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2009


(unaudited)




NOTE
I - GOING CONCERN




The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the accompanying unaudited condensed consolidated financial statements during
the nine month period ended June 30, 2009, the Company incurred a net loss from
operations of $5,702,316. These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.




The
Company’s existence is dependent upon management’s ability to develop profitable
operations. Management is devoting substantially all of its efforts to
developing DNA embedded biotechnology security solutions in the United States
and Europe and there can be no assurance that the Company’s efforts will be
successful and no assurance can be given that management’s actions will result
in profitable operations or the resolution of its liquidity problems. The
accompanying statements do not include any adjustments that might result should
the Company be unable to continue as a going concern.




In order
to improve the Company’s liquidity, the Company’s management is actively
pursuing additional equity financing through discussions with investment bankers
and private investors. There can be no assurance the Company will be successful
in its effort to secure additional equity financing.




NOTE
J – SUBSEQUENT EVENTS




On July
30, 2009, the Company issued 10,000,000 shares of its common stock in connection
with consulting services.




On July
31, 2009, the Company issued an aggregate of 3,002,823 in settlement of
convertible debentures and accrued interest.


26




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




The
following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto, included elsewhere within this report.
This quarterly report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, 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:


●
                discuss
      our future expectations;●
                contain
      projections of our future results of operations or of our financial
      condition; and●
                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 report. 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.




Introduction




We use
the DNA of plants and innovative technologies to provide anti-counterfeiting and
product authentication solutions and to manufacture ingredients for personal
care products and textiles. SigNature® DNA and BioMaterialTM Genotyping, our
principal anti-counterfeiting and product authentication solutions, allow users
to accurately and effectively protect branded products, artwork and
collectibles, fine wine, digital media, financial instruments, identity cards
and other official documents. Our BioActiveTM Ingredients, which are being used
by our customers in personal care products, such as skin care products, and in
textiles, such as intimate apparel, are custom-manufactured to address a
customer’s specific need.




SigNature
DNA.
We use the DNA of plants to manufacture highly customized and encrypted
botanical DNA markers, or SigNature DNA Markers, which we believe are virtually
impossible to replicate. We have embedded SigNature DNA Markers into a range of
our customers’ products, including various inks, thermal ribbon, thread,
varnishes and adhesives. These items can then be tested for the presence of
SigNature DNA Markers through an instant field detection or a forensic level
authentication. Our SigNature DNA solution provides a secure, accurate and
cost-effective means for users to incorporate our SigNature DNA Markers in, and
then quickly and reliably authenticate and identify, a broad range of items such
as branded products, artwork and collectibles, cash-in-transit, fine wine,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and
individuals.




BioMaterial
GenoTyping.
Our BioMaterial GenoTyping solution refers to the development of genetic assays
to distinguish between varieties or strains of biomaterials, such as cotton,
wool, tobacco, fermented beverages, natural drugs and foods, that contain their
own source DNA. We have developed two proprietary genetic tests (FiberTypingTM
and PimaTypingTM) to track American Pima cotton from the field to finished
garments. These genetic assays provide the cotton industry with the first
authentication tools that can be applied throughout the U.S. and worldwide
cotton industry from cotton growers, mills, wholesalers, distributors,
manufacturers and retailers through trade groups and government
agencies.


27




BioActive
Ingredients.
Our BioActive Ingredients program began in 2007, based on the biofermentation
expertise developed from our experience with the manufacture of DNA for our
SigNature DNA and BioMaterial Genotyping solutions. We initially targeted
potential customers in the personal care products, industry, and we developed
DermalRx Hydroseal, which has been incorporated into the fabric of a new line of
intimate apparel currently being test marketed by a global marketer of intimate
apparel. In addition, we developed DermalRx SRC, Skin Resurfacing Complex, an
ingredient designed to promote smoother more radiant skin by stimulating the
skin’s own exfoliation process.




Plan
of Operations




General




We expect
to generate revenues principally from sales of our SigNature Program,
BioMaterial Genotyping and BioActive Ingredients. We are currently attempting to
develop business in the following target markets: art and collectibles,
cash-in-transit, fine wine, consumer products, digital recording media,
pharmaceuticals, and homeland security driven programs. We intend to pursue both
domestic and international sales opportunities in each of these vertical
markets.




