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

                                   FORM 10-QSB

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

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

                For the Quarterly period ended December 31, 2006

                        Commission file number 002-90519

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

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

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


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



Indicate by check mark whether the registrant (1) filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the last 12 months (or for such shorter  period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

                               Yes _X__   No _____


Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                               Yes _____  No _X__


The number of shares of Common Stock, $0.001 par value,  outstanding on February
15, 2007, was 121,162,385 shares, held by approximately 1,305 shareholders.

Transitional Small Business Disclosure Format (check one):

                               Yes _____  No _X__



<PAGE>


                            APPLIED DNA SCIENCES, INC
                     Quarterly Report on Form 10-QSB for the
                    Quarterly Period Ending December 31, 2006

                                Table of Contents



PART I.  FINANCIAL INFORMATION

   Item 1. Financial Statements

      Condensed Consolidated Balance Sheet: December 31, 2006 (Unaudited)      1

      Condensed Consolidated Statements of Losses:
      Three Months Ended December 31, 2006 and 2005 (Unaudited) and
      the Period from September 16, 2002 (Date of Inception)
      Through December 31, 2006 (Unaudited)                                    2

      Condensed Consolidated Statement of Stockholder's Equity
      (Deficiency): For the Period from September 16, 2002
      (Date of Inception) Through December 31, 2006 (Unaudited)                3

      Condensed Consolidated Statements of Cash Flows:
      Three Months Ended December 31, 2006 and 2005 (Unaudited) and
      the Period from September 16, 2002 (Date of Inception)
      Through  December 31, 2006 (Unaudited)                                  17

      Notes to Unaudited Condensed Consolidated Financial Information:
      December 31, 2006                                                    19-42

   Item 2. Management Discussion and Analysis                                 43

   Item 3  Controls and Procedures                                            61


PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings                                                  63

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds        64

   Item 3. Defaults Upon Senior Securities                                    64

   Item 4. Submission of Matters to a Vote of Security Holders                64

   Item 5. Other Information                                                  64

   Item 6. Exhibits                                                           64

Signatures                                                                    66

                                       -i-

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                                 APPLIED DNA SCIENCES, INC.
                               (A Development stage company)
                            CONDENSED CONSOLIDATED BALANCE SHEET
                                        (unaudited)

<TABLE>
<CAPTION>

                                     ASSETS                                                  December 31, 2006
                                                                                             -----------------
<S>                                                                                             <C>
Current assets:
Cash                                                                                              $    653,109
Accounts receivable, net of allowance for doubtful accounts of $0                                        9,631
Advances and other receivables                                                                           9,396
Prepaid expenses                                                                                        66,667
                                                                                                  ------------
Total current assets                                                                                   738,803

Property, plant and equipment-net of accumulated depreciation of $36,104                               152,258

Other assets:
Deposits                                                                                                13,822
Capitalized finance costs-net of accumulated amortization of $1,024,788                                660,312

Intangible assets:
Patients, net of accumulated amortization of $20,306 (Note B)                                           13,951
Intellectual property, net of accumulated amortization of $7,430,047 (Note B)                        2,000,852
                                                                                                  ------------
Total Assets                                                                                      $  3,579,998
                                                                                                  ============

              LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities                                                          $  6,777,493
Convertible notes payable, net of unamortized discount (Note C)                                      4,217,171
                                                                                                  ------------
Total current liabilities                                                                           10,994,664

Debt derivative and warrant liability                                                                2,432,324

Commitments and contingencies (Note H)

Deficiency in Stockholders' Equity- (Note D)
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 60,000 issued
and outstanding                                                                                              6

Common stock, par value $0.001 per share; 250,000,000 shares authorized; 121,162,385 issued
and outstanding                                                                                        121,162

Additional paid in capital                                                                          83,037,855

Accumulated deficit                                                                                (93,006,013)
                                                                                                  ------------
Total deficiency in stockholders' equity                                                            (9,846,990)

Total liabilities and Deficiency in Stockholders' Equity                                          $  3,579,998
                                                                                                  ============
</TABLE>

See the accompanying notes to the consolidated financial statements

                                        1


<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                     From September 16, 2002
                                                            For the Year  Ended December 31,           (Date of Inception)
                                                              2006                   2005           Through December 31, 2006
                                                          -------------          -------------      -------------------------
                                                                                  (RESTATED)
                                                                                 -------------
<S>                                                       <C>                     <C>                  <C>
Sales                                                     $          -           $          -          $             18,900
Cost of sales                                                        -                      -                        15,639
                                                          -------------          -------------         --------------------
Gross Profit                                                         -                      -                         3,261

Operating expenses:
Selling, general and administrative                           2,054,455              1,844,477                   82,120,414
Research and development                                         29,306                 16,270                    1,059,905
Impairment of intangible asset(s)                                    -                      -                     5,655,011
Depreciation and amortization                                   107,879                342,699                    1,837,605
                                                          -------------          -------------         --------------------

Total operating expenses                                      2,191,640              2,203,446                   90,672,935
                                                          -------------          -------------         --------------------

NET LOSS FROM OPERATIONS                                     (2,191,640)            (2,203,446)                 (90,669,674)

Net gain in revaluation of debt derivative and warrant
liabilities                                                   2,098,471              6,788,790                   35,644,298
Other income                                                        977                 13,013                      111,807
Interest expense                                               (579,030)            (1,778,906)                 (38,092,444)
                                                          -------------          -------------         --------------------

Net Income (loss) before provision for income taxes            (671,222)             2,819,451                  (93,006,013)

Income taxes (benefit)                                                -                      -                            -
                                                          -------------          -------------         --------------------

NET INCOME (LOSS)                                         $    (671,222)         $   2,819,451         $        (93,006,013)
                                                          =============          =============         ====================

Net income (loss) per share-basic                         $       (0.01)         $        0.03
                                                          =============          =============
Net loss per share-assuming fully diluted (Note A)                               $       (0.02)
                                                                                 ==============
Weighted average shares outstanding-
    Basic                                                   121,021,515             53,002,278
                                                          =============          =============
    Fully diluted                                                                  163,392,948
                                                                                 =============
</TABLE>

See the accompanying notes to the consolidated financial statements

                                        2
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Issuance of
common stock
to Founders in
exchange for
services on
September 16,
2002 at $.01
per share           --         --         100,000  $        10  $       990  $      --    $       --    $       --    $      1,000

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

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

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

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

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

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

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

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

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

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

                                      3
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                         Deficit
                                                                 Additional                             Accumulated
                          Preferred                   Common      Paid in      Common        Stock        During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>

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

Issuance of
common stock
in exchange for
consulting
services valued
at $0.065 per
share in March
2003                --         --           6,000            1          389         --            --            --             390

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

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

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

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

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

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

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

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

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

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

                                      4
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common stock
subscribed in
exchange for
cash at $1.00
per share
pursuant to
private
placement on
June 30, 2003       --         --            --           --           --         10,000          --            --          10,000

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

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

Common stock
canceled in
July 2003,
previously
issued for
services
rendered at
$2.50 per share     --         --         (24,000)          (2)     (59,998)        --            --            --         (60,000)

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

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

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

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

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

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

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

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

Common stock
subscriptio
receivable
reclassificat
adjustment          --         --            --           --           --           --           2,600          --           2,600

