UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q


(Mark
      one)x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31,
      2009o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ______________ to
  _____________




Commission
File Number: 33-17387




Applied
DNA Sciences, Inc.


(Exact
name of registrant as specified in its charter)


Delaware
            59-2262718(State
      of incorporation)
            (IRS
      Employer ID Number)




25
Health Sciences Drive, Suite 113


Stony
Brook, New York 11790


(Address
of principal executive offices)




631-444-
8090


(Registrant’s
telephone number, including area code)


Not
      applicable(Former
      name, former address and former fiscal year, if changed since last
      report)




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
     o No




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


o Yes
      o No




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


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




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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. May 15, 2009:
261,888,747







Applied
DNA Sciences, Inc.




Form 10-Q
for the Quarter Ended March 31, 2009




Table of
Contents


PagePart I - Financial InformationItem
      1 - FinancialStatements
                
                1Item 2 - Management’s Discussion and Analysis or Plan of
      Operation
                
                21Item 3 - Quantitative and Qualitative Disclosures About
      Market Risk
                
                30Item 4 - Controls and Procedures
                
                30Part II - Other InformationItem 1 - Legal Proceedings
                
                31Item 1A - Risk Factors
                
                31Item 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
                
                42Signatures







Part I




Item 1 - Financial Statements




APPLIED
DNA SCIENCES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


March 31,
2009 and September 30, 2008


March
      31,
                                                        2009
                                                      
                                                      
                                                      September
      30,
                                                        2008(unaudited)ASSETSCurrent
      assets:Cash
                                                      
                                                      $
                                                      14,294
                                                      
                                                      
                                                      $
                                                      136,405Restricted
      cash
                                                      
                                                      
                                                      150,000
                                                      
                                                      
                                                      
                                                      —Accounts
      receivable
                                                      
                                                      
                                                      63,750
                                                      
                                                      
                                                      
                                                      75,150Prepaid
      expenses
                                                      
                                                      
                                                      336,449
                                                      
                                                      
                                                      
                                                      83,333Total
      current assets
                                                      
                                                      
                                                      564,493
                                                      
                                                      
                                                      
                                                      294,888Property,
      plant and equipment-net of accumulated depreciation of $178,123 and
      $147,132, respectively
                                                      
                                                      
                                                      32,739
                                                      
                                                      
                                                      
                                                      63,730Other
      assets:Deposits
                                                      
                                                      
                                                      8,322
                                                      
                                                      
                                                      
                                                      8,322Capitalized
      finance costs-net of accumulated amortization of $567,178 and $464,274,
      respectively
                                                      
                                                      
                                                      10,322
                                                      
                                                      
                                                      
                                                      113,226Intangible
      assets:Patents,
      net of accumulated amortization of $33,504 and $31,762, respectively (Note
      B)
                                                      
                                                      
                                                      753
                                                      
                                                      
                                                      
                                                      2,494Intellectual
      property, net of accumulated amortization and write off of $8,248,578 and
      $8,066,682, respectively (Note B)
                                                      
                                                      
                                                      1,182,322
                                                      
                                                      
                                                      
                                                      1,364,217Total
      Assets
                                                      
                                                      $
                                                      1,798,951
                                                      
                                                      
                                                      $
                                                      1,846,877LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
                                                      
                                                      $
                                                      918,431
                                                      
                                                      
                                                      $
                                                      12,821,171Convertible
      notes payable, net of unamortized discount of $423,253 and $486,726,
      respectively (Note D)
                                                      
                                                      
                                                      926,747
                                                      
                                                      
                                                      
                                                      3,063,274Other
      current liabilities
                                                      
                                                      
                                                      150,000
                                                      
                                                      
                                                      
                                                      —Total
      current liabilities
                                                      
                                                      
                                                      1,995,178
                                                      
                                                      
                                                      
                                                      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-
      issued and outstanding as of March 31, 2009 and September 30,
      2008
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Common
      stock, par value $0.001 per share; 410,000,000 shares authorized;
      260,511,148 and 205,359,605 issued and outstanding as of March 31, 2009
      and September 30, 2008, respectively
                                                      
                                                      
                                                      260,511
                                                      
                                                      
                                                      
                                                      205,359Additional
      paid in capital
                                                      
                                                      
                                                      140,197,854
                                                      
                                                      
                                                      
                                                      133,133,354Accumulated
      deficit
                                                      
                                                      
                                                      (140,654,592
                                                      )
                                                      
                                                      
                                                      (147,376,281
                                                      )Total
      deficiency in stockholders’ equity
                                                      
                                                      
                                                      (196,227
                                                      )
                                                      
                                                      
                                                      (14,037,568
                                                      )Total
      Liabilities and Deficiency in Stockholders’ Equity
                                                      
                                                      $
                                                      1,798,951
                                                      
                                                      
                                                      $
                                                      1,846,877




See the
accompanying notes to the unaudited condensed consolidated financial
statements


1




APPLIED
DNA SCIENCES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF LOSSES


Three and
Six Months Ended March 31, 2009 and 2008


(unaudited)


Three
      Months Ended March 31,
                    
                    
                    Six
      Months Ended March 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Sales
                    
                    $
                    64,670
                    
                    
                    $
                    207,737
                    
                    
                    $
                    211,245
                    
                    
                    $
                    330,904Cost
      of sales
                    
                    
                    (8,594
                    )
                    
                    
                    (46,114
                    )
                    
                    
                    (52,335
                    )
                    