We
believe that our existing capital resources will enable us to fund our
operations until approximately October 2009. 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
stockholders.




Product
Research and Development




We
anticipate spending approximately $50,000 for product research and development
activities during the next 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 anticipate spending approximately $30,000 on the acquisition of
leasehold improvements during the next 12 months. We believe our current leased
space is adequate to manage our growth, if any, over the next 2 to 3
years.


28




Number
of Employees




We
currently have 13 full-time employees and two part-time employees, including two
in management, nine in operations, three in sales and marketing and one in
investor relations. The company expects to increase its staffing dedicated to
sales, product prototyping, manufacturing of DNA markers and forensic
authentication services. Expenses related to travel, marketing, salaries, and
general overhead will be increased as necessary to support our growth in
revenue. 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 costs for personnel.




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:


●
                          Equity
      issued with registration rights;●
                          Revenue
      recognition;●
                          Allowance
      for doubtful accounts;●
                          Fair
      value of intangible assets; and●
                          Use
      of
estimates.




Equity
Issued with Registration Rights




In
connection with placement of our convertible notes and warrants to certain
investors during the fiscal quarters ended December 31, 2003, December 31, 2004,
March 31, 2005, March 31, 2006 and June 30, 2006, 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 in the past, and
accordingly had been reflected between liabilities and equity in our previous
consolidated balance sheet.




In
September 2007, we exchanged our common stock for the remaining Secured
Convertible Promissory Note that contained embedded derivatives such as certain
conversion features, variable interest features, call options and default
provisions.




We had an
accumulative accrual of $12,023,888 in liquidating damages in relationship to
the previously outstanding convertible promissory notes and related warrants.
During the nine months ended June 30, 2009, we determined that it was not
probable that we would be obligated to pay these damages and accordingly
adjusted the accrual to other income.


29




Revenue
Recognition




Revenues
are derived from research, development, qualification and production testing for
certain commercial products.




Revenue
from fixed price testing contracts is generally recorded upon completion of the
contracts, which are generally short-term, or upon completion of identifiable
contractual tasks. At the time the Company enters into a contract that includes
multiple tasks, the Company estimates the amount of actual labor and other costs
that will be required to complete each task based on historical experience.
Revenues are recognized which provide for a profit margin relative to the
testing performed. Revenue relative to each task and from contracts which are
time and materials based is recorded as effort is expended. Billings in excess
of amounts earned are deferred. Any anticipated losses on contracts are charged
to income when identified. To the extent management does not accurately forecast
the level of effort required to complete a contract, or individual tasks within
a contract, and the Company is unable to negotiate additional billings with a
customer for cost over-runs, the Company may incur losses on individual
contracts. All selling, general and administrative costs are treated as period
costs and expensed as incurred.




For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, Revenue
Recognition (“SAB104”), and 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) collectability 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 collectability 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.




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.




Allowance
for Uncollectible Receivables




The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. The Company
uses a combination of write-off history, aging analysis and any specific known
troubled accounts in determining the allowance. If the financial condition of
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances could be required.




Fair
Value of Intangible Assets




The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period.


30




The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should impairment in value be indicated, the carrying
value of intangible assets will be adjusted, based on estimates of future
discounted cash flows resulting from the use and ultimate disposition of the
asset. SFAS No. 144 also requires assets to be disposed of be reported at the
lower of the carrying amount or the fair value less costs to sell.




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. Actual results could differ from those estimates.




Comparison
of Results of Operations for the Three Months Ended June 30, 2009 and
2008




Revenues




For the
three months ended June 30, 2009, we generated $22,925 in revenues from
operations from the sales of BioMaterial Genotyping and Authentication Services,
and our cost of sales for the three months ended June 30, 2009 was $2,521,
netting us a gross profit of $20,404. For the three months ended June 30, 2008,
we generated $252,691 in revenues from operations and our cost of sales for
the three months ended June 30, 2008 was $50,489, netting us a gross profit of
$202,202. The decrease in gross revenue from the three months ended June 30,
2008 to the three months ended June 30, 2009 of $229,766, or 91%, was primarily
attributable to a slowdown in the economy.




Costs
and Expenses




Selling,
General and Administrative




Selling,
general and administrative expenses increased from $951,828 for the three months
ended June 30, 2008 to $982,945 for the three months ended June 30, 2009.
The increase of $31,117, or 32.7%, is primarily attributable to the fair value
of vested options granted to officers and employees, warrants and common stock
issued in settlement of litigation and as compensation for
services.