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

                                      5
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Net Loss for
the year ended
September 30,
2003                --         --            --           --           --           --            --      (3,445,164)   (3,445,164)

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

Preferred
shares issues
in exchange for
services at
$25.00 per
share,
October 2003      15,000         15          --           --           --           --            --            --              15

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

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

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

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

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

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

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

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

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

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

Adjust common
stock par value
from $0.0001 to
$0.50 per
share, per
amendment of
articles dated
in December 200     --         --            --     10,223,166  (10,223,166)        --            --            --            --
</TABLE>


                                      6
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common Stock
issued pursuant
to subscription
at $2.50 share
in January 2004     --         --          41,600       20,800       83,200     (104,000)         --            --            --

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

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

Common stock
issued in
exchange for
consulting
services at
$3.05 per
share, January
2004                --         --           1,000          500        2,550         --            --            --           3,050

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

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

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

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

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

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

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

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

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

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

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


                                      7
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common stock
issued in
exchange for
consulting
services at
$2.35 per
share,
April 2004          --         --          11,712        5,856       21,667         --            --            --          27,523

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

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

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

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

Common stock
issued in
exchange for
consulting
services at
$0.86 per
share in
May 2004            --         --         137,000       68,500       50,730         --            --            --         119,230

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

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

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

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

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

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

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

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


                                      8
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common stock
issued in
exchange for
consulting
services at
$0.47 per share
in July 2004        --         --         100,000       50,000       (2,749)        --            --            --          47,251

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

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

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

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

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

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

Common stock
issued in
exchange for
consulting
services at
$0.46 per share
in September
2004                --         --           5,000        2,500         (212)        --            --            --           2,288

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

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

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

Fair value of
2,841,000
warrants issued
to non
employees and
consultants for
services
rendered at
approximately
$0.71 per
warrant in
September 200       --         --            --           --      2,019,862         --            --            --       2,019,862

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


                                      9
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common stock
issued in
exchange for
consulting
services at
$0.68 per share
in October 2004     --         --         200,000      100,000       36,000         --            --            --         136,000

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

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

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

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

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

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

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

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

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

Common Stock
issued in
exchange for
consulting
services at
$1.44 per share
in November 200     --         --         115,000       57,500      108,100         --            --            --         165,600

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

Warrants
exercised at
$0.60 per share
in November
2004                --         --          60,000       30,000        6,000       (4,000)         --            --          32,000

Beneficial
Conversion
discount
relating to
Notes Payable       --         --            --           --      1,465,000         --            --            --       1,465,000
</TABLE>


                                      10
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>

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

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

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

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

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

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

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

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

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

Common Stock
issued in
exchange for
consulting
services at
$1.44 per share
in February 200     --         --       5,796,785    2,898,393    5,418,814         --            --            --       8,317,207

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

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

Warrants
exercised at
$0.10 per share
in February
2005                --         --          20,000       10,000       (8,000)        --            --            --           2,000

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

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


                                      11
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>

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

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

Common Stock
issued in
exchange for
consulting
services at
$1.17 per share
in February 200     --         --          17,236        8,618       11,548         --            --            --          20,166

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

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

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

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

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

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

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

Common Stock
issued in
exchange for
consulting
services at
$0.92 per share
in March 2005       --         --          24,333       12,167       10,219         --            --            --          22,386

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

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


                                      12
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common stock
canceled for
shares issued
in exchange of
debt in
March 2005          --         --        (500,000)    (250,000)        --           --            --            --        (250,000)

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

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

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

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

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

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

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

Common Stock
issued in
exchange for
consulting
services at
$0.75 per share
in April 2005       --         --         850,000          850      636,650         --            --            --         637,500

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

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

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

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

Proceeds
received
against
subscription
Payable in June
2005                --         --            --           --           --        118,000          --            --         118,000
</TABLE>


                                      13
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Common Stock
canceled in
June 2005,
previously
issued for
services
rendered at
$0.50 per share     --         --         (10,000)         (10)      (4,990)        --            --            --          (5,000)

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

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

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

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

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

Common Stock
issued in
exchange for
consulting
services at
$0.94 per share
in July  2005       --         --         121,985          121      168,217         --            --            --         168,338

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

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

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

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

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


                                      14
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Net Loss            --         --            --           --           --           --            --     (67,109,519)  (67,109,519)
               ---------  ---------  ------------  -----------  -----------  -----------  ------------  ------------  ------------
Balance as of
September
30, 2005          60,000  $       6   112,230,392  $   112,230  $82,320,715  $    20,000  $       --    $(89,924,553) $ (7,471,602)
               =========  =========  ============  ===========  ===========  ===========  ============  ============  ============

Common stock
issued in
exchange for
services at
$0.50 per share
in October 2005     --         --         400,000          400      199,600         --            --            --         200,000

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

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

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

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

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

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

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

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

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

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

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


                                      15
<PAGE>

<TABLE>
                                                APPLIED DNA SCIENCES, INC
                                              (A development stage company)
                         CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
                     FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2006
                                                       (unaudited)
<CAPTION>
                                                                                                          Deficit
                                                                 Additional                              Accumulated
                          Preferred                   Common      Paid in      Common        Stock         During
               Preferred   Shares       Common        Stock       Capital      Stock      Subscription  Development
                Shares     Amount       Shares        Amount      Amount     Subscribed    Receivable      Stage          Total
               ---------  ---------  ------------  -----------  -----------  ----------   ------------  ------------  ------------
<S>            <C>        <C>        <C>           <C>          <C>          <C>          <C>           <C>           <C>
Previously
issued
warrants
reclassed to
warrant
liability           --         --            --           --     (1,584,614)        --            --            --      (1,584,614)

Common Stock
issued in
exchange for
consulting
services at
$0.20 per share
in July 2006        --         --       2,400,000        2,400      477,600         --            --            --         480,000

Fair value of
stock options
granted to
employees in
exchange for
services
rendered in
September 2006      --         --            --           --        153,000         --            --            --         153,000

Net loss            --         --            --           --           --           --            --      (2,410,237)   (2,410,237)
               ---------  ---------  ------------  -----------  -----------  -----------  ------------  ------------  ------------
Balance as of
September
30, 2006        60,000    $       6  $120,982,385  $   120,982  $82,627,606  $      --    $       --    $(92,334,791) $ (9,586,197)
               =========  =========  ============  ===========  ===========  ===========  ============  ============  ============

Common stock
issued in
Dec 2006
in settlement
 of related
party debt
at $2.28 per
share               --         --         180,000          180      410,249         --           --             --         410,429

Net loss            --         --            --           --           --           --           --         (671,222)     (671,222)
               ---------  ---------  ------------  -----------  -----------  -----------  ------------  ------------  ------------
Balance as of
December
31, 2006        60,000    $       6   121,162,385  $   121,162  $83,037,855  $      --   $       --     $(93,006,013) $ (9,846,990)
               =========  =========  ============  ===========  ===========  ===========  ============  ============  ============