                    
                    (74,004
                    )Gross
      Profit
                    
                    
                    56,076
                    
                    
                    
                    161,623
                    
                    
                    
                    158,910
                    
                    
                    
                    256,900Operating
      expenses:Selling,
      general and administrative
                    
                    
                    1,683,534
                    
                    
                    
                    715,783
                    
                    
                    
                    4,447,545
                    
                    
                    
                    2,414,052Research
      and development
                    
                    
                    40,860
                    
                    
                    
                    55,900
                    
                    
                    
                    103,389
                    
                    
                    
                    92,226Depreciation
      and amortization
                    
                    
                    105,645
                    
                    
                    
                    107,244
                    
                    
                    
                    214,627
                    
                    
                    
                    215,048Total
      operating expenses
                    
                    
                    1,830,039
                    
                    
                    
                    878,927
                    
                    
                    
                    4,765,561
                    
                    
                    
                    2,721,326NET
      LOSS FROM OPERATIONS
                    
                    
                    (1,773,963
                    )
                    
                    
                    (717,304
                    )
                    
                    
                    (4,606,651
                    )
                    
                    
                    (2,464,426
                    )Other
      income (Note C)
                    
                    
                    12,023,888
                    
                    
                    
                    —
                    
                    
                    
                    12,023,888
                    
                    
                    
                    —Interest
      expense, net
                    
                    
                    (212,222
                    )
                    
                    
                    (608,383
                    )
                    
                    
                    (695,051
                    )
                    
                    
                    (994,005
                    )Net
      income (loss) before provision for income taxes
                    
                    
                    10,037,703
                    
                    
                    
                    (1,325,687
                    )
                    
                    
                    6,722,186
                    
                    
                    
                    (3,458,431
                    )Income
      taxes
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    497
                    
                    
                    
                    —NET
      INCOME (LOSS)
                    
                    $
                    10,037,703
                    
                    
                    $
                    (1,325,687
                    )
                    
                    $
                    6,721,689
                    
                    
                    $
                    (3,458,431
                    )Net
      income (loss) per share-basic
                    
                    $
                    0.04
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.03
                    
                    
                    $
                    (0.02
                    )Net
      income (loss) per share-diluted
                    
                    $
                    0.04
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.03
                    
                    
                    $
                    (0.02
                    )Weighted
      average shares outstanding-Basic
                    
                    
                    251,805,934
                    
                    
                    
                    191,517,098
                    
                    
                    
                    237,246,560
                    
                    
                    
                    186,798,504Diluted
                    
                    
                    279,523,227
                    
                    
                    
                    191,517,098
                    
                    
                    
                    279,523,227
                    
                    
                    
                    186,798,504




See the
accompanying notes to the unaudited condensed consolidated financial
statements


2




APPLIED
DNA SCIENCES, INC


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


Three
months ended March 31, 2009 and 2008


(unaudited)


Six
      months ended March 31,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    6,721,689
                    
                    
                    $
                    (3,458,431
                    )Adjustments
      to reconcile net loss to net used in operating activities:Depreciation
      and amortization
                    
                    
                    214,627
                    
                    
                    
                    215,048Reversal
      of accrued penalty charges
                    
                    
                    (12,023,888
                    )
                    
                    
                    —Fair
      value of vested options issued to officers, directors and
      employees
                    
                    
                    2,148,118
                    
                    
                    
                    —Fair
      value of warrants issued in exchange for services rendered
                    
                    
                    217,865
                    
                    
                    
                    —Amortization
      of capitalized financing costs
                    
                    
                    102,904
                    
                    
                    
                    185,847Amortization
      of debt discount attributable to convertible debentures
                    
                    
                    601,048
                    
                    
                    
                    832,546Common
      stock issued in exchange for services rendered
                    
                    
                    186,094
                    
                    
                    
                    1,040,000Change
      in assets and liabilities:Decrease
      (increase) in accounts receivable
                    
                    
                    11,400
                    
                    
                    
                    (89,985
                    )Decrease
      in prepaid expenses and deposits
                    
                    
                    146,884
                    
                    
                    
                    81,250Increase
      (decrease) in accounts payable and accrued liabilities
                    
                    
                    451,148
                    
                    
                    
                    (794,669
                    )Net
      cash used in operating activities
                    
                    
                    (1,222,111
                    )
                    
                    
                    (1,988,394
                    )Cash
      flows from investing activities:(Increase)
      decrease in restricted cash held in escrow
                    
                    
                    (150,000
                    )
                    
                    
                    399,920Acquisition
      (disposal) of property and equipment, net
                    
                    
                    —
                    
                    
                    
                    (5,492
                    )Net
      cash provided by (used in) investing activities
                    
                    
                    (150,000
                    )
                    
                    
                    394,428Cash
      flows from financing activities:Net
      proceeds from issuance of convertible notes
                    
                    
                    1,250,000
                    
                    
                    
                    2,447,580Net
      cash provided by financing activities
                    
                    
                    1,250,000
                    
                    
                    
                    2,447,580Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (122,111
                    )
                    
                    
                    853,614Cash
      and cash equivalents at beginning of period
                    
                    
                    136,405
                    
                    
                    
                    25,185Cash
      and cash equivalents at end of period
                    
                    $
                    14,294
                    
                    
                    $
                    878,799Supplemental
      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
                    
                    $
                    2,148,118
                    
                    
                    $
                    —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
                    
                    $
                    3,630,000
                    
                    
                    $
                    50,275




See the
accompanying notes to the unaudited condensed consolidated financial
statements


3




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES




General




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




In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2009. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated September 30,
2008 financial statements and footnotes thereto included in the Company’s SEC
Form 10-K.