Research
and Development




Research
and development expenses increased from $19,816 for the three months ended June
30, 2008 to $28,306 for the three months ended June 30, 2009. The increase of
$8,490 is attributed to more research and development activity related to
the recent development and feasibility study agreements.




Depreciation
and Amortization




In the
three months ended June 30, 2009, depreciation and amortization decreased by
$4,737 from $109,555 for the three months ended June 30, 2008 to
$104,818 for the three months ended June 30, 2009. The decrease is
attributable to the reduced depreciation/additions to our property and
equipment.


31




Total
Operating Expenses




Total
operating expenses increased to $1,116,069 for the three months ended June
30, 2009 from $1,081,199 for the three months ended June 30, 2008, or an
increase of $34,870, primarily attributable to equity based payments in the
three months ended June 30, 2009 as compared to the same period last
year.




Interest
Expenses




Interest
expense for the three months ended June 30, 2009 decreased by $414,782 to
$234,940 from $649,722 in the same period of 2008. The decrease in
interest expense was due to the conversion into common stock in 2009 of the
convertible notes issued in connection with financings completed in
2008.




Net
Loss




Net loss
for the three months ended June 30, 2009 was $1,330,680 as compared to a net
loss of $1,528,719 in the prior period primarily attributable to the
factors described above, net with our increase in operating
expenses.




Comparison
of Results of Operations for the Nine Months Ended June 30, 2009 and
2008




Revenues




For the
nine months ended June 30, 2009, we generated $234,170 in revenues from
operations, principally from the sales of BioActive Ingredients, and our cost of
sales for the nine months ended June 30, 2009 was $54,856, netting us a gross
profit of $179,314. For the nine months ended June 30, 2008, we generated
$583,595 in revenues from operations and our cost of sales for the nine
months ended June 30, 2008 was $124,493, netting us a gross profit of $459,102.
The decrease in gross revenue of $349,425, or 60%, was primarily attributable to
a slowdown in the economy.




Costs
and Expenses




Selling,
General and Administrative




Selling,
general and administrative expenses increased from $3,365,880 for the nine
months ended June 30, 2008 to $5,430,490 for the nine months ended June 30,
2009. The increase of $2,064,610, or 61%, is primarily attributable to the fair
value of vested options granted to officers and employees, warrants and common
stock issued in settlement of litigation and as compensation for
services.




Research
and Development




Research
and development expenses increased from $112,042 for the nine months ended June
30, 2008 to $131,695 for the nine months ended June 30, 2009. The increase of
$19,653 is attributed to more research and development activity related to
the recent development and feasibility study agreements.




Depreciation
and Amortization




In the
nine months ended June 30, 2009, depreciation and amortization decreased by
$5,158 from $324,603 for the nine months ended June 30, 2008 to
$319,445 for the nine months ended June 30, 2009. The decrease is
attributable to the reduced depreciation/additions to our property and
equipment.


32




Total
Operating Expenses




Total
operating expenses increased to $5,881,630 for the nine months ended June 30,
2009 from $3,802,525 for the nine months ended June 30, 2008, or an
increase of $2,079,105, primarily attributable to equity based payments in the
nine months ended June 30, 2009 as compared to the same period last
year.




Other
Income/Loss




During
the nine months ended June 30, 2009, we determined that future payments of
liquidated damages on previously issued notes were not probable, therefore we
adjusted our accrual from $12,023,888 to $-0- resulting in a gain of
$12,023,888.




Interest
Expenses




Interest
expense for the nine months ended June 30, 2009 decreased by $713,736 to
$929,991 from $1,643,727 in the same period of 2008. The decrease in
interest expense was due to the conversion into common stock in 2009 of the
convertible notes issued in connection with financings completed in
2008.




Net
Income (Loss)




Net
income for the nine months ended June 30, 2009 was $5,391,009 as compared to a
net loss of $4,987,150 in the prior period primarily attributable to our
other income adjustment described above, net with our increase in operating
expenses.




Liquidity
and Capital Resources




Our
liquidity needs consist of our 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.




