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
      1934
 
 For the
quarterly period endedDecember
31, 2008
 
 o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For 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.xYes  oNo
 
 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 filero
              
              Accelerated
      fileroNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting companyx
 
 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.  February 12, 2009:
255,224,880


Applied
DNA Sciences, Inc.
 
 Form 10-Q
for the Quarter Ended December 31, 2008
 
 Table of
Contents
 
 
 PagePart I - Financial Information
              1Item 1 - Financial
      Statements
              1Item 2 - Management's Discussion
      and Analysis or Plan of Operation
              22Item 3 - Quantitative and
      Qualitative Disclosures About Market Risk
              30Item 4 - Controls and
      Procedures
              30Part II - Other Information
              31Item 1 - Legal
      Proceedings
              31Item 1A – Risk
      Factors
              31Item 2 - Recent Sales of
      Unregistered 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
              42Item 6 -
      Exhibits
              42Signatures
              43
  
  PART I.  FINANCIAL INFORMATION
  ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
 APPLIED
      DNA SCIENCES, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETSDecember
      31,
              
              
              September
      30,2008
              
              
              2008(unaudited)ASSETSCurrent
      assets:Cash
              
              $
              51,146
              
              
              $
              136,405Accounts
      Receivable
              
              
              70,999
              
              
              
              75,150Prepaid
      expenses
              
              
              52,083
              
              
              
              83,333Total
      current assets
              
              
              174,228
              
              
              
              294,888Property,
      plant and equipment-net of accumulated depreciation of $164,150 and
      $147,132, respectively
              
              
              46,712
              
              
              
              63,730Other
      assets:Deposits
              
              
              8,322
              
              
              
              8,322Capitalized
      finance costs-net of accumulated amortization of $548,058 and $464,274,
      respectively
              
              
              29,442
              
              
              
              113,226Intangible
      assets:Patents,
      net of accumulated amortization of $32,781 and $31,762, respectively (Note
      B)
              
              
              1,476
              
              
              
              2,494Intellectual
      property, net of accumulated amortization and write off of $8,157,631 and
      $8,066,682, respectively  (Note B)
              
              
              1,273,270
              
              
              
              1,364,217Total
      Assets
              
              $
              1,533,450
              
              
              $
              1,846,877LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              12,795,577
              
              
              $
              12,821,171Convertible
      notes payable, net of unamortized discount or $382,085 and $486,726,
      respectively (Note D)
              
              
              1,067,915
              
              
              
              3,063,274Total
      current liabilities
              
              
              13,863,492
              
              
              
              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 shares
      issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, par value $0.001 per share; 410,000,000 shares authorized;
      238,491,359 and 205,359,605 issued and outstanding as of December 31, 2008
      and September 30, 2008, respectively
              
              
              238,491
              
              
              
              205,359Additional
      paid in capital
              
              
              138,123,762
              
              
              
              133,133,354Accumulated
      deficit
              
              
              (150,692,295
              )
              
              
              (147,376,281
              )Total
      deficiency in stockholders' equity
              
              
              (12,330,042
              )
              
              
              (14,037,568
              )Total
      Liabilities and Deficiency in Stockholders' Equity
              
              $
              1,533,450
              
              
              $
              1,846,877See
      the accompanying notes to the unaudited condensed consolidated financial
      statements
 
 1
 
 APPLIED
      DNA SCIENCES, INC.CONDENSED CONSOLIDATED
      STATEMENTS OF LOSSES(unaudited)Three
      Months Ended December 31,2008
              
              
              2007Sales
              
              $
              146,575
              
              
              $
              123,167Cost
      of sales
              
              
              43,741
              
              
              
              27,890Gross
      Profit
              
              
              102,834
              
              
              
              95,277Operating
      expenses:Selling,
      general and administrative
              
              
              2,764,009
              
              
              
              1,698,269Research
      and development
              
              
              62,529
              
              
              
              36,326Depreciation
      and amortization
              
              
              108,984
              
              
              
              107,804Total
      operating expenses
              
              
              2,935,522
              
              
              
              1,842,399NET
      LOSS FROM OPERATIONS
              
              
              (2,832,688
              )
              
              
              (1,747,122
              )Interest
      expense
              
              
              (482,829
              )
              
              
              (385,622
              )Net
      loss before provision for income taxes
              
              
              (3,315,517
              )
              
              
              (2,132,744
              )Income
      taxes
              
              
              497
              
              
              
              -NET
      LOSS
              
              $
              (3,316,014
              )
              
              $
              (2,132,744
              )Net
      loss per share-basic
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted
      average shares outstanding-Basic
      and fully diluted
              
              
              222,657,096
              
              
              
              182,131,200See
      the accompanying notes to the unaudited condensed consolidated financial
      statements
 
 2
  APPLIED
      DNA SCIENCES, INCCONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS(unaudited)Three
      months ended December 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (3,316,014
              )
              
              $
              (2,132,744
              )Adjustments
      to reconcile net loss to net used in operating activities:Depreciation
      and amortization
              
              
              108,984
              
              
              
              107,804Fair
      value of vested options issued to officers, directors and
      employees
              
              
              1,850,247
              
              
              
              -Amortization
      of capitalized financing costs
              
              
              83,784
              
              
              
              60,592Amortization
      of debt discount attributable to convertible debentures
              
              
              417,934
              
              
              
              324,047Common
      stock issued in exchange for services rendered
              
              
              -
              
              
              
              1,040,000Change
      in assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              4,151
              
              
              
              (14,007
              )Decrease
      in prepaid expenses and deposits
              
              
              31,250
              
              
              
              37,875Decrease
      in other assets
              
              
              -
              
              
              
              5,500Increase
      (decrease) in accounts payable and accrued liabilities
              
              
              234,405
              
              
              
              (855,608
              )Net
      cash used in operating activities
              
              
              (585,259
              )
              
              
              (1,426,541
              )Cash
      flows from investing activities:Decrease
      in restricted cash held in escrow
              
              
              -
              
              
              
              100,000Acquisition
      (disposal) of property and equipment, net
              
              
              -
              
              
              
              (5,492
              )Net
      cash provided by investing activities
              
              
              -
              
              
              
              94,508Cash
      flows from financing activities:Net
      proceeds from issuance of convertible notes
              
              
              500,000
              
              
              
              2,152,500Net
      cash provided by financing activities
              
              
              500,000
              
              
              
              2,152,500Net
      increase (decrease) in cash and cash equivalents
              
              
              (85,259
              )
              
              
              820,467Cash
      and cash equivalents at beginning of period
              
              
              136,405
              
              
              
              25,185Cash
      and cash equivalents at end of period
              
              $
              51,146
              
              
              $
              845,652Supplemental
      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
              
              $
              1,850,247
              
              
              $
              -Common
      stock issued for services
              
              $
              -
              
              
              $
              1,040,000Common
      stock issued in exchange for previously incurred debt and accrued
      interest
              
              $
              2,860,000
              
              
              $
              50,275See
      the accompanying notes to the unaudited condensed consolidated financial
      statements
  3
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (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 month period ended December 31, 2008 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 December 31, 2008, the Company has accumulated
losses of $150,692,295.
 