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 March 31, 2009, the
Company has accumulated losses of $140,654,592.




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.




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 March 31, 2009, the Company’s
deferred revenue was $-0-.


4




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Revenue
Recognition (continued)




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.




Cash
Equivalents




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




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 March 31, 2009, the Company has deemed that no
allowance for doubtful accounts was necessary.




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 six month period ended March 31, 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 March 31, 2009 and
September 30, 2008 property and equipment consist of:


March
      31,
                            2009
                            (unaudited)
                          
                          
                          September
      30,
                            2008Computer
      equipment
                          
                          $
                          27,404
                          
                          
                          $
                          27,404Lab
      equipment
                          
                          
                          77,473
                          
                          
                          
                          77,473Furniture
                          
                          
                          105,985
                          
                          
                          
                          105,985210,862
                          
                          
                          
                          210,862Accumulated
      Depreciation
                          
                          
                          (178,123
                          )
                          
                          
                          (147,132
                          )Net
                          
                          $
                          32,739
                          
                          
                          $
                          63,730


5




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




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.




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 six months ended March 31, 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 255,551,691 for the three
and six months ended March 31, 2008.




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 six month periods ended March 31, 2009 and
2008, respectively to employees and directors of the Company under a
non-qualified employee stock option plan.




As of
March 31, 2009, 44,330,000 non-qualified employee stock options were outstanding
with 15,077,500 shares vested and exercisable.


6




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




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 March 31,
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 $40,860 and $103,389 for the three and six
month period ended March 31, 2009, respectively and $55,900 and $92,226 for the
three and six month period ended March 31, 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 $21,213 and $35,550 for the three
and six month period ended March 31, 2009, respectively and $9,118 and 11,364 as
advertising costs for the three and six month period March 31, 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.




Restricted
Cash/Other Current Liabilities




Restricted
cash is comprised of funds deposited into an escrow account pending consummation
of the placement of convertible debt as of March 31, 2009. The related
obligation is recorded as other current liabilities until
consummation.




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). The adoption of SFAS No. 157 did not have a material
impact on the Company’s consolidated financial position, results of operations
or cash flows.


7




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 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 will have a
material effect 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.


8




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Recent
accounting pronouncements (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 to 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 to have a material effect on its consolidated financial
statements.




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.




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 statements.




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 any
material impact on the Company’s consolidated financial statements.


9




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
A — SUMMARY OF ACCOUNTING POLICIES (continued)




Recent
accounting pronouncements (continued)




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.




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 March 31,
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
                    
                    
                    (2,627,071
                    )Impairment
      (See below)
                    
                    
                    (5,655,011
                    )Net:
                    
                    $
                    1,183,075Residual
      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 six months ended
March 31, 2009 was $91,672 and $183,638, respectively; $92,661 and $184,305 for
the three and six months ended March 31, 2008, respectively.




NOTE
C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




Accounts
payable and accrued liabilities at March 31, 2009 are as follows:


Accounts
      payable
                            
                            $
                            737,277Accrued
      consulting fees
                            
                            
                            102,500Accrued
      interest payable
                            
                            
                            45,356Accrued
      salaries payable
                            
                            
                            33,298Total
                            
                            $
                            918,431


10




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (continued)




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 March 31, 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 three months ended March 31, 2009.




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES




Convertible
notes payable as of March 31, 2009 are as follows:


Secured
      Convertible Note Payable dated May 7, 2008, net of unamortized debt
      discount of $6,003 (see below)
                                          
                                          $
                                          93,997Secured
      Convertible Note Payable dated July 31, 2008, net of unamortized debt
      discount of $38,413 (see below)
                                          
                                          
                                          111,587Secured
      Convertible Note Payable dated October 21, 2008, net of unamortized debt
      discount of $171,667 (see below)
                                          
                                          
                                          328,333Secured
      Convertible Note Payable dated January 29, 2009, net of unamortized debt
      discount of $59,527 (see below)
                                          
                                          
                                          90,473Secured
      Convertible Note Payable dated February 27, 2009, net of unamortized debt
      discount of $51,003 (see below)
                                          
                                          
                                          148,997Secured
      Convertible Note Payable dated March 30, 2009, net of unamortized debt
      discount of $96,640 (see below)
                                          
                                          
                                          153,360926,747Less
      current portion
                                          
                                          
                                          (926,747
                                          )$
                                          —




10%
Secured Convertible Promissory Note dated May 7, 2008




On May 7,
2008, the Company issued a $100,000 convertible promissory note due May 7, 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 $0.079849085 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 $0.079849085 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 $48,490 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.  11




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




10%
Secured Convertible Promissory Note dated May 7, 2008 (continued)




In
connection with the placement of the note the Company issued non-detachable
warrants granting the holders the right to acquire 200,000 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 $10,730 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 3.09%, a dividend yield of 0%, and volatility of 101.74%. 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 ($48,490) and warrants ($10,730) to debt discount, aggregating $59,220,
which will be amortized to interest expense over the term of the Notes.
Amortization of $14,602 and $29,529 was recorded for the three and six month
periods ended March 31, 2009.




10%
Secured Convertible Promissory Note dated July 31, 2008




On May 7,
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 $28,337 and $57,304 was recorded for the three and six month
periods ended March 31, 2009.