Our
registered independent certified public accountants have stated in their report
dated December 15, 2008, that we have incurred operating losses in the last two
years, and that we are dependent upon management’s ability to develop profitable
operations and raise additional capital. These factors among others may raise
substantial doubt about our ability to continue as a going concern.




As of
June 30, 2009, we had a working capital deficit of $2,113,375. For the
nine-month period ended June 30, 2009, we generated a net cash flow deficit from
operating activities of $1,836,533. Net cash flow deficit from operations
consist primarily of year to date income of $5,391,009, net, with a non cash
accrual reduction (see other income above) of $12,023,888. Other non-cash
adjustments included $1,238,043 in depreciation and amortization charges and
$2,855,636 for equity based payments and compensation. Additionally, we had a
net decrease in current assets of $219,258 and a net increase in current
liabilities of $483,408. Cash used in investing activities was $0 for the nine
months ended June 30, 2009. Cash provided by financing activities for the
nine-month period ended June 30, 2009 totaled $1,717,500 consisting of proceeds
from issuance of convertible debt.




Without
the other income adjustment, we would have incurred a net loss of $6,632,879 in
the nine months ended June 30, 2009.




We expect
capital expenditures to be less than $50,000 in fiscal 2009. Our primary
investments will be in laboratory equipment to support prototyping and our
authentication services.


33




Exploitation
of potential revenue sources will be financed primarily through the sale of
securities and convertible debt, issuance of notes payable and other debt or a
combination thereof, depending upon the transaction size, market conditions and
other factors.




While we
have raised capital to meet our working capital and financing needs in the past,
additional financing is required within the next two months in order to meet our
current and projected cash flow deficits from operations and development. We
have sufficient funds to conduct our operations until approximately October
2009. From time to time, and as needed to meet accounts payable and other
obligations, James A. Hayward, our Chairman, President and Chief Executive
Officer, has invested in convertible promissory notes of the Company and
warrants to purchase our common stock on terms similar to those offered to
accredited investors at the time of his investment. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, if at
all.




By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial
condition.




We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. We
intend to pursue the building of a re-seller network outside the United States,
and if successful, the re-seller agreements would constitute a source of
liquidity and capital over time. In order to obtain capital, we may need to sell
additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional
funding and execution of re-seller agreements outside the Unites
States.




We
believe we may 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 stockholders.




Additional
investments are being sought, but we cannot guarantee that we will be able to
obtain such investments. 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 and the downturn in
the U.S. stock and debt markets could make it more difficult to obtain financing
through the issuance of equity or debt securities. Even if we are able to raise
the funds required, it is possible that we could incur unexpected costs and
expenses, fail to collect significant amounts owed to us, or experience
unexpected cash requirements that would force us to seek alternative financing.
Further, if we issue additional equity or 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, we will have to curtail our operations.




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


34




Recent
Debt and Equity Financing Transactions




Fiscal
2008




During
the year ended September 30, 2008, we sold an aggregate of thirty-six units at a
price of $100,000 per unit for sale to “accredited investors,” as defined in
regulations promulgated under the Securities Act, for aggregate gross proceeds
of $3,600,000. Each unit consists of (i) a $100,000 Principal Amount 10% Secured
Convertible Promissory Note and (ii) a warrant to purchase 200,000 shares of our
common stock. The promissory notes and accrued but unpaid interest thereon
automatically convert one year after issuance at a conversion price equal to a
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and are convertible into shares of our
common stock at the option of the holder at any time prior to such automatic
conversion at a price equal to the greater of (i) 50% of the average price of
our common stock for the ten trading days prior to the date of the notice of
conversion and (ii) the automatic conversion price. In addition, any time prior
to conversion, we have the irrevocable right to repay the unpaid principal and
accrued but unpaid interest under the notes on three days notice. The promissory
notes bear interest at the rate of 10% per annum and are due and payable in full
on the one year anniversary of their issuance. The warrants are exercisable for
cash or on a cashless basis for a period of four years commencing one year after
issuance at a price of $0.50 per share. Each warrant may be redeemed at our
option at a redemption price of $0.01 upon the earlier of (i) three years after
the issuance, and (ii) the date our common stock has traded on The Over the
Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.