 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 December 31, 2008 the
Company‘s deferred revenue was $-0-.
  4
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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 December 31, 2008, 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 three month period ended December 31,
2008.
 
 5
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  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 December 31,
2008 and September 30, 2008 property and equipment consist of:
 
 December
                31,
                2008
                (unaudited)
              
              
              September
                30,
      2008Computer
      equipment
              
              $
              27,404
              
              
              $
              27,404Lab
      equipment
              
              
              77,473
              
              
              
              77,473Furniture
              
              
              105,985
              
              
              
              105,985210,862
              
              
              
              210,862Accumulated
      Depreciation
              
              
              (164,150
              )
              
              
              (147,132
              )Net
              
              $
              46,712
              
              
              $
              63,730
  Impairment
of Long-Lived Assets
 
 The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144).  The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Events relating to recoverability
may include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undiscounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset.  SFAS No. 144 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.
 
 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. 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 253,851,073
and 245,277,349 for the three months ended December 31, 2008 and 2007,
respectively.
  6
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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 37,670,000 and -0- stock
options during the three month periods ended December 31, 2008 and 2007,
respectively to employees and directors of the Company under a non-qualified
employee stock option plan.
 
 As of
December 31, 2008, 43,330,000 employee stock options were outstanding with
15,077,500 shares vested and exercisable.
 
 Concentrations
of Credit Risk
 
 Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables.  The Company places its cash and temporary cash
investments with high credit quality institutions.  At times, such
investments may be in excess of the FDIC insurance limit. The Company
periodically reviews its trade receivables in determining its allowance for
doubtful accounts.  At December 31, 2008, 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 $62,529 and $36,326 for
the three month periods ended December 31, 2008 and 2007,
respectively.
 
 Reclassifications
 
 Certain
reclassifications have been made in prior year's financial statements to conform
to classifications used in the current year.
 
 7
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  Advertising
 
 The
Company follows the policy of charging the costs of advertising to expense as
incurred.  The Company charged to
operations $14,337 and $2,246 for the three month periods ended December 31,
2008 and 2007, 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.
 
 Recent
accounting pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”.  The objective of SFAS No. 157 is to increase
consistency and comparability in fair value measurements and to expand
disclosures about fair value measurements.  SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements.  The provisions of SFAS No.
157 are effective for fair value measurements made in fiscal years beginning
after November 15, 2007.   In February 2008, the FASB issued
FASB Staff Position (“FSP”) 157-2,“Effective Date of FASB Statement
No. 157” (“FSP 157-2”), which delayed the
effective date of SFAS No. 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning after November 15,
2008.   The Company has not yet determined the impact that the
implementation of FSP 157-2 will have on our non-financial assets and
liabilities which are not recognized on a recurring basis; however, we do not
anticipate the adoption of this standard will have a material impact on its
consolidated financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141(R) is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008, which will be
the Company’s fiscal year 2009. Earlier adoption is prohibited and the Company
is currently evaluating the effect, if any that the adoption will have on its
consolidated financial position, results of operations or cash
flows.
 
 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, which will be the Company’s fiscal year
2009. Earlier adoption is prohibited and the Company is currently evaluating the
effect, if any that the adoption will have on its consolidated financial
position, results of operations or cash flows.
 
 In
June 2007, the Accounting Standards Executive Committee issued Statement of
Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1
provides guidance for determining whether an entity is within the scope of the
AICPA Audit and Accounting Guide Investment Companies (the “Audit Guide”). SOP
07-1 was originally determined to be effective for fiscal years beginning on or
after December 15, 2007, however, on February 6, 2008, FASB issued a
final Staff Position indefinitely deferring the effective date and prohibiting
early adoption of SOP 07-1 while addressing implementation issues.
  8
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   In June
2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services to be Used in Future
Research and Development Activities” (EITF 07-3), which requires
that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development (R&D) activities be deferred
and amortized over the period that the goods are delivered or the related
services are performed, subject to an assessment of recoverability.
EITF 07-3 will be effective for fiscal years beginning after
December 15, 2007. The Company does not expect that the adoption of
EITF 07-3 will have a material impact on its consolidated financial
position, results of operations or cash flows.
 
 In
December 2007, the FASB ratified the consensus in 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 has not yet evaluated the potential impact
of adopting EITF 07-1 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 is currently evaluating
the impact of SFAS No. 161, if any, will have on its consolidated financial
position, results of operations or cash flows.
 
 In April
2008, the FASB issued FSP No. SFAS No. 142-3,“Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible
Assets”.  The Company is required to adopt FSP 142-3 on
September 1, 2009, earlier adoption is prohibited.  The guidance in
FSP 142-3 for determining the useful life of a recognized intangible asset shall
be applied prospectively to intangible assets acquired after adoption, and the
disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, adoption.  The Company is
currently evaluating the impact of FSP 142-3 on its consolidated financial
position, results of operations or cash flows.
 
 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.
  9
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
 
 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 is currently evaluating the
potential impact, if any, of the adoption of FSP APB 14-1 on its
consolidated financial position, results of operations or cash
flows.
 
 In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive nonforfeitable 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 to have a material effect on
its consolidated financial position, results of operations or cash
flows.
 
 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 December 31,
2008 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
              
              
              (2,535,400
              )Impairment
      (See below)
              
              
              (5,655,011
              )Net:
              
              $
              1,274,746Residual
      value:
              
              $
              0
  During
the year ended September 30, 2006 the Company 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.
  10
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  Total
amortization expense charged to operations for the three month periods ended
December 31, 2008 and 2007 was $91,966 and $92,661, respectively.
  NOTE
C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts
payable and accrued liabilities at December 31, 2008 are as
follows:
  Accounts
      payable
              
              $
              582,942Accrued
      consulting fees
              
              
              102,500Accrued
      interest payable
              
              
              86,247Accrued
      penalties relating to registration rights liquidating
    damages
              
              12,023,888Total
              
              $
              12,795,577
  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.  The Company has
accrued $12,023,888 as of December 31, 2008 to account for late effectiveness of
the registration statement.
 