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.  12




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




10%
Secured Convertible Promissory Note dated October 21, 2008
(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 $77,250 and $141,625 was recorded for the three and six
month periods ended March 31, 2009.




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.




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 $11,945 was recorded for the three and six month periods ended
March 31, 2009.  13




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)




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 $4,901 was recorded for the three and six month periods
ended March 31, 2009.




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 $265 was recorded for the three and six month periods
ended March 31, 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 March 31,
2009.




During
the six months ended March 31, 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 $1,100,000 in the form of convertible
promissory notes for working capital purposes (see Note D).




During
the three and six month period ended March 31, 2009, the Company had sales of
$-0- and $5,000 (or 0% and 2.4% of total sales), respectively, to an entity
whereby the Company’s Chief Executive Officer is the President.




During
the three and six month period ended March 31, 2008, the Company had sales of
$50,455 and $68,518 (or 24.3% and 20.7% of total sales), respectively, to an
entity whereby the Company’s Chief Executive Officer is the
President.


14




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




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 as the result of a shareholder meeting conducted on May 16,
2007. Prior to the May 16, 2007 share increase, the Company was authorized to
issue 250,000,000 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.




Preferred
and Common Stock Transactions During the Six Months Ended March 31,
2009:




During
the six months ended March 31, 2009, the Company issued 42,049,975 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
                                                  
                                                  4.89
                                                  
                                                  $
                                                  0.06
                                                  
                                                  2,000,000
                                                  
                                                  $
                                                  0.06$0.07
                                                  
                                                  
                                                  200,000
                                                  
                                                  0.96
                                                  
                                                  $
                                                  0.07
                                                  
                                                  200,000
                                                  
                                                  $
                                                  0.07$0.09
                                                  
                                                  
                                                  16,400,000
                                                  
                                                  2.42
                                                  
                                                  $
                                                  0.09
                                                  
                                                  16,400,000
                                                  
                                                  $
                                                  0.09$0.10
                                                  
                                                  
                                                  1,605,464
                                                  
                                                  3.75
                                                  
                                                  $
                                                  0.10
                                                  
                                                  1,605,464
                                                  
                                                  $
                                                  0.10$0.50
                                                  
                                                  
                                                  27,150,000
                                                  
                                                  2.61
                                                  
                                                  $
                                                  0.50
                                                  
                                                  24,850,000
                                                  
                                                  $
                                                  0.50$0.60
                                                  
                                                  
                                                  6,623,500
                                                  
                                                  .46
                                                  
                                                  $
                                                  0.60
                                                  
                                                  6,623,500
                                                  
                                                  $
                                                  0.60$0.75
                                                  
                                                  
                                                  14,797,000
                                                  
                                                  0.85
                                                  
                                                  $
                                                  0.75
                                                  
                                                  14,797,000
                                                  
                                                  $
                                                  0.7568,775,964
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  66,475,964


15




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
G - STOCK OPTIONS AND WARRANTS (continued)




Warrants
(continued)




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,
      March 31, 2009
                                    
                                    
                                    68,775,964
                                    
                                    
                                    $
                                    0.44




During
the six month period ended March 31, 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 year.




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




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
                                            
                                            
                                            0.50
                                            
                                            $
                                            0.68
                                            
                                            
                                            3,660,000
                                            
                                            $
                                            0.680.07
                                            
                                            
                                            1,000,000
                                            
                                            
                                            4.90
                                            
                                            
                                            0.07
                                            
                                            
                                            —
                                            
                                            
                                            0.070.09
                                            
                                            
                                            2,000,000
                                            
                                            
                                            2.42
                                            
                                            
                                            0.09
                                            
                                            
                                            2,000,000
                                            
                                            
                                            0.090.11
                                            
                                            
                                            37,670,000
                                            
                                            
                                            4.22
                                            
                                            
                                            0.11
                                            
                                            
                                            9,417,500
                                            
                                            
                                            0.1144,330,000
                                            
                                            $
                                            0.16
                                            
                                            
                                            
                                            
                                            
                                            15,077,500
                                            
                                            $
                                            0.28


16




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
G - STOCK OPTIONS AND WARRANTS (continued)




Employee
Stock Options (continued)




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


Number
      ofShares
                    
                    
                    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 March 31, 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 increase amendment, the Board of Directors granted
options to purchase a total of 37,670,000 shares to certain key employees and
non-employee directors under the 2005 Incentive Stock Plan, including
17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and
Ming-Hwa Liang, respectively, and 500,000 to each of Yacov Shamash and Sanford
R. Simon. The options granted to our key employees and non-employee directors
vested with respect to 25% of the underlying shares on the date of grant and the
remaining will vest ratably each anniversary thereafter until fully vested on
the third anniversary of the date of grant. The fair value was determined
using the Black Scholes Option Pricing Model, with the following assumptions
utilized: Dividend yield: -0-%, volatility: 208.48%; risk free rate: 3.66%;
expected life: 5 years.




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 $297,871 and $2,148,118 as stock compensation expense for the
three and six month period ended March 31, 2009 for the vesting portion of all
employee options outstanding.




NOTE
H- COMMITMENTS AND CONTINGENCIES




Operating
Lease Commitments




The
Company leases office space under an operating lease in Stony Brook, New York
for its corporate use from an entity controlled by a significant former
shareholder, expiring in October 2009. In November 2005, the Company vacated the
Los Angeles facility to relocated to the new Stony Brook New York
address.




Total
lease rental expense for the three and six month periods ended on March 31,
2009 was $21,366 and $40,004, respectively.