Fiscal
2009




On
October 21, 2008, we issued and sold to James A. Hayward, our Chairman,
President and Chief Executive Officer, a $500,000 principal amount secured
promissory note (“October Note”) bearing interest at a rate of 10% per annum and
a warrant (“October Warrant”) to purchase 1,000,000 shares of our common stock.
The October Note and accrued but unpaid interest thereon shall automatically
convert on October 21, 2009 at a conversion price of $0.026171520 per share,
which is equal to a 30% discount to the average volume, weighted average price
of our common stock for the ten trading days prior to issuance. At any time
prior to conversion, we have the right to prepay the October Note and accrued
but unpaid interest thereon upon 3 days prior written notice (during which
period the holder can elect to convert the note). The October Warrant is
exercisable for a four-year period commencing on October 21, 2009, and expiring
on October 20, 2013, at a price of $0.50 per share. The October Warrant may be
redeemed at our option at a redemption price of $0.01 upon the earlier of (i)
October 20, 2011, and (ii) the date our common stock has traded on The Over the
Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.




On
January 29, 2009, we issued and sold to James A. Hayward, our Chairman,
President and Chief Executive Officer, a $150,000 principal amount secured
promissory note (“Hayward January Note”) bearing interest at a rate of 10% per
annum and a warrant (“January Warrant”) to purchase 300,000 shares of our common
stock. The Hayward January Note and accrued but unpaid interest thereon shall
automatically convert on January 29, 2010 at a conversion price of $0.033337264
per share, which is equal to a 20% discount to the average volume, weighted
average price of our common stock for the ten trading days prior to issuance,
and are convertible into shares of our common stock at the option of the
noteholder at any time prior to such automatic conversion at a price equal to
the greater of (i) 50% of the average price of our common stock for the ten
trading days prior to the date of the notice of conversion and (ii) the
automatic conversion price. In addition, any time prior to conversion, we have
the irrevocable right to repay the unpaid principal and accrued but unpaid
interest under the Hayward January Note on three days written notice (during
which period the holder can elect to convert the note). The Hayward January Note
bears interest at the rate of 10% per annum and is due and payable in full on
January 29, 2010. Until the principal and accrued but unpaid interest under the
Hayward January Note are paid in full, or converted into our common stock, the
Hayward January Note will be secured by a security interest in all of our
assets. The Hayward January Warrant is exercisable for a four-year period
commencing on January 29, 2010, and expiring on January 28, 2014, at a price of
$0.50 per share. The Hayward January Warrant may be redeemed at our option at a
redemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) the
date our common stock has been quoted on The Over the Counter Bulletin Board at
or above $1.00 per share for 20 consecutive trading days.


35




On
February 27, 2009, we issued and sold a $200,000 principal amount secured
promissory note (“Hayward February Note”) bearing interest at a rate of 10% per
annum to James A. Hayward, our Chairman, President and Chief Executive Officer.
The Hayward February Note and accrued but unpaid interest thereon shall
automatically convert into shares of our common stock on February 27, 2010 at a
conversion price of $0.046892438 per share, which is equal to a 20% discount to
the average volume, weighted average price of our common stock for the ten
trading days prior to issuance, and is convertible into shares of our common
stock at the option of the noteholder at any time prior to such automatic
conversion at a price equal to the greater of (i) 50% of the average price of
our common stock for the ten trading days prior to the date of the notice of
conversion and (ii) the automatic conversion price. In addition, any time prior
to conversion, we have the irrevocable right to repay the unpaid principal and
accrued but unpaid interest under the Hayward February Note on three days
written notice (during which period the holder can elect to convert the Hayward
February Note). The Hayward February Note bears interest at the rate of 10% per
annum and is due and payable in full on February 27, 2010. Until the principal
and accrued but unpaid interest under the Hayward February Note are paid in
full, or converted into shares of our common stock, the Hayward February Note
will be secured by a security interest in all of our assets.