 NOTE
D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES
  Convertible
notes payable as of December 31, 2008 are as follows:
 
 10%
      Secured Convertible Notes Payable dated January 17, 2008, net of
      unamortized debt discount of $10,927 (see below)
              
              $
              439,07310%
      Secured Convertible Notes Payable dated March 4, 2008, net of unamortized
      debt discount of $34,885 (see below)
              
              
              215,115%
      Secured Convertible Note Payable dated May 7, 2008, net of unamortized
      debt discount of $20,606 (see below)
              
              
              79,394s    Secured  Convertible
      Note Payable dated July 31, 2008, net of unamortized debt discount of
      $66,750 (see below)
              
              
              83,250Secured  Convertible
      Note Payable dated October 21, 2008, net of unamortized debt discount of
      $248,917 (see below)
              
              
              251,0831,067,915Less:
      Less current portion
              
              
              (1,067,915
              )$
              -
  11
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  10%
Secured Convertible Promissory Notes dated January 17, 2008
 
 On
January 17, 2008, the Company issued $450,000 principal amount convertible
promissory notes due January 17, 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 $0.073512803 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 convertible at $0.073512803 per share. The Company has granted the
noteholders 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 notes. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The Company recognized and measured an aggregate of
$205,708 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 notes. The debt discount attributed to the beneficial conversion
feature is amortized over the notes’ maturity period (one year) as interest
expense.
 
 In
connection with the placement of the notes the Company issued non-detachable
warrants granting the holders the right to acquire 900,000 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 $43,569 to additional paid in capital and a
discount against the notes.  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 2.90%, a dividend yield of 0%, and volatility of
102.72%.  The debt discount attributed to the value of the warrants
issued is amortized over the notes’ maturity period (one year) as interest
expense.
 
 The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($205,708) and warrants ($43,569) to debt discount, aggregating
$249,277, which will be amortized to interest expense over the term of the
notes.  Amortization of $62,831 was recorded for the three month
period ended December 31, 2008.
 
 10%
Secured Convertible Promissory Notes dated March 4, 2008
 
 On March
4, 2008, the Company issued $250,000 principal amount convertible promissory
notes due March 4, 2009 with interest at 10% per annum due upon
maturity.  The notes are convertible at any time prior to maturity, at
the option of the holders, 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
$0.125875423 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 notes, including any accrued and unpaid
interest, are convertible at $0.125875423 per share.  The Company has
granted the noteholders 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 notes. The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The Company recognized and measured an aggregate of
$154,805 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 notes. The debt discount attributed to the beneficial conversion
feature is amortized over the notes’ maturity period (one year) as interest
expense.
  12
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  In
connection with the placement of the notes the Company issued non-detachable
warrants granting the holders the right to acquire 500,000 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 $47,308 to additional paid in capital and a
discount against the notes.  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 2.53%, a dividend yield of 0%, and volatility of 106.37%. The
debt discount attributed to the value of the warrants issued is amortized over
the notes’ maturity period (one year) as interest expense.
 
 The
Company recorded the intrinsic value of the embedded beneficial conversion
feature ($154,805) and warrants ($47,308) to debt discount, aggregating
$202,113, which will be amortized to interest expense over the term of the
notes. Amortization of $50,944 was recorded for the three month period ended
December 31, 2008.
 
 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 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.
 
 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 $14,927 was recorded for the three month period ended December
31, 2008.
 
 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 convertible at $0.0549483 per
share. The Company has granted the noteholder a security interest in all the
Company’s assets.
  13
  APPLIED DNA SCIENCES,
INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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 $28,967 was recorded for the three month period ended December
31, 2008.
 
 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 convertible at $0.02617152 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
$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.
  14
  APPLIED DNA SCIENCES,
INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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 $64,375 was recorded for the three month period ended
December 31, 2008.
 
 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
December 31, 2008.
 
 During
the three months ended December 31, 2008, 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 $500,000 in the form of a convertible
promissory note for working capital purposes (see Note D).
 
 During
the three month period ended December 31, 2008 and 2007, the Company had sales
of $5,000 and $18,063 (or 3.4% and 14.7% of total sales), respectively, to an
entity whereby the Company’s Chief Executive Officer was the
President.
 
 NOTE
F - CAPITAL STOCK
 
 The
Company is authorized to issue 410,000,000 shares of common stock, with a $0.001
par value per share 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.  The preferred
stock is convertible at the option of the holder into common stock at the rate
of twenty-five (25) shares of common for every one share of preferred at the
option of the holder.
  Preferred
and Common Stock Transactions During the Three Months Ended December 31,
2008:
 
 During
the three months ended December 31, 2008, the Company issued 33,131,754 shares
of common stock in exchange for convertible notes and accrued
interest.
 
 15
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  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.
 
 WarrantsOutstanding
              
              
              Weighted
              
              
              
              
              
              ExercisableRemaining
              
              
              Average
              
              
              Weighted
              
              
              WeightedExercise
              
              
              Number
              
              
              Contractual
              
              
              Exercise
              
              
              Average
              
              
              AveragePrices
              
              
              Outstanding
              
              
              Life
      (Years)
              
              
              Price
              
              
              Exercisable
              
              
              Exercise
      Price$0.09
              
              
              
              16,400,000
              
              
              
              2.67
              
              
              $
              0.09
              
              
              
              16,400,000
              
              
              $
              0.09$0.10
              
              
              
              105,464
              
              
              
              0.54
              
              
              $
              0.10
              
              
              
              105,464
              
              
              $
              0.10$0.50
              
              
              
              26,850,000
              
              
              
              2.83
              
              
              $
              0.50
              
              
              
              26,850,000
              
              
              $
              0.50$0.60
              
              
              
              6,623,500
              
              
              
              0.70
              
              
              $
              0.60
              
              
              
              6,623,500
              
              
              $
              0.60$0.70
              
              
              
              200,000
              
              
              
              0.03
              
              
              $
              0.70
              
              
              
              200,000
              
              
              $
              0.70$0.75
              
              
              
              14,797,000
              
              
              
              1.10
              
              
              $
              0.75
              
              
              
              14,797,000
              
              
              $
              0.7564,975,964
              
              
              
              
              
              
              
              
              
              
              
              64,975,964
 
 Transactions
involving warrants are summarized as follows:
 
 Weighted
                AverageNumber
      of
              
              
              Price
      PerShares
              
              
              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
              
              
              1,000,000
              
              
              
              0.50Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              (5,000
              )
              