Total
lease rental expense for the three and six month periods ended on March 31,
2008 was $19,338 and $37,421, respectively.


17




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES (continued)




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. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings 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 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. This matter is
in the early stages of discovery. We intend to vigorously defend against the
claims asserted against us.




18




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009


(unaudited)




NOTE
H- COMMITMENTS AND CONTINGENCIES (continued)




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.


19




APPLIED
DNA SCIENCES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 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 six month period ended March 31, 2009, the Company incurred a net loss from
operations of $4,606,651. 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 April
14, 2009, the Company 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.




The
Company claims an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Securities Act”), for the private placement of the
promissory notes pursuant to Section 4(2) of the Securities Act because
each of the promissory notes was made in a sale by the issuer not involving a
public offering.




Arjent
Services LLC, a registered broker dealer firm (the “Placement Agent”), acted as
the Company’s placement agent. In connection with the sale of the sale of
promissory notes described above, the Company paid the Placement Agent
commissions and discounts aggregating $45,000. In addition, in connection with
an engagement agreement dated February 20, 2009, pursuant to which the Placement
Agent agreed to act as our placement agent to assist us in raising up to one and
a half million dollars ($1,500,000) through the issuance of convertible
promissory notes in a private placement transaction, the Company had issued on
February 20, 2009 to an affiliate of the Placement Agent a warrant to purchase
two million (2,000,000) shares of the Company’s common stock at an exercise
price equal to the closing price of our common stock on the date of the
engagement agreement, or $0.06, exercisable for a four year period commencing on
February 20, 2010. There can be no assurances that the Placement Agent will be
successful in raising additional capital.




On May 7,
2009, the Company issued 1,377,599 shares of common stock upon the automatic
conversion of a secured convertible promissory note.


20


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.


21




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 July 2009. 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.




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.




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.


22




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 three months ended March 31, 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.




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.


23




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.




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 March 31, 2009 and
2008




Revenues




For the
three months ended March 31, 2009, we generated $64,670 in revenues from
operations, principally from the sales of BioActive Ingredients, and our cost of
sales for the three months ended March 31, 2009 was $8,594, netting us a gross
profit of $56,076. For the three months ended March 31, 2008, we generated
$207,737 in revenues from operations and our cost of sales for the three
months ended March 31, 2008 was $46,114, netting us a gross profit of
$161,623.  The decrease in gross revenue of $97,990, or 62%, was primarily
attributable to a slowdown in the economy.




Costs
and Expenses




Selling,
General and Administrative




Selling,
general and administrative expenses increased from $715,783 for the three months
ended March 31, 2008 to $1,683,534 for the three months ended March 31,
2009. The increase of $967,751, or 135.2%, 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.


24




Research
and Development




Research
and development expenses decreased from $55,900 for the three months ended March
31, 2008 to $40,860 for the three months ended March 31, 2009. The decrease of
$15,040 is attributed to less research and development activity related to
the recent development and feasibility study agreements.




Depreciation
and Amortization




In the
three months ended March 31, 2009, depreciation and amortization decreased by
$1,599 from $107,244 to $105,645 for the three months ended March 31,
2008. The decrease is attributable to the reduced depreciation/additions to our
property and equipment.




Total
Operating Expenses




Total
operating expenses increased to $1,830,039 for the three months ended March
31, 2009 from $878,927 for the three months ended March 31, 2008, or an
increase of $951,112, primarily attributable to equity based payments in the
three months ended March 31, 2009 as compared to the same period last
year.




Other
Income/Loss




During
the three months ended March 31, 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 three months ended March 31, 2009 decreased by $396,161 to
$212,222 from $608,383 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 three months ended March 31, 2009 was $10,037,703 as compared to
a net loss of $1,325,687 in the prior period primarily attributable to our
other income adjustment described above, net with our increase in operating
expenses.




Comparison
of Results of Operations for the Six Months Ended March 31, 2009 and
2008




Revenues




For the
six months ended March 31, 2009, we generated $211,245 in revenues from
operations, principally from the sales of BioActive Ingredients, and our cost of
sales for the six months ended March 31, 2009 was $52,335, netting us a gross
profit of $158,910. For the six months ended March 31, 2008, we generated
$330,904 in revenues from operations and our cost of sales for the six
months ended March 31, 2008 was $74,004, netting us a gross profit of $256,900.
The decrease in gross revenue of $96,953, or 40%, was primarily attributable to
a slowdown in the economy.




Costs
and Expenses




Selling,
General and Administrative




Selling,
general and administrative expenses increased from $2,414,052 for the six months
ended March 31, 2008 to $4,447,545 for the six months ended March 31, 2009.
The increase of $2,033,493, or 84%, 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.


25




Research
and Development




Research
and development expenses increased from $92,226 for the six months ended March
31, 2008 to $103,389 for the six months ended March 31, 2009. The increase of
$11,163 is attributed to more research and development activity related to
the recent development and feasibility study agreements.




Depreciation
and Amortization




In the
six months ended March 31, 2009, depreciation and amortization decreased by $421
from $215,048 to $214,627 for the six months ended March 31, 2009. The
decrease is attributable to the reduced depreciation/additions to our property
and equipment.




Total
Operating Expenses




Total
operating expenses increased to $4,765,561 for the six months ended March 31,
2009 from $2,721,326 for the six months ended March 31, 2008, or an
increase of $2,044,235, primarily attributable to equity based payments in the
six months ended March 31, 2009 as compared to the same period last
year.