</TABLE>

See accompanying notes to consolidated financial statements

                                      16
<PAGE>
<TABLE>

                                                        APPLIED DNA SCIENCES, INC
                                                      (A DEVELOPMENT STAGE COMPANY)
                                              CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                                               (unaudited)
<CAPTION>
                                                                                                                  For the Period
                                                                                                               September 16, 2002
                                                                                                               (Date of Inception)
                                                                    For the three months ended December 31,          through
                                                                                2006               2005         December 31, 2006
                                                                            ------------       ------------       ------------
Cash flows from operating activities:                                                            RESTATED
<S>                                                                         <C>                <C>                <C>
Net income (loss)                                                           $   (671,222)      $  2,819,451       $(93,006,013)
Adjustments to reconcile net loss to net used in operating activities:

Depreciation and amortization                                                    107,879            336,942          1,837,605

Organization expenses                                                               --                 --               88,500

Impairment of intangible assets                                                     --                 --            5,655,011

Preferred shares issued in exchange for services                                    --                 --            1,500,000

Options and warrants issued in exchange for services rendered                       --                 --           11,001,255

Income attributable to repricing of warrants and debt derivatives             (2,098,471)        (6,788,790)       (35,644,299)

Financing costs attributable to issuance of warrants                                --            1,758,900         25,419,214

Amortization of beneficial conversion feature-convertible notes                     --                 --           10,461,000

Amortization of capitalized financing costs                                      388,775               --            1,024,788

Amortization of debt discount attributable to convertible debentures             455,400               --            1,186,890

Debt in exchange for common stock at fair market price                              --                 --            1,365,000

Common stock issued in exchange for services rendered                               --               75,000         31,964,573
Common stock exchanged for intellectual property in connection with
costs of acquiring intangible assets                                                --                 --           14,689,100
Common stock issued in connection with penalties pursuant to
registration                                                                        --              257,986          1,550,487

Common stock canceled-previously issued for services rendered                       --             (210,000)        (1,343,845)
Change in assets and liabilities:

Increase in accounts receivable                                                     (977)              --              (19,027)

Decrease (increase) in prepaid expenses and deposits                              40,000               --              (80,489)
Decrease (increase) in other assets                                                 --               (4,975)
Increase in due related parties                                                     --               53,805               --

Increase (decrease) in accounts payable and accrued liabilities                1,217,460          1,288,311          6,747,621
                                                                            ------------       ------------       ------------

Net cash used in operating activities                                           (561,156)          (413,370)       (15,602,629)

Cash flows from investing activities:

Payments for patent filing                                                          --                6,103            (25,698)

Acquisition (disposal) of property and equipment, net                            (11,039)            (9,397)          (188,360)
                                                                            ------------       ------------       ------------

Net cash provided by (used in) investing activities                              (11,039)            (3,294)          (214,058)

Cash flows from financing activities:

Proceeds from sale of common stock, net of cost                                     --                 --              432,000

Proceeds from issuance of convertible notes                                         --                 --           12,968,900

Proceeds from sale of options                                                       --                 --              343,750

Repayment of debt                                                                   --                 --              (24,854)

Proceeds from loans                                                                 --              550,000          2,750,000
                                                                            ------------       ------------       ------------

Net cash provided by financing activities                                           --              550,000         16,469,796
</TABLE>

                                       17

<PAGE>




<TABLE>
                                                        APPLIED DNA SCIENCES, INC
                                                      (A DEVELOPMENT STAGE COMPANY)
                                              CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                                               (unaudited)
<CAPTION>
                                                                                                                  For the Period
                                                                                                               September 16, 2002
                                                                                                               (Date of Inception)
                                                                    For the three months ended December 31,          through
                                                                                2006               2005         December 31, 2006
                                                                            ------------       ------------       ------------
<S>                                                                         <C>                <C>                <C>
Net increase (decrease) in cash and cash equivalents                            (572,195)           133,336            653,109

Cash and cash equivalents at beginning of period                               1,225,304             31,190               --
                                                                            ------------       ------------       ------------
Cash and cash equivalents at end of period                                  $    653,109       $    164,526       $    653,109
                                                                            ============       ============       ============

Supplemental Disclosures of Cash Flow Information:

Cash paid during period for interest                                                --                 --                 --

Cash paid during period for taxes                                                   --                 --                 --

Non-cash transactions:

Common stock issued for services                                                    --               75,000         31,964,573
Common stock issued in exchange for intellectual
property                                                                            --                 --
Common stock issued in exchange for previously
incurred debt                                                                    410,429               --            2,707,729
Common stock canceled-previously issued for services
rendered                                                                            --             (210,000)        (1,343,845)

Common stock issued for ESOP shares                                                 --                 --
Common stock penalty shares issued pursuant to Pending
SB-2 registration                                                                   --              257,986

Amortization of beneficial conversion feature                                       --                 --           10,461,000
Preferred shares in exchange for service at $25 per
share in September 2004                                                             --                 --            1,500,000

Warrants issued in exchange for financing costs                                     --            1,758,900         24,907,115
Fair value of options and warrants issued to
consultants for services                                                            --                 --           11,001,255

Acquisition:

Common stock retained                                                               --                 --                1,015

Assets acquired                                                                     --                 --                 (135)
                                                                            ------------       ------------       ------------

Total consideration paid                                                            --                 --                  880
                                                                            ------------       ------------       ------------
Organizational expenses-note issued in exchange for
shares retired                                                                                                          88,500

Common stock issued in exchange for note payable                                                                        88,500
</TABLE>

See the accompanying notes to the consolidated financial statements


                                       18

<PAGE>

                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

 General

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-QSB, 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, 2006
are not  necessarily  indicative  of the results  that may be  expected  for the
fiscal year ending  September  30, 2007.  The unaudited  condensed  consolidated
financial  statements  should  be  read in  conjunction  with  the  consolidated
September 30, 2006 financial  statements and footnotes  thereto  included in the
Company's SEC Form 10-KSB, as amended.

Business and Basis of Presentation

     On September 16, 2002,  Applied DNA  Sciences,  Inc.  (the  "Company")  was
incorporated  under  the laws of the  State of  Nevada.  The  Company  is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded  biotechnology  security  solutions in the United States.  To date, the
Company has generated  nominal  sales  revenues,  has incurred  expenses and has
sustained  losses.  Consequently,  its  operations  are subject to all the risks
inherent in the establishment of a new business enterprise.  For the period from
inception  through  December 31,  2006,  the Company has  accumulated  losses of
$93,006,013.

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

Reclassification

     Certain  prior  period  amounts  have  been  reclassified  for  comparative
purposes.

Property and Equipment

     Property  and  equipment  are  stated at cost and  depreciated  over  their
estimated  useful  lives of 3 to 5 years  using the  straight  line  method.  At
December 31, 2006 property and equipment consist of:


Computer equipment              $  27,404
Lab equipment                      54,973
Furniture                         105,985
Accumulated  depreciation        (36,104)
                                 --------
Net                             $ 152,258

Stock Based Compensation

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  this
statement  amends  the  disclosure  requirements  of  SFAS  No.  123 to  require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based


                                       19
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


employee compensation and the effect of the method used on reported results. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic   value  method   prescribed   in  APB  Opinion  No.  25  and  related
interpretations. Accordingly, compensation expense for stock options is measured
as the excess,  if any, of the fair market value of the  Company's  stock at the
date of the grant over the exercise price of the related option. The Company has
adopted  the  annual  disclosure  provisions  of SFAS No.  148 in its  financial
reports for the year ended  September 30, 2006 and for the  subsequent  periods.
The Company did not issue employee  options as stock-based  compensation  during
the three months ended December 31, 2006 and therefore has no unrecognized stock
compensation related liabilities ended December 31, 2006.