              
              (0.20
              )Balance,
      December 31, 2008
              
              
              64,975,964
              
              
              $
              0.46
  16
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
  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
              
              
              
              0.75
              
              
              $
              0.68
              
              
              
              3,660,000
              
              
              $
              0.680.09
              
              
              
              2,000,000
              
              
              
              2.67
              
              
              
              0.09
              
              
              
              2,000,000
              
              
              
              0.090.11
              
              
              
              37,670,000
              
              
              
              4.46
              
              
              
              0.11
              
              
              
              9,417,500
              
              
              
              0.1143,330,000
              
              
              
              
              
              
              
              
              
              
              
              15,077,500
              
              
              $
              0.49
 
 Transactions
involving stock options issued to employees are summarized as
follows:
  Number
      of
                Shares
              
              
              Weighted
                Average
                Exercise
                Price
      Per
                ShareOutstanding
      at October 1, 2007
              
              
              5,660,000
              
              
              $
              0.47Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Cancelled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2008
              
              
              5,660,000
              
              
              $
              0.47Granted
              
              
              37,670,000
              
              
              
              0.11Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008
              
              
              43,330,000
              
              
              $
              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, determined using the Black Scholes Option
Pricing Model, of the vested portion of the options of $1,850,247 was recorded
as stock compensation expense for the three month period ended December 31,
2008. The following assumptions were utilized: Dividend yield: -0-%, volatility:
208.48%; risk free rate: 3.66%; expected life: 5 years.
  17
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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 month periods ended December 31, 2008 and
2007 was $18,638 and $18,083, respectively.
 
 Employment
and Consulting Agreements
 
 The
Company has consulting agreements with outside contractors, certain of whom are
also Company stockholders. The Agreements are generally month to
month.
 
 Litigation
 
 From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. 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.
 
 Douglas
A. Falkner v. Applied DNA Sciences, Inc./N.C. Industrial Commission File No.
585698
 
 Plaintiff
Douglas Falkner ("Falkner") filed a worker’s compensation claim in North
Carolina for an alleged work-related neck injury that he alleges occurred on
January 14, 2004. Falkner worked as Business Development and Operations Manager
at our sole East Coast office at the time of the alleged injury. Falkner was the
only employee employed by us in North Carolina at the time of the alleged injury
and we have employed no other employees in North Carolina at any other time. The
claim has been denied and is being defended on several grounds, including the
lack of both personal and subject matter jurisdiction. Specifically, we contend
that we did not employ the requisite minimum number of employees in North
Carolina at the time of the alleged injury and that the company is therefore not
subject to the North Carolina Workers' Compensation Act. The claim was
originally set for hearing in January 2007, but was continued to allow the
parties to engage in further discovery.
 
 Douglas
A. Falkner v. Applied DNA Sciences, Inc. (Los Angeles County Superior Court
Case No. BC 386557):
 
 Falkner
filed a claim on March 3, 2008 asserting counts for breach of contract under his
employment agreements dated March 10, 2003 and June 16, 2003 and wrongful
discharge in violation of public policy. The relief sought includes compensatory
damages in an aggregate amount of approximately $1.7 million, unspecified
exemplary and punitive damages, and attorneys’ fees. We have filed a motion for
summary judgment that will be heard on February 19, 2009. The trial is currently
set for March 24, 2009. We intend to vigorously defend against the claims
asserted against us.
 
 18
  APPLIED
DNA SCIENCES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
 
 Intervex, Inc. v.
Applied DNA Sciences, Inc. (Supreme Court of the State ofNew
YorkIndex 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.
 
 Registration
of Company’s Shares of Common Stock
  In
connection with the private placement of our convertible promissory 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,
pursuant to a registration rights agreement the Company agreed to file a
registration statement to register the common stock issuable upon the conversion
of the promissory notes and the exercise of the warrants and to have the
registration statement declared effective by the SEC.  The
registration rights agreement provided for the payment of liquidated damages if
a registration statement was not declared effective by the SEC within 120 days
of the private placement of the convertible promissory notes.  The
liquidated damages are equal to 3.5% per month of the aggregate proceeds, with
no limitations.  The liquidated damages may be paid in cash or our
common stock, at our option.  Although the promissory 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 issuable upon the conversion of the promissory notes and the
exercise of the warrants subject to the liquidated damages provisions of the
registration rights agreement does not meet the tests required for shareholders’
equity classification in the past, and accordingly has been reflected between
liabilities and equity in our previous consolidated balance sheet.
 
 As of
September 30, 2007, the Company did not have a registration statement declared
effective relating to the common stock issuable upon the conversion of the
promissory notes and the exercise of the warrants.  In accordance with
EITF 00-19-2, the Company evaluated the likelihood of having the registration
statement declared effective by the SEC.  As of September 30, 2007,
the Company determined it was probable that it will be required to remit
payments to these investors because of our failure to have the registration
statement declared effective and the Company estimated that the obligation to
make additional payments would continue for nine months from September 30, 2007,
at which time the Company estimated that the registration statement would have
been declared effective.  Although the Company was unable to estimate
the exact amount of time needed to have the registration statement declared
effective, it believed that an additional nine months would be required to
complete the SEC’s comment and review process and have the registration
statement declared effective.  In accordance with SFAS No. 5,
Accounting For Contingencies, the Company recorded an aggregate liability of
$11,750,941 as of September 30, 2007 and an increase of $7,725,585 as compared
to September 30, 2006, in order to account for the potential liquidated damages
accruing until the registration statement is declared effective by the
SEC.  This increase, which was charged to operations as a selling,
general and administrative expense, in fiscal 2007, is comprised of $8,439,976
of current and prior years’ stipulated contractual obligations, plus the
additional accrual of $3,310,965 described previously to account for the
potential liquidated damages until the expected effectiveness of the
registration statement is achieved.
 
 At
December 31, 2008, the Company has an accumulative accrual of $12,023,888 of
liquidated damages in connection with certain previously outstanding convertible
promissory notes and related warrants, which is included in accounts payable and
accrued liabilities.  Any increases to the accrued liabilities will be
charged to operations as a selling, general and administrative
expense.  Any decreases will be included in other income (expenses).
During the year ended September 30, 2008, the SEC declared effective the
Company's registration statement (see Note C).
  19
  APPLIED DNA SCIENCES,
INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   In
developing the best estimate for the accrual of additional liquidating damages,
the Company took into account a number of factors and information, including,
but not limited to, the following:
 
 •
              advice
      of legal counsel and other advisors;•
              its
      experience in addressing comments raised by the SEC in past registration
      statements;•
              the
      limited number of matters needed to be addressed by the Company to achieve
      effectiveness;•
              its
      limited resources in connection with responding to SEC comments;
      and•
              the
      intent to achieve effectiveness of the registration statement as soon as
      practicable.
 