On March
30, 2009, we issued and sold a $250,000 principal amount secured promissory note
(“Hayward March Note”) bearing interest at a rate of 10% per annum to James A.
Hayward, our Chairman, President and Chief Executive Officer. The Hayward March
Note and accrued but unpaid interest thereon shall automatically convert into
shares of our common stock on March 30, 2010 at a conversion price of
$0.043239467 per share, which is equal to a 20% discount to the average volume,
weighted average price of our common stock for the ten trading days prior to
issuance, and is convertible into shares of our common stock at the option of
the noteholder at any time prior to such automatic conversion at a price equal
to the greater of (i) 50% of the average price of our common stock for the ten
trading days prior to the date of the notice of conversion and (ii) the
automatic conversion price. In addition, any time prior to conversion, we have
the irrevocable right to repay the unpaid principal and accrued but unpaid
interest under the Hayward March Note on three days written notice (during which
period the holder can elect to convert the Hayward March Note). The Hayward
March Note bears interest at the rate of 10% per annum and is due and payable in
full on March 30, 2010. Until the principal and accrued but unpaid interest
under the Hayward March Note are paid in full, or converted into shares of our
common stock, the Hayward March Note will be secured by a security interest in
all of our assets.




On April
14, 2009, we issued and sold an aggregate of $300,000 principal amount secured
promissory notes (“April Notes”) bearing interest at a rate of 10% per annum to
certain accredited investors. The April Notes and accrued but unpaid interest
thereon shall automatically convert into shares of our common stock on April 14,
2010 at a conversion price of $0.070756456 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and is convertible into shares of our
common stock at the option of the noteholders at any time prior to such
automatic conversion at a price equal to the greater of (i) 50% of the average
price of our common stock for the ten trading days prior to the date of the
notice of conversion and (ii) the automatic conversion price. In addition, any
time prior to conversion, we have the irrevocable right to repay the unpaid
principal and accrued but unpaid interest under the April Notes on three days
written notice (during which period the holders can elect to convert the April
Notes). The April Notes bear interest at the rate of 10% per annum and are due
and payable in full on April 14, 2010. Until the principal and accrued but
unpaid interest under the April Notes are paid in full, or converted into shares
of our common stock, the April Notes will be secured by a security interest in
all of our assets.


36




On June
22, 2009, we issued and sold an aggregate of $250,000 principal amount secured
promissory notes (“June Notes”) bearing interest at a rate of 10% per annum to
certain accredited investors. The June Notes and accrued but unpaid interest
thereon shall automatically convert into shares of our common stock on June 22,
2010 at a conversion price of $0.110279774 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and is convertible into shares of our
common stock at the option of the noteholders at any time prior to such
automatic conversion at a price equal to the greater of (i) 50% of the average
price of our common stock for the ten trading days prior to the date of the
notice of conversion and (ii) the automatic conversion price. In addition, any
time prior to conversion, we have the irrevocable right to repay the unpaid
principal and accrued but unpaid interest under the June Notes on three days
written notice (during which period the holders can elect to convert the June
Notes). The June Notes bear interest at the rate of 10% per annum and are due
and payable in full on June 22, 2010. Until the principal and accrued but unpaid
interest under the June Notes are paid in full, or converted into shares of our
common stock, the June Notes will be secured by a security interest in all of
our assets.




On June
30, 2009, we issued and sold a $150,000 principal amount secured promissory note
(“Hayward June Note”) bearing interest at a rate of 10% per annum to James A.
Hayward, our Chairman, President and Chief Executive Officer. The Hayward June
Note and accrued but unpaid interest thereon shall automatically convert into
shares of our common stock on June 30, 2010 at a conversion price of
$0.103059299 per share, which is equal to a 20% discount to the average volume,
weighted average price of our common stock for the ten trading days prior to
issuance, and is convertible into shares of our common stock at the option of
the noteholder at any time prior to such automatic conversion at a price equal
to the greater of (i) 50% of the average price of our common stock for the ten
trading days prior to the date of the notice of conversion and (ii) the
automatic conversion price. In addition, any time prior to conversion, we have
the irrevocable right to repay the unpaid principal and accrued but unpaid
interest under the Hayward June Note on three days written notice (during which
period the holder can elect to convert the Hayward June Note). The Hayward June
Note bears interest at the rate of 10% per annum and is due and payable in full
on June 30, 2010. Until the principal and accrued but unpaid interest under the
Hayward June Note are paid in full, or converted into shares of our common
stock, the Hayward June Note will be secured by a security interest in all of
our assets.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.




Inflation




The
effect of inflation on our revenue and operating results was not
significant.