     On  January  1,  2006,  the  Company  adopted  the fair  value  recognition
provisions  of  Financial  Accounting  Standards  Board  ("FASB")  Statement  of
Financial  Accounting  Standards  ("SFAS") No. 123,  Accounting  for Stock Based
Compensation, to account for compensation costs under our stock option plans. We
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25,  Accounting  for Stock  Issued to Employees  (as amended)  ("APB
25").  Under the intrinsic  value method  prescribed by APB 25, no  compensation
costs were recognized for our employee stock options because the option exercise
price  equaled  the market  price on the date of the grant.  Prior to January 1,
2006 we only  disclosed  the pro forma  effects on net income and  earnings  per
share  as if the fair  value  recognition  provisions  of SFAS  123(R)  had been
utilized.

     In adopting  SFAS No.  123(R),  we elected to use the modified  prospective
method to account for the transition from the intrinsic value method to the fair
value recognition method. Under modified  prospective method,  compensation cost
is recognized  from the adoption date forward for all new stock options  granted
and for any  outstanding  unvested  awards as if the fair value  method had been
applied to those  awards as of the date of the grant.  In the three months ended
December 31, 2006; the Company did not grant any employee stock options.

     The following table shows the effect on net earnings and earnings per share
had compensation cost been recognized based upon the estimated fair value on the
grant date of stock  options  for three  months  ended  December  31,  2005,  in
accordance with SFAS 123, as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure":

<TABLE>
<CAPTION>
                                                                              For the Period
                                                                             September 16, 2002
                                       For the Three        For the Three    (Date of Inception)
                                        Months ended         Months ended          through
                                      December 31, 2006    December 31, 2005  December 31, 2006
                                      -----------------    -----------------  -----------------
<S>                                      <C>                  <C>               <C>
Net income (loss) - as reported          $ (671,222)          $ 2,819,451       $ (93,006,013)

Add: Total stock based employee
compensation expense as reported
under intrinsic value method (APB
No. 25)                                           -                    -                    -

Deduct: Total stock based employee
compensation expense as reported
under fair value method (FASB No.
123)                                              -                    -          (1,406,350)
                                         ----------          -----------       --------------

Net Income (loss) - Pro Forma            $(671,222)          $ 2,819,451       $ (94,412,363)
                                         ==========          ===========       ==============

Net Income (loss) attributable to
common stockholders - Pro Forma          $(671,222)          $ 2,819,451       $ (94,412,363)
                                         ==========          ===========       ==============

Basic income (loss) per share - as
reported                                 $   (0.01)          $      0.03       $       (1.62)
                                         ==========          ===========       ==============

Basic income (loss) per share -Pro
forma                                    $   (0.01)          $      0.03       $       (1.65)
                                         ==========          ===========       ======= ======

Fully diluted income per share - as
reported                                        N/A          $      0.02                  N/A
                                                ===          ====== ====                  ===
Fully diluted income per share -Pro
forma                                           N/A          $      0.02                  N/A
                                                ===          ===========                  ===
</TABLE>

                                       20
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


Revenue Recognition

     Revenues  are  recognized  in the period that  services are  provided.  For
revenue from product sales,  the Company  recognizes  revenue in accordance with
Staff  Accounting  Bulletin  No.  104,  REVENUE  RECOGNITION  ("SAB104"),  which
superseded Staff Accounting  Bulletin No. 101, REVENUE  RECOGNITION IN FINANCIAL
STATEMENTS  ("SAB101").  SAB 101 requires  that four basic  criteria must be met
before  revenue can be  recognized:  (1)  persuasive  evidence of an arrangement
exists;  (2)  delivery  has  occurred;  (3)  the  selling  price  is  fixed  and
determinable;  and (4)  collectibility is reasonably  assured.  Determination of
criteria (3) and (4) are based on  management's  judgments  regarding  the fixed
nature of the selling prices of the products delivered and the collectibility of
those  amounts.  Provisions  for discounts  and rebates to customers,  estimated
returns and  allowances,  and other  adjustments  are  provided  for in the same
period the related sales are recorded.  The Company defers any revenue for which
the product has not been  delivered or is subject to refund until such time that
the  Company  and the  customer  jointly  determine  that the  product  has been
delivered  or no refund will be  required.  At December 31, 2006 the Company did
not have any deferred revenue.

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

Concentrations of Credit Risk

     Financial  instruments  and  related  items which  potentially  subject the
Company  to  concentrations  of credit  risk  consist  primarily  of cash,  cash
equivalents  and trade  receivables.  The Company  places its cash and temporary
cash investments with credit quality  institutions.  At times,  such investments
may be in excess of the FDIC insurance limit. The Company  periodically  reviews
its trade  receivables in determining  its allowance for doubtful  accounts.  At
December 31, 2006, allowance for doubtful receivable was $0.


                                       21
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


Net income (loss) per share

     The  following  reconciliation  of net income and share amounts used in the
computation  of income (loss) per share for the three months ended  December 31,
2005:

                                                              Three Months Ended
                                                              December 31, 2005
                                                              ------------------
Net income used in computing basic net income per share          $  2,629,918

Impact of assumed assumptions:
 Fair value of warrants relating to convertible debt
 charged to interest expense                                       1,758,900

Impact of equity classified as liability:
  Gain on warrant liability marked to fair value                  (6,788,790)
                                                                 ------------

Net loss in computing diluted net loss per share:                $(2,399,972)
                                                                 ============

     The weighted  average shares  outstanding  used in the basic net income per
share  computations for the three months ended December 31, 2005 was 53,002,278.
In  determining  the number of shares used in computing  diluted loss per share,
the Company added approximately  110,390,670 potentially dilutive securities for
the three months ended December 31, 2006. The  potentially  dilutive  securities
added  were  mostly  attributable  to  the  warrants,  options  and  convertible
debentures  outstanding.  As a result,  the diluted loss per share for the three
months ended December 31, 2006 was $0.02.

Derivative Financial Instruments

     The  Company's  derivative   financial   instruments  consist  of  embedded
derivatives related to the 10% Secured Convertible Promissory Notes (the "Serial
Notes")  entered into in 2006 (see Note D). These embedded  derivatives  include
certain  conversion  features,  variable  interest  features,  call  options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company recorded the derivatives and related warrants at their
fair  values  as of the  inception  date of the  Note  Agreement  (estimated  at
$2,419,719)  and at fair value as of each  subsequent  balance  sheet  date.  In
addition,  under  the  provisions  of EITF  Issue  No.  00-19,  "Accounting  for
Derivative  Financial  Instruments  Indexed  to, and  Potentially  Settled in, a
Company's  Own  Stock," as a result of entering  into the Notes,  the Company is
required to  classify  all other  non-employee  stock  options  and  warrants as
derivative  liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were  reclassified  as liabilities  from
additional  paid-in  capital in the three months ended December 31, 2006 totaled
$1,584,614. Any change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting  date. If the fair value of the  derivatives
is higher at the  subsequent  balance  sheet  date,  the  Company  will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the  subsequent  balance  sheet  date,  the Company  will record  non-operating,
non-cash income.  Conversion-related  derivatives were valued using the Binomial
Option  Pricing  Model with the  following  assumptions:  dividend  yield of 0%;
annual  volatility of 111 to 112%;  and risk free interest rate of 4.96 to 5.15%
as well as  probability  analysis  related to trading volume  restrictions.  The
remaining  derivatives  were valued using  discounted cash flows and probability
analysis. The derivatives are classified as long-term liabilities (see Note F).