 Estimates
of potential future damages are based on our assumptions and projections and
actual results and outcomes could differ significantly.
 
 In
September 2007, the Company issued common stock upon conversion of the final
convertible promissory note that contained embedded derivatives, such as certain
conversion features, variable interest features, call options and default
provisions.
  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.
 
 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 three month period ended December 31, 2008, the Company incurred a loss of
$3,316,014. These factors among others may indicate that the Company will be
unable to continue as a going concern for a reasonable period of
time.
  20
  APPLIED DNA SCIENCES,
INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (unaudited)
   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
January 17, 2009, the Company issued 6,733,521 shares of common stock upon the
automatic conversion of a secured convertible promissory note.
 
 Effective
January 13, 2009, the Company entered into a Consulting Agreement with Strategic
Partners Consulting, LLC (“SPC”).  Under the terms of the Consulting
Agreement, SPC will provide consulting services to the Company on various
matters related to corporate planning.  The Consulting Agreement is
for a term of one year.  In consideration for these consulting
services, upon execution of the Consulting Agreement the Company issued to SPC
ten million (10,000,000) shares of the Company’s common stock, par value $0.001
per share.
 
 On
January 29, 2009, the Company sold a $150,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant to
purchase 300,000 shares of our common stock to James A. Hayward, the Chairman,
President, Chief Executive Officer and a director.
 
 The
promissory 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 the Company’s common stock for the ten trading days prior to issuance, and
are convertible into shares of the Company’s 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 the Company’sr 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, the Company has the irrevocable right to repay the unpaid principal
and accrued but unpaid interest under the notes on three days written notice
(during which period the holder can elect to convert the note).  The
promissory notes bear interest at the rate of 10% per annum and are due and
payable in full on January 29, 2010. Until the principal and accrued but unpaid
interest under the promissory note are paid in full, or converted into the
Company’s common stock, the promissory note will be secured by a security
interest in all of our assets.
 
 The
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
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.
  21
  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.
  BioActive
Ingredients.  Our BioActive Ingredients program began in 2007,
based on the biofermentation expertise developed during the manufacturing of DNA
for our SigNature DNA and BioMaterial Genotyping solutions.  Our
BioActive Ingredients have been used by our customers in personal care products,
such as skin care products, and in textiles, such as intimate
apparel.
  22
  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 March 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
shareholders.
  Product
Research and Development
  We
anticipate spending approximately $150,000 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 12 full-time employees and two part-time employees, including two
in management, eight 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.
  23
  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; and●
              Fair
      value of intangible assets.●
              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 has 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.
  Revenue
Recognition
  Revenues
are derived from research, development, qualification and production testing for
certain commercial products.
 
 Revenue
from fixed price testing contracts is generally recorded upon completion of the
contracts, which are generally short-term, or upon completion of identifiable
contractual tasks. At the time the Company enters into a contract that includes
multiple tasks, the Company estimates the amount of actual labor and other costs
that will be required to complete each task based on historical experience.
Revenues are recognized which provide for a profit margin relative to the
testing performed. Revenue relative to each task and from contracts which are
time and materials based is recorded as effort is expended. Billings in excess
of amounts earned are deferred. Any anticipated losses on contracts are charged
to income when identified. To the extent management does not accurately forecast
the level of effort required to complete a contract, or individual tasks within
a contract, and the Company is unable to negotiate additional billings with a
customer for cost over-runs, the Company may incur losses on individual
contracts. All selling, general and administrative costs are treated as period
costs and expensed as incurred.
 