Other
Income/Loss




During
the six months ended March 31, 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 six months ended March 31, 2009 decreased by $298,954 to
$695,051 from $994,005 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 six months ended March 31, 2009 was $6,721,689 as compared to a
net loss of $3,458,431 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
March 31, 2009, we had a working capital deficit of $1,430,685. For the
six-month period ended March 31, 2009, we generated a net cash flow deficit from
operating activities of $1,222,111. Net cash flow deficit from operations
consist primarily of year to date income of $6,721,689, net, with a non cash
accrual reduction (see other income above) of $12,023,888. Other non-cash
adjustments included $918,579 in depreciation and amortization charges and
$2,552,077 for equity based payments and compensation. Additionally, we had a
net decrease in current assets of $158,284 and a net increase in current
liabilities of $451,148. Cash used in investing activities totaled $150,000,
primarily provided by an increase in cash held in escrow. Cash provided by
financing activities for the six-month period ended March 31, 2009 totaled
$1,250,000 consisting of proceeds from issuance of convertible
debt.




Without the other income
adjustment, we would have incurred a net loss of $5,302,199 in the six months
ended March 31, 2009.


26




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.




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 three 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 July 2009.
Form 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.


27




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 is convertible into
shares of our common stock at a price of $0.50 per share by the holder at any
time from October 21, 2008, through October 20, 2009, and 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 (“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 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 January
Note on three days written notice (during which period the holder can elect to
convert the note). The 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 January Note are paid in full, or
converted into our common stock, the January Note will be secured by a security
interest in all of our assets. The 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 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.


28




On
February 27, 2009, we issued and sold a $200,000 principal amount secured
promissory note (“February Note”) bearing interest at a rate of 10% per annum to
James A. Hayward, our Chairman, President and Chief Executive Officer. The
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 February Note on three days written notice (during which
period the holder can elect to convert the February Note). The 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
February Note are paid in full, or converted into shares of our common stock,
the 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
(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,
our Chairman, President and Chief Executive Officer. The 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 March Note
on three days written notice (during which period the holder can elect to
convert the March Note). The 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 March Note are paid in full, or converted
into shares of our common stock, the 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.




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.


29




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 March 31, 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.




30




Part II - Other Information




Item 1 - Legal Proceedings




From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings 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. This matter is
in the early stages of discovery. We intend to vigorously defend against the
claims asserted against us.




Terminated
Litigation




.




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.
 Risks
Relating To Our Business:
  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 $6.8 million for the year ended September 30, 2008 and
$4.6 million from operations for the six-month period ended March 31, 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.


31




We
will require additional financing which may require the issuance of additional
shares which would dilute the ownership held by our stockholders.




We will
need to raise funds through either debt or the sale of our shares in order to
achieve our business goals. Any sale of additional shares or securities
convertible into any such shares by us would further dilute the percentage
ownership held by the stockholders. Furthermore, if we raise funds in equity
transactions through the issuance of convertible securities which are
convertible at the time of conversion at a discount to the prevailing market
price, substantial dilution is likely to occur resulting in a material decline
in the price of your shares.




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 July 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.




Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.




In their
report dated December 15, 2008, our independent auditors stated that our
financial statements for the year ended September 30, 2008 were prepared
assuming that we would continue as a going concern, and that they have
substantial doubt about our ability to continue as a going concern. Our
auditors’ doubts are based on our incurring net losses of $6.8 million for the
year ended September 30, 2008. We continue to experience net operating losses.
Our ability to continue as a going concern is subject to our ability to generate
a profit and/or obtain necessary funding from outside sources, including by the
sale of our securities, obtaining loans from financial institutions, or
obtaining grants from various organizations or governments, where possible. Our
continued net operating losses and our auditors’ doubts increase the difficulty
of our meeting such goals and our efforts to continue as a going concern may not
prove successful.




General
economic conditions and the current global financial crisis may adversely affect
our business, operating results and financial condition.




The
current global economy and economic slowdown may have serious negative
consequences for our business and operating results. Since our customers
incorporate our products into a variety of consumer goods, the demand for our
products is subject to worldwide economic conditions and their impact on levels
of consumer spending. Some of the factors affecting consumer spending include
general economic conditions, unemployment, consumer debt, reductions in net
worth based on recent severe market declines, residential real estate and
mortgage markets, taxation, energy prices, interest rates, consumer confidence
and other macroeconomic factors. During a period of economic weakness or
uncertainty, demand for consumer goods incorporating our products may weaken,
and current or potential customers may defer purchases of our
products.




The
recent distress in the credit and financial markets has also resulted in extreme
volatility in security prices and diminished liquidity, and there can be no
assurance that our liquidity will not be affected by changes in the financial
markets and the global economy. Moreover, the current crisis has had a
significant material adverse impact on a number of financial institutions and
has limited access to capital and credit for many companies. This could, among
other things, make it more difficult for us to obtain, or increase our cost of
obtaining, capital and financing for our operations. Our access to additional
capital may not be available on terms acceptable to us or at all.


32




If
our existing products and services are not accepted by potential customers or we
fail to introduce new products and services, our business, results of operations
and financial condition will be harmed.




There has
been limited market acceptance of our botanical DNA encryption, encapsulation,
embedment and authentication products and services to date. Some of the factors
that will affect whether we achieve market acceptance of our solutions
include:


●
                          availability,
      quality and price relative to competitive solutions;●
                          customers’
      opinions of the solutions’ utility;●
                          ease
      of use;●
                          consistency
      with prior practices;●
                          scientists’
      opinions of the solutions’ usefulness;●
                          citation
      of the solutions in published research; and●
                          general
      trends in anti-counterfeit and security solutions’
    research.