                                       22
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


New Accounting Pronouncements

     In February  2006,  the FASB issued SFAS No. 155.  "Accounting  for certain
Hybrid  Financial  Instruments an amendment of FASB Statements No. 133 and 140,"
or SFAS No. 155.  SFAS No. 155 permits fair value  remeasurement  for any hybrid
financial  instrument that contains an embedded  derivative that otherwise would
require  bifurcation,  clarifies which  interest-only  strips and principal-only
strips are not subject to the  requirements of Statement No. 133,  establishes a
requirement to evaluate  interests in securitized  financial  assets to identify
interests  that  are  freestanding  derivatives  or that  are  hybrid  financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives,  and  amends  SFAS  No.  140  to  eliminate  the  prohibition  on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial  interest other than another derivative  financial
instrument.  SFAS 155 is effective  for all  financial  instruments  acquired or
issued after the  beginning  of an entity's  first fiscal year that begins after
September 15, 2006. We do not expect the adoption of SFAS 155 to have a material
impact on our  consolidated  financial  position,  results of operations or cash
flows.

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

     In July 2006, the FASB issued  Interpretation No. 48 (FIN 48).  "Accounting
for  uncertainty  in Income  Taxes".  FIN 48 clarifies the accounting for Income
Taxes by  prescribing  the  minimum  recognition  threshold  a tax  position  is
required to meet before being  recognized in the financial  statements.  It also
provides guidance on derecognition,  measurement,  classification,  interest and
penalties,  accounting in interim periods, disclosure and transition and clearly
scopes income taxes out of SFAS 5,  "Accounting  for  Contingencies".  FIN 48 is
effective for fiscal years  beginning  after  December 15, 2006. We have not yet
evaluated the impact of adopting FIN 48 on our consolidated  financial position,
results of operations and cash flows.

     In September 2006 the Financial Account Standards Board (the "FASB") issued
its Statement of Financial  Accounting  Standards 157, Fair Value  Measurements.
This  Statement  defines fair value,  establishes a framework for measuring fair
value  in  generally   accepted   accounting   principles  (GAAP),  and  expands
disclosures  about fair value  measurements.  This Statement applies under other
accounting  pronouncements that require or permit fair value  measurements,  the
Board having previously  concluded in those accounting  pronouncements that fair
value is the relevant measurement  attribute.  Accordingly,  this Statement does
not require any new fair value  measurements.  However,  for some entities,  the
application of this Statement  will change current  practice.  FAS 157 effective
date is for fiscal years beginning after November 15, 2007. The Company does not
expect  adoption of this standard  will have a material  impact on its financial
position, operations or cash flows.

     In September  2006 the FASB issued its  Statement  of Financial  Accounting
Standards  158  "Employers'  Accounting  for Defined  Benefit  Pension and Other
Postretirement  Plans". This Statement improves financial reporting by requiring
an employer to  recognize  the  overfunded  or  underfunded  status of a defined
benefit  postretirement  plan (other than a  multiemployer  plan) as an asset or
liability in its  statement of  financial  position and to recognize  changes in
that funded status in the year in which the changes occur through  comprehensive
income  of a  business  entity  or  changes  in  unrestricted  net  assets  of a
not-for-profit organization. This Statement also improves financial reporting by
requiring  an employer to measure the funded  status of a plan as of the date of
its year-end  statement  of financial  position,  with limited  exceptions.  The
effective date for an employer with publicly  traded equity  securities is as of
the end of the fiscal year ending after  December 15, 2006. The Company does not
expect  adoption of this standard  will have a material  impact on its financial
position, operations or cash flows.


                                       23
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


NOTE B - INTANGIBLE ASSETS AND AMORTIZATION

     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.

Biowell Technology, Inc.

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

     The purchase price has been allocated as follows:

     Amortizable intangible assets acquired are comprised of:

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

In Process Research & Development

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

Transaction costs

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

     The  identifiable  intangible  assets  acquired and their carrying value at
December 31, 2006 are:

Trade secrets and developed technologies              $9,430,900
(Weighted average life of 7 years)
Patents (Weighted average life of 5 years)                34,257
                                                     -----------
Total Amortized identifiable intangible               $9,465,157
assets-Gross carrying value:
Less:
Accumulated Amortization                             (1,795,343)
Impairment                                           (5,655,011)
                                                     -----------
Net:                                                 $ 2,014,803
Residual value:                                      $         0


                                       24
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


     Total amortization expense charged to operations for the three months ended
December 31, 2006 and 2005 was $92,661 and $338,545, respectively.

NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES

     Convertible notes payable as of December 31, 2006 are as follows:


10% Secured Convertible Notes Payable dated March 8, 2006,
net of unamortized debt discount of $393,910 (see below)     $  1,106,090

10% Secured Convertible Notes Payable dated May 2, 2006,
net of unamortized debt discount of $212,758 (see below)          787,242

10% Secured Convertible Notes Payable dated June 15, 2006,
net of unamortized debt discount of $626,161 (see below)        2,323,839
                                                             --=---------
                                                                4,217,171
Less: current portion                                         (4,217,171)
                                                             ------------
                                                             $         -

10% Secured Convertible Promissory Notes dated March 8, 2006

     On March 8, 2006,  in  connection  with a private  placement,  the  Company
issued 10%  Secured  Convertible  Promissory  Notes in the  aggregate  principal
amount of  $1,500,000  (the "Serial  Notes") and warrants to purchase  3,000,000
shares of the Company's common stock to accredited  investors.  The Serial Notes
bear interest at 10%, mature on September 7, 2007 and are  convertible  into the
Company's common stock, at the holder's option, at fifty cents ($0.50) per share
during the period from the date of  issuance  (March 8, 2006)  through  March 7,
2007. Should the holder of the Serial Note elect not to convert to the Company's
common stock on or before March 7, 2007, the outstanding  principal,  along with
accrued and unpaid interest automatically converts to the Company's common stock
at an amount equal to 80% of the average bid price of the Company's common stock
on the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior
to  conversion  on the maturity  date of September 7, 2007. At any time prior to
conversion,  the Company will have the right to prepay the promissory  notes and
accrued but unpaid  interest  thereon in cash upon 3 days  notice,  allowing the
holders to convert the  promissory  notes  during such notice  period.  The full
principal  amount of the Serial  Notes is due upon a default  under the terms of
the Note  Agreement.  In addition,  the Company granted the Investors a security
interest  in all of its  assets  (see  Note B).  The  Company  agreed  to file a
registration  statement with the SEC to effect the registration of the shares of
its common stock  underlying the Serial Notes and the warrants within 30 days of
the effective date of the Company's pending Registration Statement (SEC File 333
-  122848)  being  declared  effective.  The  Company  also  agreed  to use  its
reasonable  best  efforts to cause the  registration  statement  to be  declared
effective no later than 180 days after its filing. If the Registration Statement
is not filed and  declared  effective as  described  above,  the Company will be
required  to pay  liquidated  damages in the form of cash to the  holders of the
Serial Notes, in an amount equal to 2% of the unpaid principal balance per month
if the above  deadlines  are not met.  In the event of a default  on the  Serial
Notes,  the Serial Notes will bear  interest at twelve  percent  (12%) per annum
until paid.