 For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), and
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB101"). SAB 101 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund will
be required.
  24
  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 December 31, 2008 and
2007
  Revenues
  For the
three months ended December 31, 2008, we generated $146,575 in revenues from
operations, principally from the sales of BioActive Ingredients, and our cost of
sales for the three months ended December 31, 2008 was $43,741, netting us a
gross profit of $102,834. For the three months ended December 31, 2007, we
generated $123,167 in revenues from operations and our cost of sales for the
three months ended December 31, 2008 was $27,890, netting us a gross profit of
$95,277.
  Costs
and Expenses
  Selling,
General and Administrative
  Selling,
general and administrative expenses increased from $1,698,269 for the three
months ended December 31, 2007 to $2,764,009 for the three months ended
December 31, 2008. The increase of $1,065,740, or 62.8%, is primarily
attributable to the fair value of vested options granted to officers and
employees, net with a decrease in cost incurred in connection with professional
services.
  25
  Research
and Development
  Research
and development expenses increased from $36,326 for the three months ended
December 31, 2007 to $62,529 for the three months ended December 31, 2008.
The increase of $26,303 is attributed to more research and development
activity related to the recent development and feasibility study
agreements.
  Depreciation
and Amortization
  In the
three months ended December 31, 2008, depreciation and amortization increased by
$1,180 from $107,804 for the three months ended December 31, 2007 to
$108,984 for the three months ended December 31, 2008.  The
increase is attributable to the additions to our property and
equipment.
  Total
Operating Expenses
  Total
operating expenses increased to $2,935,522 from $1,842,399, or an increase
of $1,093,123 primarily attributable to the fair value of vested options
granted and additional R&D expenditures, net with a decrease in costs
incurred in connection with professional services.
  Interest
Expenses
  Interest
expense for the three months ended December 31, 2008 increased by
$97,207 to $482,829 from $385,622 in the same period of 2007. The
increase in interest expense was due to additional borrowing during the year
2008.
  Net
Income (loss)
  Net loss
for the three months ended December 31, 2008 increased to $3,316,014 from a
net loss of $2,132,744 in the prior period primarily attributable to
factors described above.
  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
December 31, 2008, we had a working capital deficit of approximately $13.7
million.  For the three months ended December 31, 2008, we generated a
net cash flow deficit from operating activities of $585,259 consisting primarily
of year to date losses of $3,316,014.  Non-cash adjustments included
$610,702 in depreciation and amortization charges and the fair value of
vested options for services provided of $1,850,247. Additionally, we had a net
decrease in current assets of $35,401 and a net decrease in current liabilities
of $234,405.  We met our cash flow needs by issuance of convertible
notes of $500,000, net, for the three months ended December 31,
2008.
  We expect
capital expenditures to be less than $75,000 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 for approximately one
month.  There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.  If, in the next
three months 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.
  26
  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
shareholders.
  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.
  Recent
Debt and Equity Financing Transactions
  Fiscal
2007
  During
the year ended September 30, 2007, we issued and sold an aggregate principal
amount of $850,000 in secured convertible promissory notes bearing interest at
10% per annum and warrants to purchase an aggregate of 1,700,000 shares of our
common stock to James A. Hayward, our President, Chairman, Chief Executive
Officer and a director.
  On April
23, 2007, we issued and sold to James A. Hayward a $100,000 principal amount
secured promissory note (“April Note”) bearing interest at a rate of 10% per
annum and a warrant (“April Warrant”) to purchase 200,000 shares of our common
stock.  On June 30, 2007, we issued and sold to James A. Hayward a
$250,000 principal amount secured promissory note (“June Note”) bearing interest
at a rate of 10% per annum and a warrant (“June Warrant”) to purchase 500,000
shares of our common stock. On July 30, 2007, we issued and sold to James A.
Hayward a $200,000 principal amount secured promissory note (“July Note”)
bearing interest at a rate of 10% per annum and a warrant (“July Warrant”) to
purchase 400,000 shares of our common stock.  On September 28, 2007,
we issued and sold to James A. Hayward a $300,000 principal amount secured
promissory note (“September Note”) bearing interest at a rate of 10% per annum
and a warrant (“September Warrant”) to purchase 600,000 shares of our common
stock.
  27
  The April
Note and accrued but unpaid interest thereon converted on April 22, 2008 at a
conversion price of $0.15 into 733,334 shares of our common
stock.  The April Warrant is exercisable for a four-year period
commencing on April 23, 2008, and expiring on April 22, 2012, at a price of
$0.50 per share. The April Warrant may be redeemed at our option at a redemption
price of $0.01 upon the earlier of (i) April 22, 2010, and (ii) the date our
common stock is quoted on The Over the Counter Bulletin Board at or above $1.00
per share for 20 consecutive trading days.
  The June
Note and accrued but unpaid interest thereon converted on June 30, 2008 at a
conversion price of $0.087732076 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 into 3,134,543 shares of our common stock. The
June Warrant is exercisable for a four-year period commencing on June 30, 2008,
and expiring on June 29, 2012, at a price of $0.50 per share. The June Warrant
may be redeemed at our option at a redemption price of $0.01 upon the earlier of
(i) June 29, 2010, 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.
  The July
Note and accrued but unpaid interest thereon converted on July 30, 2008 at a
conversion price of $0.102568072 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, into 2,144,917 shares of our common
stock.  The July Warrant is exercisable for a four-year period
commencing on July 30, 2008, and expiring on July 29, 2012, at a price of $0.50
per share. The July Warrant may be redeemed at our option at a redemption price
of $0.01 upon the earlier of (i) July 29, 2010, 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.
  The
September Note and accrued but unpaid interest thereon converted on September
28, 2008 at a conversion price of $0.066429851 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, into 4,967,646 shares of our common
stock.  The September Warrant is exercisable for a four-year period
commencing on July 30, 2008, and expiring on September 27, 2012, at a price of
$0.50 per share. The September Warrant may be redeemed at our option at a
redemption price of $0.01 upon the earlier of (i) September 27, 2010, 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.
  In
addition, on June 27, 2007, we completed a private placement offering of
convertible debt and associated warrants in which we issued and sold to certain
investors an aggregate of 3 units of our securities, each unit consisting of (i)
a $50,000 Principal Amount of 10% Secured Convertible Promissory Note and (ii)
warrants to purchase 100,000 shares of our common stock.  The notes
and accrued but unpaid interest thereon converted at $0.15 per share on June 27,
2008 into an aggregate of 1,100,000 shares of our common stock.  The
warrants are exercisable for a four year period commencing on June 27, 2008, and
expiring on June 26, 2012, at a price of $0.50 per share.  On August
8, 2007, we issued and sold a $100,000 principal amount secured promissory note
bearing interest at a rate of 10% per annum and a warrant to purchase 200,000
shares of our common stock to an “accredited investor,” as defined in
regulations promulgated under the Securities Act.  The promissory note
and accrued but unpaid interest thereon converted on August 8, 2008 at a
conversion price of $0.096274883 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, into 1,142,562 shares of our common
stock.  The warrant is exercisable for a four-year period commencing
on August 8, 2008, and expiring on August 7, 2012, at a price of $0.50 per
share.
  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.
  28
  Fiscal
2009
  On
October 21, 2008, we issued and sold to James A. Hayward 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 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.
  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 4. - 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 December 31, 2008, 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.
  Item
4T. Controls and Procedures.
  Not
applicable.
  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.
  Douglas
A. Falkner v. Applied DNA Sciences, Inc./N.C. Industrial Commission File No.
585698
  Plaintiff Douglas Falkner ("Falkner")
filed a worker’s compensation claim in North Carolina for an alleged
work-related neck injury that he alleges occurred on January 14, 2004. Falkner
worked as Business Development and Operations Manager at our sole East Coast
office at the time of the alleged injury. Falkner was the only employee employed
by us in North Carolina at the time of the alleged injury and we have employed
no other employees in North Carolina at any other time. The claim has been
denied and is being defended on several grounds, including the lack of both
personal and subject matter jurisdiction. Specifically, we contend that we did
not employ the requisite minimum number of employees in North Carolina at the
time of the alleged injury and that the company is therefore not subject to the
North Carolina Workers' Compensation Act. The claim was originally set for
hearing in January 2007, but was continued to allow the parties to engage in
further discovery.
  Douglas A. Falkner v.
Applied DNASciences, Inc. (Los Angeles County Superior
Court Case No. BC 386557):
  Falkner
filed a claim on March 3, 2008 asserting counts for breach of contract under his
employment agreements dated March 10, 2003 and June 16, 2003 and wrongful
discharge in violation of public policy. The relief sought includes compensatory
damages in an aggregate amount of approximately $1.7 million, unspecified
exemplary and punitive damages, and attorneys’ fees. We have filed a motion for
summary judgment that will be heard on February 19, 2009. The trial is currently
set for March 24, 2009. We intend to vigorously defend against the claims
asserted against us.
  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.
  Item 1A - Risk Factors
  Because
of the following factors, as well as other variables affecting our operating
results and financial condition, past financial performance may not be a
reliable indicator of future performance, and historical trends should not be
used to anticipate results or trends in future periods.
  Risks
Relating To Our Business:
  We
have a short operating history, a relatively new business model, and have not
produced significant revenues.  This makes it difficult to evaluate
our future prospects and increases the risk that we will not be
successful.
  We have a
short operating history with our current business model, which involves the
marketing, sale and distribution of anti-counterfeiting and product
authentication solutions as well as ingredients for use in personal care and
other products. Our operations since inception have produced insignificant
revenues, and may not produce significant revenues in the near term, or at all,
which may harm our ability to obtain additional financing and may require us to
reduce or discontinue our operations. If we create significant revenues in the
future, we will derive most of such revenues from the sale of
anti-counterfeiting and product authentication solutions as well as ingredients,
which are immature industries. You must consider our business and prospects in
light of the risks and difficulties we will encounter as an early-stage company
in a new and rapidly evolving industry. We may not be able to successfully
address these risks and difficulties, which could significantly harm our
business, operating results, and financial condition.
  31
  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
$13.3 million for the year ended September 30, 2007.  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.
  We
will require additional financing which may require the issuance of additional
shares which would dilute the ownership held by our shareholders.
  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
shareholders may suffer substantial dilution.
  We
believe that our existing capital resources will enable us to fund our
operations until approximately March 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
shareholders.
  Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
  In their
report dated 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.
  32