Going
Concern




The
financial statements included in this filing have been prepared in conformity
with generally accepted accounting principles that contemplate our continuance
as a going concern. Our registered independent certified public accountants have
stated in their report dated December 15, 2008, that we have incurred operating
losses in the last two years, and that we are dependent upon management’s
ability to develop profitable operations and raise additional capital. These
factors among others may raise substantial doubt about our ability to continue
as a going concern. Our cash position may be inadequate to pay all of the costs
associated with the testing, production and marketing of our products.
Management intends to use borrowings and the sale of equity or convertible debt
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.


37




Item 3. -
Quantitative and Qualitative Disclosures About Market
Risk.




The
Company is a smaller reporting company as defined by Rule 12b-2 under the
Exchange Act and is not required to provide the information required under this
item.




Item 4T. -
Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this Quarterly Report on Form 10-Q, we conducted an
evaluation, under the supervision and with the participation of our management,
including our principal executive and principal financial officers, of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act). Based on the evaluation of these disclosure controls
and procedures, and in light of the material weaknesses previously found in our
internal controls, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not
effective.




Changes
in Internal Control over Financial Reporting




During
the fiscal quarter ended June 30, 2009, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




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. 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 that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.




Intervex,
Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York Index
No.08-601219):




Intervex,
Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008
related to a claim for breach of contract. In March 2005, we entered into a
consulting agreement with Intervex, which provided for, among other things, a
payment of $6,000 per month for a period of 24 months, or an aggregate of
$144,000. In addition, the consulting agreement provided for the issuance by us
to Intervex of a five-year warrant to purchase 250,000 shares of our common
stock with an exercise price of $.75. Intervex asserts that we owe it 17
payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon,
and a warrant to purchase 250,000 shares of our common stock. We have
counterclaimed for compensatory and punitive damages, restitution, attorneys’
fees and costs, interest and other relief the court deems proper. We intend to
vigorously defend against the claims asserted against us.


38




Item 1A -
Risk Factors




There are
many risks and uncertainties that can affect our future business, financial
performance or share price. In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part I,
‘‘Item 1A. Risk Factors’’ in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2008. Below are new or updated risk factors from those
appearing in our Annual Report on Form 10-K. In addition to the other
information set forth in this report, you should carefully consider the
following factors, which could materially affect our business, financial
condition or future results. The risks described below are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.




We
have a history of losses which may continue, and which may harm our ability to
obtain financing and continue our operations.




We
incurred net losses of $4.2 million for the year ended September 30, 2008 and
$5.7 million from operations for the nine-month period ended June 30, 2009.
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, began marketing
activities, and incurred interest expense on notes and warrants we issued to
obtain financing. Our operations are subject to the risks and competition
inherent in a company that moved from the development stage to an operating
company. 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 and services or any new products and services 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 financing our business operations will be
harmed or discontinued, and if we do obtain additional financing our
stockholders may suffer substantial dilution.




We
believe that our existing capital resources will enable us to fund our
operations until approximately October 2009. 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
stockholders.


39




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
August 4, 2009, we had 274,891,570 shares of common stock issued and outstanding
and outstanding options and warrants to purchase 113,105,964 shares of common
stock. The sale of these shares may adversely affect the market price of our
common stock. The issuance of shares 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.




Item 2 - Unregistered Sales
of Equity Securities and Use of Proceeds




On April
14, 2009, we issued and sold an aggregate of $300,000 principal amount secured
promissory notes bearing interest at a rate of 10% per annum to “accredited
investors,” as defined in regulations promulgated under the Securities Act of
1933, as amended. The promissory notes and accrued but unpaid interest thereon
shall automatically convert into shares of our common stock on April 14, 2010 at
a conversion price of $0.070756456 per share, which is equal to a 20% discount
to the average volume, weighted average price of our common stock for the ten
trading days prior to issuance, and are convertible into shares of our common
stock at the option of the noteholders at any time prior to such automatic
conversion at a price equal to the greater of (i) 50% of the average price of
our common stock for the ten trading days prior to the date of the notice of
conversion and (ii) the automatic conversion price. In addition, any time prior
to conversion, we have the irrevocable right to repay the unpaid principal and
accrued but unpaid interest under the promissory notes on three days written
notice (during which period the holders can elect to convert the promissory
notes). The promissory notes bear interest at the rate of 10% per annum and are
due and payable in full on April 14, 2010. Until the principal and accrued but
unpaid interest under the promissory notes are paid in full, or converted into
shares of our common stock, the promissory notes will be secured by a security
interest in all of our assets. Arjent Services LLC, a registered broker dealer
firm (the “Placement Agent”), acted as our placement agent. In connection with
the sale of promissory notes, we paid the Placement Agent commissions and
discounts aggregating $45,000. We claim an exemption from the registration
requirements of the Securities Act for the private placement of the promissory
notes pursuant to Section 4(2) of the Securities Act because the promissory
notes were sold by the issuer not involving a public offering.