                                       25
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

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

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

     The  Company  recorded  the fair value of the  derivatives  ($346,500)  and
warrants  ($512,100)  to debt  discount,  aggregating  $858,600,  which  will be
amortized  to  interest  expense  over the term of the  Notes.  Amortization  of
$143,100 was recorded for the three months ended December 31, 2006.

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

10% Secured Convertible Promissory Notes dated May 2, 2006

     On May 2, 2006, in connection with a private placement,  the Company issued
10% Secured  Convertible  Promissory Notes in the aggregate  principal amount of
$1,000,000 (the "Serial Notes") and warrants to purchase 2,000,000 shares of the
Company's common stock to accredited  investors.  The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible  into the Company's  common
stock,  at the  holder's  option,  at fifty cents  ($0.50) per share  during the
period from the date of issuance (May 2, 2006)  through May 2, 2007.  Should the
holder of the Serial Note elect not to convert to the Company's  common stock on
or before May 2, 2007, the outstanding principal,  along with accrued and unpaid
interest automatically converts to the Company's common stock at an amount equal
to  80%  of  the  average  bid  price  of  the  Company's  common  stock  on the
Over-The-Counter  Bulletin Board during the 12 months prior to such  conversion.
At any time prior to  conversion,  the Company will have the right to prepay the
promissory  notes and  accrued but unpaid  interest  thereon in cash upon 3 days
notice,  allowing the holders to convert the promissory notes during such notice
period.  The full  principal  amount of the  Serial  Notes is due upon a default
under the terms of the Note  Agreement.  In  addition,  the Company  granted the
Investors  a security  interest  in all of its assets  (see Note B). The Company
agreed to file a registration  statement with the SEC to effect the registration
of the shares of its common stock  underlying  the Serial Notes and the warrants
within  30 days of the  effective  date of the  Company's  pending  Registration
Statement  (SEC File 333 - 122848) being  declared  effective.  The Company also
agreed to use its reasonable best efforts to cause the registration statement to
be declared effective no later than 180 days after its filing. In the event of a
default  on the Serial  Notes,  the Serial  Notes will bear  interest  at twelve
percent (12%) per annum until paid.

     The warrants are  exercisable  for four years from May 2, 2007 until May 2,
2011 at a price of $0.50 per  share.  The  Company  has the  right,  but not the
obligation,  to call these  warrants  for $0.001 per share at the earlier of (i)
one year from  issuance and (ii) the date that shares of common  stock  issuable
upon  conversion of the Serial Notes and exercise of the warrants are registered
for resale and the


                                       26
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


Company's  common  stock  trades at and above  $1.00 per share for  twenty  (20)
consecutive trading days. The Notes include certain features that are considered
embedded  derivative  financial  instruments,  such as a variety  of  conversion
options,  a variable  interest  rate  feature,  events of default and a variable
liquidated damages clause.

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

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

     The  Company  recorded  the fair  value of the  derivatives  ($82,358)  and
warrants  ($373,600)  to debt  discount,  aggregating  $455,958,  which  will be
amortized  to  interest  expense  over the term of the  Notes.  Amortization  of
$91,200 was recorded for the three months ended December 31, 2006.

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

10% Secured Convertible Promissory Notes dated June 15, 2006

     On June 15,  2006,  in  connection  with a private  placement,  the Company
issued 10%  Secured  Convertible  Promissory  Notes in the  aggregate  principal
amount of  $2,950,000  (the "Serial  Notes") and warrants to purchase  5,900,000
shares of the Company's common stock to accredited  investors.  The Serial Notes
bear  interest  at 10%,  mature on August 2, 2007 and are  convertible  into the
Company's common stock, at the holder's option, at fifty cents ($0.50) per share
during the period from the one years from the date of issuance  (June 15,  2006)
through June 15, 2007. Should the holder of the Serial Note elect not to convert
to the  Company's  common  stock on or before  June 15,  2007,  the  outstanding
principal,  along with accrued and unpaid interest automatically converts to the
Company's common stock at an amount equal to 80% of the average bid price of the
Company's  common  stock on the  Over-The-Counter  Bulletin  Board during the 12
months prior to such  conversion.  At any time prior to conversion,  the Company
will have the right to prepay  the  promissory  notes  and  accrued  but  unpaid
interest thereon in cash upon 3 days notice, allowing the holders to convert the
promissory  notes during such notice period.  The full  principal  amount of the
Serial  Notes is due upon a default  under the terms of the Note  Agreement.  In
addition,  the Company  granted the Investors a security  interest in all of its
assets (see Note B). The Company  agreed to file a  registration  statement with
the SEC to effect the  registration of the shares of its common stock underlying
the Serial Notes and the warrants  within 30 days of the  effective  date of the
Company's pending Registration  Statement (SEC File 333 - 122848) being declared
effective.  The Company also agreed to use its reasonable  best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.

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


                                       27
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

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

     The  Company  recorded  the fair value of the  derivatives  ($175,321)  and
warrants  ($929,840) to debt  discount,  aggregating  $1,105,161,  which will be
amortized  to  interest  expense  over the term of the  Notes.  Amortization  of
$221,100 was recorded for the three months ended December 31, 2006.

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

$1,675,000 Convertible Notes

     Convertible   notes   payable   ("Bridge   Unit   Offering")  in  quarterly
installments  of  interest  only at 10% per annum,  secured by all assets of the
Company  and due on the earlier of the 9 month  anniversary  date of the initial
closing of the offering or the completion of any equity  financing of $3,000,000
or more; the Company,  at its sole  discretion may prepay  principal at any time
without  penalty.  The Bridge Unit Offering  Notes unpaid  principal  along with
accrued and unpaid  interest were converted to an aggregate of 4,988,051  shares
of the Company's common shares at a price equal to approximately $0.33 per share
during the quarter ended March 31, 2005.

$1,465,000 Convertible Notes

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

     The Convertible  Note's terms called for the debt to automatically  convert
at $0.50  per  share  upon the  filing a of a  registration  statement  with the
Securities and Exchange Commission.

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

     As additional  consideration for the purchase of the Convertible Notes, the
Company  granted to the holders  warrants  entitling  it to  purchase  2,930,000
common  shares of the  Company's  common  stock at the price of $0.75 per share.
These  warrants  were  issued  in  February,  2005 and lapse if  unexercised  by
February,  2010. A registration  rights  agreement was executed in December 2004
and  consummated in February,  2005 requiring the Company to register the shares
of its common  stock  underlying  the  Convertible  Notes and  warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of  liquidated  damages of 3.5% of the  aggregate  Convertible  Note
financing per month if the stipulated  registration  deadlines were not met. The
liquidated  damages,  which  approximate  $51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.