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




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




If
we are unable to retain the services of Drs. Hayward or Liang we may not be able
to continue our operations.




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




The
markets for our anti-counterfeiting and product authentication solutions as well
as our BioActive Ingredients are very competitive, and we may be unable to
continue to compete effectively these industries in the future.




The
principal markets for our our anti-counterfeiting and product authentication
solutions as well as our BioActive Ingredients are intensely competitive. Many
of our competitors, both in the United States and elsewhere, are major
pharmaceutical, chemical and biotechnology companies, or have strategic
alliances with such companies, and many of them have substantially greater
capital resources, marketing experience, research and development staff, and
facilities than we do. Any of these companies could succeed in developing
products that are more effective than the products that we have or may develop
and may be more successful than us in producing and marketing their existing
products. Some of our competitors that operate in the anti-counterfeiting and
fraud prevention markets include: Authentix, Collectors Universe Inc., Data Dot
Technology, Digimarc Corp., DNA Technologies, Inc., ID Global, Informium AG,
Inksure Technologies, Kodak, L-1 Identity Solutions, Manakoa, OpSec Security
Group, SmartWater Technology, Inc., Sun Chemical Corp, and
Tracetag.


33




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


●
                              product
      performance, features and liability;●
                              price;●
                              timing
      of product introductions;●
                              ability
      to develop, maintain and protect proprietary products and
      technologies;●
                              sales
      and distribution capabilities;●
                              technical
      support and service;●
                              brand
      loyalty;●
                              applications
      support; and●
                              breadth
      of product
line.




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




We
need to expand our sales, marketing and support organizations and our
distribution arrangements to increase market acceptance of our products and
services.




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




A
manufacturer’s inability or willingness to produce our goods on time and to our
specifications could result in lost revenue and net losses.




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




If
we need to replace manufacturers, our expenses could increase, resulting in
smaller profit margins.




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


34




If a manufacturer fails to use
acceptable labor practices, we might have delays in shipments or face joint
liability for violations, resulting in decreased revenue and increased
expenses.




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




Failure
to license new technologies could impair sales of our existing products or any
new product development we undertake in the future.




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




Our
failure to manage our growth in operations and acquisitions of new product lines
and new businesses could harm our business.




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


●
                  operations
      and financial systems;●
                  procedures
      and controls; and●
                  training
      and management of our
employees.




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




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


●
                    difficulties
      in staffing, managing and integrating international operations due to
      language, cultural or other differences;●
                    different
      or conflicting regulatory or legal requirements;●
                    foreign
      currency fluctuations; and●
                    diversion
      of significant time and attention of our
  management.


35




Failure
to attract and retain qualified scientific, production and managerial personnel
could harm our business.




Recruiting
and retaining qualified scientific and production personnel to perform and
manage prototype, sample, and product manufacturing and business development
personnel to conduct business development are critical to our success. In
addition, our desired growth and expansion into areas and activities requiring
additional expertise, such as clinical testing, government approvals,
production, and marketing will require the addition of new management personnel
and the development of additional expertise by existing management personnel.
Because the industry in which we compete is very competitive, we face
significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, we may not be able to continue to successfully attract qualified
personnel. The failure to attract and retain these personnel or, alternatively,
to develop this expertise internally would harm our business since our ability
to conduct business development and manufacturing will be reduced or eliminated,
resulting in lower revenues. We generally do not enter into employment
agreements requiring our employees to continue in our employment for any period
of time.




36




Litigation
generally could affect our financial condition and results of
operations.




We
generally may be subject to claims made by and required to respond to litigation
brought by customers, former employees, former officers and directors, former
distributors and sales representatives, and vendors and service providers. We
have faced such claims and litigation in the past and we cannot assure that we
will not be subject to claims in the future. In the event that a claim is
successfully brought against us, considering our lack of material revenue and
the losses our business has incurred for the period from our inception to
December 31, 2008, this could result in a significant decrease in our liquidity
or assets, which could result in the reduction or termination of our
business.


37




We
were obligated to pay liquidated damages as a result of our failure to have our
registration statement declared effective prior to June 15, 2005, and any
payment of liquidated damages will either result in depletion of our limited
working capital or issuance of shares of common stock which would cause dilution
to our existing stockholders.
  Pursuant
to the terms of a registration rights agreement with respect to common stock
underlying convertible notes and warrants we issued in private placements in
November and December, 2003, December, 2004, and January and February, 2005, for
each month after June 15, 2005 that we did not have a registration statement
registering the shares underlying these convertible notes and warrants declared
effective, we were obligated to pay liquidated damages in the amount of 3.5% per
month of the face amount of the notes, an amount equal to
$367,885.




On
July 24, 2008, the SEC declared effective our registration statement with
respect to common stock underlying convertible notes and warrants we issued in
private placements in November and December, 2003, December, 2004, and January
and February, 2005. At our option, these liquidated damages can be paid in cash
or unregistered shares of our common stock. To date we have decided to pay
certain of these liquidated damages in common stock, although any future
payments of liquidated damages may, at our option, be made in cash. If we decide
to pay such liquidated damages in cash, we would be required to use our limited
working capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Based on the closing
market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our common
stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005,
November 15, 2005 and December 15, 2005, respectively, we issued a total of
3,807,375 shares of common stock in liquidated damages from August, 2005 to
January, 2006 to persons who invested in the January and February, 2005 private
placements. The issuance of shares upon any payment by us of further liquidated
damages will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock.