  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.
  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 Liangcould 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.
  33
  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.
  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.
  34
  If
we need to replace manufacturers, our expenses could increase, resulting in
smaller profit margins.
  We
compete with other companies for the production capacity of our manufacturers
and import quota capacity.  Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity.  If we
experience a significant increase in demand, or if our existing manufacturers
must be replaced, we will need to establish new relationships with another or
multiple manufacturers.  We cannot assure you that this additional
third party manufacturing capacity will be available when required on terms that
are acceptable to us or terms similar to those we have with our existing
manufacturers, either from a production standpoint or a financial
standpoint.  We do not have long-term contracts with our
manufacturers, and our manufacturers do not produce our products
exclusively.  Should we be forced to replace our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late
shipments.
  If
a manufacturer fails to use acceptable labor practices, we might have delays in
shipments or face joint liability for violations, resulting in decreased revenue
and increased expenses.
  While we
require our independent manufacturers to operate in compliance with applicable
laws and regulations, we have no control over their ultimate
actions.  While our internal and vendor operating guidelines promote
ethical business practices and our staff and buying agents periodically visit
and monitor the operations of our independent manufacturers, we do not control
these manufacturers or their labor practices.  The violation of labor
or other laws by our independent manufacturers, or by one of our licensing
partners, or the divergence of an independent manufacturer’s or licensing
partner’s labor practices from those generally accepted as ethical in the United
States, could interrupt, or otherwise disrupt the shipment of finished products
to us or damage our reputation.  Any of these, in turn, could have a
material adverse effect on our financial condition and results of operations,
such as the loss of potential revenue and incurring additional
expenses.
  Failure
to license new technologies could impair sales of our existing products or any
new product development we undertake in the future.
  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.
  35
  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.
  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.
  Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our products, services and brand.
  Our
patents, trademarks, trade secrets, copyrights and all of our other intellectual
property rights are important assets for us. There are events that are outside
of our control that pose a threat to our intellectual property rights as well as
to our products and services.  For example, effective intellectual
property protection may not be available in every country in which our products
and services are distributed.  The efforts we have taken to protect
our proprietary rights may not be sufficient or effective.  Any
significant impairment of our intellectual property rights could harm our
business or our ability to compete.  Protecting our intellectual
property rights is costly and time consuming.  Any increase in the
unauthorized use of our intellectual property could make it more expensive to do
business and harm our operating results.  Although we seek to obtain
patent protection for our innovations, it is possible we may not be able to
protect some of these innovations.  Given the costs of obtaining
patent protection, we may choose not to protect certain innovations that later
turn out to be important.  There is always the possibility that the
scope of the protection gained from one of our issued patents will be
insufficient or deemed invalid or unenforceable.  We also seek to
maintain certain intellectual property as trade secrets. The secrecy could be
compromised by third parties, or intentionally or accidentally by our employees,
which would cause us to lose the competitive advantage resulting from these
trade secrets.
  Intellectual
property litigation could harm our business.
  Litigation
regarding patents and other intellectual property rights is extensive in the
biotechnology industry.  In the event of an intellectual property
dispute, we may be forced to litigate.  This litigation could involve
proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by
affected third parties.  Intellectual property litigation can be
extremely expensive, and these expenses, as well as the consequences should we
not prevail, could seriously harm our business.
  36
  If a
third party claims an intellectual property right to technology we use, we might
need to discontinue an important product or product line, alter our products and
processes, pay license fees or cease our affected business
activities.  Although we might under these circumstances attempt to
obtain a license to this intellectual property, we may not be able to do so on
favorable terms, or at all.  Furthermore, a third party may claim that
we are using inventions covered by the third party’s patent rights and may go to
court to stop us from engaging in our normal operations and activities,
including making or selling our product candidates.  These lawsuits
are costly and could affect our results of operations and divert the attention
of managerial and technical personnel.  A court may decide that we are
infringing the third party’s patents and would order us to stop the activities
covered by the patents.  In addition, a court may order us to pay the
other party damages for having violated the other party’s
patents.  The biotechnology industry has produced a proliferation of
patents, and it is not always clear to industry participants, including us,
which patents cover various types of products or methods of use.  The
coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform.  If we are sued for patent
infringement, we would need to demonstrate that our products or methods of use
either do not infringe the patent claims of the relevant patent and/or that the
patent claims are invalid, and we may not be able to do this.  Proving
invalidity, in particular, is difficult since it requires a showing of clear and
convincing evidence to overcome the presumption of validity enjoyed by issued
patents.
  Because
some patent applications in the United States may be maintained in secrecy until
the patents are issued, because patent applications in the United States and
many foreign jurisdictions are typically not published until eighteen months
after filing, and because publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our or our licensor’s issued
patents or pending applications or that we or our licensors were the first to
invent the technology.  Our competitors may have filed, and may in the
future file, patent applications covering technology similar to
ours.  Any such patent application may have priority over our or our
licensors’ patent applications and could further require us to obtain rights to
issued patents covering such technologies.  If another party has filed
a United States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United
States.  The costs of these proceedings could be substantial, and it
is possible that such efforts would be unsuccessful, resulting in a loss of our
United States patent position with respect to such inventions.
  Some of
our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater
resources.  In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our
operations.
  Accidents
related to hazardous materials could adversely affect our business.
  Some of
our operations require the controlled use of hazardous
materials.  Although we believe our safety procedures comply with the
standards prescribed by federal, state, local and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated.  In the event of an
accident, we could be liable for any damages that result, which could seriously
damage our business and results of operations.
  Potential
product liability claims could affect our earnings and financial
condition.
  We face a
potential risk of liability claims based on our products and services, and we
have faced such claims in the past.  Though we have product liability
insurance coverage which we believe is adequate, we may not be able to maintain
this insurance at reasonable cost and on reasonable terms.  We also
cannot assure that this insurance, if obtained, will be adequate to protect us
against a product liability claim, should one arise.  In the event
that a product liability claim is successfully brought against us, it could
result in a significant decrease in our liquidity or assets, which could result
in the reduction or termination of our business.
  37
  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.
  For
additional information concerning litigation during the period, please refer to
Part II, Item 1 of this report
  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 shareholders.
  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, including investors in this offering.
  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.  Nonetheless, as of February 12, 2009 we have accrued
approximately $12.0 million in penalties representing further liquidated damages
associated with our failure to have the registration statement declared
effective by the deadline, and have included this amount in accounts payable and
accrued expenses.
  Matter
voluntarily reported to the Securities and Exchange Commission
  During
the months of March, May, July and August 2005, we issued a total of 8,550,000
shares of our common stock to certain employees and consultants pursuant to the
2005 Incentive Stock Plan.  We engaged our outside counsel to conduct
an investigation of the circumstances surrounding the issuance of these
shares.  On April 26, 2006, we voluntarily reported the findings from
this investigation to the SEC, and agreed to provide the SEC with further
information arising from the investigation.  We believe that the
issuance of 8,000,000 shares to employees in July 2005 was effectuated by both
our former President and our former Chief Financial Officer/Chief Operating
Officer without approval of our board of directors.  These former
officers received a total of 3,000,000 of these shares.  In addition,
it appears that the 8,000,000 shares issued in July 2005, as well as an
additional 550,000 shares issued to employees and consultants in March, May and
August 2005, were improperly issued without a restrictive legend stating that
the shares could not be resold legally except in compliance with the Securities
Act of 1933, as amended.  The members of the Company's management who
effectuated the stock issuances no longer work for the Company.  These
shares were not registered under the Securities Act of 1933, or the securities
laws of any state, and we believe that certain of these shares may have been
sold on the open market, though we have been unable to determine the magnitude
of such sales.  Since our voluntary report of the findings of our
internal investigation to the SEC on April 26, 2006, we have received no
communication from the SEC or any third party with respect to this
matter.  If violations of securities laws occurred in connection with
the resale of certain of these shares, the employees and consultants or persons
who purchased shares from them may have rights to have their purchase rescinded
or other claims against us for violation of securities laws, which could harm
our business, results of operations, and financial condition.
  38
  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
February 12, 2009, we had 255,224,880 shares of common stock issued and
outstanding and outstanding options and warrants to purchase 108,405,964 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.
  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.
  39
  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.
  Item 2 - Recent Sales of Unregistered Securities and Use of
Proceeds
  On
October 21, 2008, we issued and sold a $500,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant to
purchase 1,000,000 shares of our common stock to James A. Hayward, our Chairman,
President, Chief Executive Officer and a director.
  The
promissory note and accrued but unpaid interest thereon are convertible into
shares of our common stock at a price of $0.50 per share by the holder of the
promissory note 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 promissory note and accrued but unpaid interest thereon upon three
days prior written notice (during which period the holder can elect to convert
the note).  Until the principal and interest under the promissory note
is paid in full, or converted into our common stock, the promissory note will be
secured by a security interest in all of our assets.
  The
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 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 a $150,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant to
purchase 300,000 shares of our common stock to James A. Hayward, our Chairman,
President, Chief Executive Officer and a director.
 