     In accordance  with Emerging  Issues Task Force Issue 98-5,  Accounting for
Convertible  Securities  with a Beneficial  Conversion  Features or Contingently
Adjustable  Conversion Ratios ("EITF 98-5"),  the Company recognized an imbedded
beneficial  conversion  feature  present in the Convertible


                                       28
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


Notes.  The Company  allocated a portion of the proceeds  equal to the intrinsic
value of that feature to additional paid-in capital.  The Company recognized and
measured an  aggregate  of  $1,465,000  of the  proceeds,  which is equal to the
intrinsic value of the imbedded  beneficial  conversion  feature,  to additional
paid-in  capital  and a  discount  against  the  Convertible  Notes.  Since  the
Convertible Notes were converted to the Company's common stock in February 2005,
the debt discount attributed to the beneficial  conversion feature of $1,465,000
was  charged to interest  expense in its  entirety  during the six months  ended
March 31, 2005.

     In  conjunction  with raising  capital  through the issuance of Convertible
Notes, the Company has issued a warrant in February,  2005 that has registration
rights  for the  underlying  shares.  As the  contract  must be  settled  by the
delivery of registered  shares and the delivery of the registered  shares is not
controlled by the Company,  pursuant to EITF 00-19,  "Accounting  for Derivative
Financial  Instruments  Indexed to, and Potentially  Settled in, a Company's Own
Stock",  the net value of the warrants at the date of issuance was recorded as a
warrant  liability on the balance sheet  $3,845,039 and charged to operations as
interest expense. Upon the registration statement being declared effective,  the
fair value of the  warrant  on that date will be  reclassified  to  equity.  The
Company initially valued the warrants using the Black-Scholes pricing model with
the following assumptions:  (1) dividend yield of 0%; (2) expected volatility of
148.66%, (3) risk-free interest rate of 3.21%, and (4) expected life of 3 years.

     In connection with the placement of the $1,465,000 of convertible  notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying  certain  previously issued and outstanding  warrants that were
not subject to a  registration  rights  agreement at the time the warrants  were
issued. These warrants consist of following:

     o    105,464  warrants  entitling the holder to purchase  105,464 shares of
          the  Company's  common  stock at the price of $0.10 per  share.  These
          warrants were issued in July,  2004 and lapse if  unexercised by July,
          2009.

     o    1,602,500  warrants  entitling the holder to purchase 1,602,500 shares
          of the Company's  common stock at the price of $0.60 per share.  These
          warrants  were issued in  October,  2003 and lapse if  unexercised  by
          October, 2008.

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

$7,371,000 Convertible Notes

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

     The Convertible  Note's terms called for the debt to automatically  convert
at $0.50  per  share  upon  the  filing  of a  registration  statement  with the
Securities and Exchange Commission.

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


                                       29
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


     As additional  consideration for the purchase of the Convertible Notes, the
Company  granted to the holders  warrants  entitling  it to purchase  14,742,000
common  shares of the  Company's  common  stock at the price of $0.75 per share.
These warrants lapse if  unexercised  by February,  2010. A registration  rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock  underlying  the  Convertible  Notes and
warrants so as to permit the public  resale  thereof.  The  registration  rights
agreement  provided  for  the  payment  of  liquidated  damages  of  3.5% of the
aggregate  Convertible  Note financing per month if the stipulated  registration
deadlines were not met. The liquidated damages,  which approximate  $257,985 per
month, may be paid, at the Company's option,  in cash or unregistered  shares of
the Company's common stock.

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

     In  conjunction  with raising  capital  through the issuance of Convertible
Notes,  the Company has issued  warrants that have  registration  rights for the
underlying shares. As the contract must be settled by the delivery of registered
shares  and the  delivery  of the  registered  shares is not  controlled  by the
Company,   pursuant  to  EITF  00-19,   "Accounting  for  Derivative   Financial
Instruments  Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the  warrants  at the date of  issuance  was  recorded as a warrant
liability on the balance sheet $19,303,175 and charged to operations as interest
expense.  Upon the  registration  statement being declared  effective,  the fair
value of the warrant on that date will be  reclassified  to equity.  The Company
initially  valued the warrants  using the  Black-Scholes  pricing model with the
following  assumptions:  (1) dividend  yield of 0%; (2) expected  volatility  of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.

NOTE D - CAPITAL STOCK

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

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

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

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


                                       30
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

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

     In January 2003,  the Company  issued  1,500,000  shares of common stock in
exchange  for a licensing  agreement.  The Company  valued the shares  issued at
approximately  $0.065 per share,  which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.

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

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

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

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

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

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

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

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

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


                                       31
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

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

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

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

     During the  fiscal  year ended  September  30,  2005,  the  Company  issued
1,500,000   shares  of  common  stock  for  shares   previously   subscribed  at
approximately $0.54 per share.

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

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

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

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

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

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

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

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


                                       32
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


     Until the Company successfully completes its pending registration statement
on SEC Form SB-2, the Company is subject to liquidated  damages (see Note D). In
connection  with  the  $1,465,000  and  $7,371,000   million   convertible  debt
financing, the Company was obligated to deliver registered shares underlying the
convertible  notes and  warrants by July 2005.  Since the  registration  was not
effective by July 2005, the Company has been accruing and charging to operations
the  stipulated  liquidated  damages  in shares of the  Company's  common  stock
accruing at a rate of 3.5% per month on the face value of the previously  issued
convertible  notes.  During the year ended  September 30, 2005,  the Company has
paid and  charged to  operations  penalties  of  $776,529 in the form of 605,382
unregistered shares of its common stock to the former note holders.

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

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

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

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

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

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

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

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


                                       33
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

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

     In December  2006,  the Company  issued  180,000  shares of common stock in
settlement  of a previously  incurred  debt of $410,429  held by a related party
(see Note G).

NOTE E - STOCK OPTIONS AND WARRANTS

Warrants

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

<TABLE>
<CAPTION>
                                               Warrants                                                    Exercisable
                                              Outstanding             Weighted                              Weighted
                                               Remaining              Average            Weighted            Average
   Exercise             Number                Contractual             Exercise           Average            Exercise
    Prices            Outstanding             Life(Years)              Price           Exercisable            Price
----------------    ----------------    ------------------------   ---------------   ----------------      ---------------
     <S>              <C>                        <C>                   <C>              <C>                   <C>
     $0.09            18,900,000                 4.67                  $0.09            18,900,000            $0.09
     $0.10              105,464                  2.51                  $0.10             105,464              $0.10
     $0.20               5,000                   2.14                  $0.20              5,000               $0.20
     $0.50            16,450,000                 3.52                  $0.50            8,550,000             $0.50
     $0.55             9,000,000                 2.22                  $0.55            9,000,000             $0.55
     $0.60             8,847,000                 3.13                  $0.60            8,847,000             $0.60
     $0.70              950,000                  1.34                  $0.70             950,000              $0.70
     $0.75            17,727,000                 3.50                  $0.75            17,727,000            $0.75
                      ----------                                                        ----------
                      71,984,464                                                        64,084,464
                      ==========                                                        ==========
</TABLE>

     Transactions involving warrants are summarized as follows:

                                                                      Weighted
                                                                      Average
                                                     Number of       Price Per
                                                       Shares          Share
                                                    -----------      ----------
Balance, September 30, 2004                           4,870,253        $0.63
Granted                                              32,873,000         0.71
Exercised                                              (142,500)        0.34
Canceled or expired                                    (731,289)        0.65
                                                    -----------        -----
Balance, September 30, 2005                          36,869,464         0.67
Granted                                              35,500,000         0.29
Exercised                                                   -            -
Canceled or expired                                         -            -
                                                    -----------        -----
Outstanding at September 30, 2006                    72,369,464         0.48
Granted                                                     -            -
Exercised                                                   -            -
Canceled or expired                                    (385,000)       (0.71)
                                                    -----------        -----
Balance, December 31, 2006                           71,984,464        $0.48
                                                    ===========        =====


                                       34
<PAGE>

                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (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.