We paid
liquidated damages in the form of common stock only for the period from June 15,
2005 to December 15, 2005, and only to persons who invested in the January and
February, 2005 private placements. We believe that we have no enforceable
obligation to pay liquidated damages to holders of any shares we agreed to
register under the registration rights agreement for periods after the first
anniversary of the date of issuance of such shares, since they were eligible for
resale under Rule 144 of the Securities Act during such periods, and such
liquidated damages are grossly inconsistent with actual damages to such persons.
During the six month period ended March 31, 2009, we determined it was not
probable that we would be required to pay future liquidated damages, therefore
adjusted our previously accrual of $12 million to other income.




Risks
Relating to Our Common Stock:




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 May
15, 2009, we had 261,888,747 shares of common stock issued and outstanding and
outstanding options and warrants to purchase 113,105,964 shares of common stock.
All of the shares issuable upon exercise of our options and warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares 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.


38




If
we fail to remain current on our reporting requirements, we could be removed
from the OTC bulletin board which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.




Companies
trading on The Over The Counter Bulletin Board (the “OTC Bulletin Board”), such
as us, must be reporting issuers under Section 12 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting requirements,
we could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market. Prior to May
2001, we were delinquent in our reporting requirements, having failed to file
our quarterly and annual reports for the years ended 1998 – 2000 (except the
quarterly reports for the first two quarters of 1999). We have been current in
our reporting requirements for the last six years, however, there can be no
assurance that in the future we will always be current in our reporting
requirements.




Our
common stock is subject to the “penny stock” rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.




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


●
                that
      a broker or dealer approve a person’s account for transactions in penny
      stocks; and●
                the
      broker or dealer receive from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.




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


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




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


●
                sets
      forth the basis on which the broker or dealer made the suitability
      determination; and●
                that
      the broker or dealer received a signed, written agreement from the
      investor prior to the
transaction.




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




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


39




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




On
January 29, 2009, in connection with a Consulting Agreement dated January 13,
2009 with Strategic Partners Consulting, LLC (“SPC”), we issued to SPC ten
million (10,000,000) shares of our common stock, par value $0.001 per
share.




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 (“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 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 January
Note on three days written notice (during which period the holder can elect to
convert the note). The 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 January Note are paid in full, or
converted into our common stock, the January Note will be secured by a security
interest in all of our assets. The 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 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.




On
February 20, 2009, we entered into an engagement agreement with Arjent Services
LLC, (the “Engagement Agreement”). Pursuant to the Engagement Agreement, we
issued to Arjent Limited (UK) a warrant to purchase 2,000,000 shares of our
common stock at an exercise price of $.06 per share. This issuance is considered
exempt under Regulation D of the Securities Act and Rule 506 promulgated
thereunder.




On
February 27, 2009, we issued and sold a $200,000 principal amount secured
promissory note (“February Note”) bearing interest at a rate of 10% per annum to
James A. Hayward, our Chairman, President and Chief Executive Officer. The
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 February Note on three days written notice (during which
period the holder can elect to convert the February Note). The 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
February Note are paid in full, or converted into shares of our common stock,
the February Note will be secured by a security interest in all of our
assets.




On March
16, 2009, in connection with a letter agreement dated March 16, 2009 with
Crystal Research Associates, LLC (CRA), pursuant to which CRA agreed, among
other things, to prepare an executive informational overview, we issued to
employees of CRA warrants to purchase an aggregate of two hundred thousand
(200,000) shares of our common stock at an exercise price equal to the closing
price of our common stock on the date of the letter agreement, or $0.07,
exercisable for a three year period commencing on March 16, 2009.




On March 27, 2009, we entered into a
settlement agreement and mutual general release with Mr. Douglas Falkner, one of
our former employees and consultants, to settle a lawsuit in California for
alleged breach of contract under his employment and consulting agreements and
wrongful discharge in violation of public policy and a lawsuit in North Carolina
for a worker’s compensation claim. In exchange for the dismissal of all claims
against us, we agreed to issue to Mr. Falkner 3,000,000 restricted shares of our
common stock and a warrant to purchase 1,500,000 shares of our common stock with
an exercise price of $.10 exercisable for a period of four years beginning on
the first anniversary of issuance. As of the date of the settlement agreement,
the closing sales price for our common stock on the OTC Bulletin Board was $0.06
per share. We filed a registration statement on Form S-1 (File No. 333-158796)
to register the shares of common stock issued to Mr. Fakner, which was declared
effective by the SEC on May 12, 2009.




40




On March
30, 2009, we issued and sold a $250,000 principal amount secured promissory note
(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,
our Chairman, President and Chief Executive Officer. The 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 March Note
on three days written notice (during which period the holder can elect to
convert the March Note). The 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 March Note are paid in full, or converted
into shares of our common stock, the 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 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. In addition, we issued to an affiliate of the
Placement Agent a warrant to purchase two million (2,000,000) shares of our
common stock at an exercise price equal to the closing price of our common stock
on the date of the engagement agreement, or $0.06, exercisable for a four year
period commencing on February 20, 2010 (see above). 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.




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


41




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)


42




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:
      May 15, 2009
            
            /s/
      James
      A. Hayward,
      Ph.
      D.James
      A. Hayward, Ph. D.Chief
      Executive Officer