 The
promissory 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 the our common stock for the ten trading days prior to issuance, and are
convertible into shares of the 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 the our common stock for the ten trading days
prior to the date of the notice of conversion and (ii) the automatic conversion
price.  Any time prior to conversion, we have the irrevocable right to
repay the unpaid principal and accrued but unpaid interest under the notes upon
three days prior written notice (during which period the holder can elect to
convert the note).  The promissory notes bear interest at the rate of
10% per annum and are due and payable in full on January 29, 2010. Until the
principal and accrued but unpaid interest under the promissory note are paid in
full, or converted into the our common stock, the promissory note will be
secured by a security interest in all of our assets.
  40
 The
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
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.
 
 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
  As a
company that reports under Section 15(d) of the Securities Exchange Act, we are
not subject to the proxy rules of Section 14.  In accordance with
Nevada law and pursuant to our bylaws, we sought the approval of the matters
described below through the solicitation of proxies.  Our annual
meeting of stockholders was held on December 16, 2008.  At the
meeting, the stockholders:
  (1)
              voted
      to reelect the existing members of the board of directors, James A.
      Hayward, Yacov Shamash, and Sanford R. Simon, each for a one-year term or
      until their successors are duly elected and qualified;(2)
              to
      approve the reincorporation of the Company from the State of Nevada to the
      State of Delaware;(3)
              to
      approve an amendment to our 2005 Incentive Stock Plan to increase the
      number of shares of common stock subject to the Plan from 20 million to
      100 million and limit to 25 million the number of shares that can be
      covered by awards made to any participant in any calendar year;
      and(4)
              to
      ratify the appointment of RBSM LLP as our independent registered public
      accounting firm for the fiscal year ending September 30,
    2008.
  The
number of votes cast for, against or withheld, and the number of abstentions
with respect to each such matter is set forth below.
  MATTER
              
              FOR
              AGAINST/
                WITHHELD
              ABSTAINED(1)
              Election
      of Directors:James
      A. Hayward;
              
              147,925,196
              2,771,436
              —Yacov
      Shamash; and
              
              149,434,196
              1,262,436
              —Sanford
      R. Simon.
              
              149,416,740
              1,279,892
              —(2)
              Approval
      of the reincorporation of the Company from the State of Nevada to the
      State of Delaware.
              
              110,867,218
              581,708
              17,500(3)
              Approval
      of an amendment to our 2005 Incentive Stock Plan to increase the number of
      shares of common stock subject to the Plan from 20 million to 100 million
      and limit to 25 million the number of shares that can be covered by awards
      made to any participant in any calendar year.
              
              97,076,544
              12,347,246
              2,042,636(4)
              Ratification
      of the appointment of RBSM LLP as our independent registered public
      accounting firm for the fiscal year ending September 30,
    2008.
              
              145,326,890
              4,415,418
              954,323
 
 41
  Item 5 - Other Information
  None
  Item 6 – Exhibits
  31.1
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)32.2
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)
 
 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:
      February 17, 2009
              /s/
      James A. Hayward, Ph. D.James
      A. Hayward, Ph. D.Chief
      Executive Officer




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