On June
22, 2009, we issued and sold an aggregate of $250,000 principal amount secured
promissory notes bearing interest at a rate of 10% per annum to “accredited
investors,” as defined in regulations promulgated under the Securities Act of
1933, as amended. The promissory notes and accrued but unpaid interest thereon
shall automatically convert into shares of our common stock on June 22, 2010 at
a conversion price of $0.110279774 per share, which is equal to a 20% discount
to the average volume, weighted average price of our common stock for the ten
trading days prior to issuance, and are convertible into shares of our common
stock at the option of the noteholders at any time prior to such automatic
conversion at a price equal to the greater of (i) 50% of the average price of
our common stock for the ten trading days prior to the date of the notice of
conversion and (ii) the automatic conversion price. In addition, any time prior
to conversion, we have the irrevocable right to repay the unpaid principal and
accrued but unpaid interest under the promissory notes on three days written
notice (during which period the holders can elect to convert the promissory
notes). The promissory notes bear interest at the rate of 10% per annum and are
due and payable in full on June 22, 2010. Until the principal and accrued but
unpaid interest under the promissory notes are paid in full, or converted into
shares of our common stock, the promissory notes will be secured by a security
interest in all of our assets. Arjent Services LLC, a registered broker dealer
firm (the “Placement Agent”), acted as our placement agent. In connection with
the sale of promissory notes, we paid the Placement Agent commissions and
discounts aggregating $37,500. We claim an exemption from the registration
requirements of the Securities Act for the private placement of the promissory
notes pursuant to Section 4(2) of the Securities Act because the promissory
notes were sold by the issuer not involving a public offering.


40




On June
30, 2009, we issued and sold a $150,000 principal amount secured promissory note
(“Hayward June Note”) bearing interest at a rate of 10% per annum to James A.
Hayward, our Chairman, President and Chief Executive Officer. The Hayward June
Note and accrued but unpaid interest thereon shall automatically convert into
shares of our common stock on June 30, 2010 at a conversion price of
$0.103059299 per share, which is equal to a 20% discount to the average volume,
weighted average price of our common stock for the ten trading days prior to
issuance, and is convertible into shares of our common stock at the option of
the noteholder at any time prior to such automatic conversion at a price equal
to the greater of (i) 50% of the average price of our common stock for the ten
trading days prior to the date of the notice of conversion and (ii) the
automatic conversion price. In addition, any time prior to conversion, we have
the irrevocable right to repay the unpaid principal and accrued but unpaid
interest under the Hayward June Note on three days written notice (during which
period the holder can elect to convert the Hayward June Note). The Hayward June
Note bears interest at the rate of 10% per annum and is due and payable in full
on June 30, 2010. Until the principal and accrued but unpaid interest under the
Hayward March Note are paid in full, or converted into shares of our common
stock, the Hayward June Note will be secured by a security interest in all of
our assets.




For
additional information concerning our sales of unregistered securities during
the period covered by this report and subsequent to the period covered by this
report, please refer to Note D and Note J, respectively, to our Consolidated
Financial Statements in Part I, Item 1 of this report, which are incorporated
herein by reference.




Item 3 - Defaults on Senior
Securities




None.




Item 4 - Submission of
Matters to a Vote of Security Holders




None.




Item 5 - Other
Information




None




Item 6 –
Exhibits


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
      amended31.2*
                      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
      amended32.1*
                      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)







* Filed
herewith.


41




Signatures




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.


Applied
      DNA Sciences, Inc.Dated:
      August 14, 2009
                          /s/
      James
      A. Hayward,
      Ph.
      D.James
      A. Hayward, Ph. D.Chief
      Executive Officer(Duly
      authorized officer)Dated:
      August 14, 2009
                          /s/
      Kurt
      H. JensenKurt
      H. JensenChief
      Financial Officer(Duly
      authorized officer and principal
      financial officer)






42