<TABLE>
<CAPTION>
           Options Outstanding                               Options Exercisable
--------------------------------------------     ----------------------------------------------
                                  Weighted
                                   Average          Weighted                         Weighted
                                  Remaining          Average                          Average
    Exercise        Number       Contractual        Exercise        Number           Exercise
     Prices      Outstanding    Life (Years)          Price      Exercisable           Price
--------------   -------------  ------------    --------------   ------------    --------------
<S>                <C>                 <C>      <C>                <C>           <C>
$         0.68     3,660,000           4.75     $         0.68     2,745,000     $         0.68
          0.09     2,000,000           4.91               0.09       500,000               0.09
                   ---------                                       ---------
                   5,660,000                                       3,245,000               0.47
</TABLE>

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

                                    Number of     Weighted Average Exercise
                                      Shares           Price Per Share
                                    ----------    -------------------------
Outstanding at October 1, 2005       3,660,000                $0.68
      Granted                        2,000,000                 0.09
      Exercised                              -                    -
      Cancelled or expired                   -                    -
                                             -                    -
Outstanding at September 30, 2006    5,660,000                $0.47
                                     ---------                -----
      Granted                                -                    -
      Exercised                              -                    -
      Canceled or expired                    -                    -
                                             -                    -
                                     ---------                -----
Outstanding at December 31, 2006     5,660,000                $0.47

     The  Company did not grant any  employee  options  during the three  months
ended December 31, 2006.

     Effective  January,  2006,  the Company  adopted  SFAS 123R and  recognized
compensation  expense in its financial  statements in fiscal 2006.  Prior to the
adoption  of SFAS  123R,  the  Company


                                       35
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


accounted for its stock option plans  according to Accounting  Principles  Board
Opinion No. 25,  "Accounting  for Stock Issued to  Employees."  Accordingly,  no
compensation  costs were  recognized  upon issuance or exercise of stock options
for fiscal 2005.

     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  required  the
disclosure  of the  estimated  fair value of  employee  option  grants and their
impact on net income using option  pricing  models that are designed to estimate
the value of options that,  unlike employee stock options,  can be traded at any
time and are  transferable.  In addition to  restrictions  on trading,  employee
stock options may include other  restrictions such as vesting periods.  Further,
such models require the input of highly  subjective  assumptions,  including the
expected volatility of the stock price.

NOTE F - DEBT DERIVATIVE AND WARRANT LIABILITY

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

     As of the date of this filing, the registration  statement has not yet been
declared  effective  by the SEC.  The Company  determined  the fair value of the
embedded  derivatives  and valued the warrants  using the  Black-Scholes  option
pricing model.  Assumptions  regarding the life were one to five years, expected
dividend  yield of 0%, a risk free rate of 4.74 to 5.00%,  and a  volatility  of
83.69%.  The determined  value of both the warrants and the underlying  embedded
derivatives as of December 31, 2006 was  $2,432,324.  The net change in the fair
value of the derivative and warrant liability values from September 30, 2006 has
been recorded as a gain from change in debt  derivative and warrant  liabilities
in the consolidated condensed statement of operations.

NOTE G- RELATED PARTY TRANSACTIONS

     On December 12, 2006, the Company issued 180,000 shares of its common stock
as  settlement  of the  outstanding  related  party note payable of $410,429 and
related accrued interest of $8,884 (see Note D).

     The  Company's  officers  have  advanced  funds to the  Company  for travel
related and working capital purposes.  No formal repayment terms or arrangements
exist. There were no advances due at December 31, 2006.

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


                                       36
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


     On November 13, 2006, The Company  restructured  its  consulting  agreement
with Timpix for  consulting  services of three  former  Biowell  employees.  Drs
Jun-Jei Sheu, Ben Liang and Johnson Chen. The restructured  consulting agreement
expires on July 15, 2007 or until all of the consultants have obtained a visa to
work in the United States and execute  employment  agreements  with the Company.
The revised consulting  agreement shall automatically renew for one year periods
until  terminated.  Pursuant to the  agreement,  the Company is obligated to pay
$120,000,  $100,000  and  $80,000  per year  pro-rated  for each  week,  or part
thereof, of time spent within the United States providing full time services for
Drs  Jun-Jei  Sheu,  Ben Lang and  Johnson  Chen,  respectively.  The Company is
obligated to provide a corporate house for the Consultants  while working in the
United States.  All previous fees incurred  through  November 13, 2006 have been
waived.

     In July 2005,  the Company  entered into a license  agreement with Biowell,
whereby the Company granted Biowell an exclusive  license to sell,  market,  and
sub-license the Company's  products in selected Asian  countries.  The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing  technology that may be developed for the
marketplace  as long as the license  agreement  remains in effect.  In the event
that Biowell shall  sub-license  the products  within its  territories,  Biowell
shall pay the Company 50% of all fees,  payments  or  consideration  or any kind
received in connection with the grant of the sublicense.  Biowell is required to
pay a  royalty  of 10% on all net sales  made and is  required  to meet  certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through December 31, 2006 totaled $34,698. Net amounts
owed to the Company by Biowell in  connection  with the royalty  agreement as of
September 30, 2006 are $9,396.

NOTE H - COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

     The Company leases office space under operating  lease in Stony Brook,  New
York for its  corporate  use from an entity  controlled  by  significant  former
shareholder,  expiring in November 2007. In November  2005, the Company  vacated
the Los Angeles  facility  to relocate to the new Stony Brook New York  address.
Total lease rental  expenses  for the three  months ended  December 31, 2006 was
$12,500.

Employment and Consulting Agreements

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

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

     On November 13, 2006, The Company  restructured  its  consulting  agreement
with Timpix  International  Limited ("Timpix") for consulting  services of three
former  Biowell  employees.  Drs Jun-Jei Sheu,  Ben Liang and Johnson Chen.  The
restructured  consulting  agreement expires on July 15, 2007 or


                                       37
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


until all of the  consultants  have obtained a visa to work in the United States
and execute  employment  agreements  with the  Company.  The revised  consulting
agreement  shall  automatically  renew for one year  periods  until  terminated.
Pursuant to the  agreement,  the Company is obligated to pay $120,000,  $100,000
and $80,000 per year  pro-rated for each week,  or part  thereof,  of time spent
within the United States  providing full time services for Drs Jun-Jei Sheu, Ben
Lang and  Johnson  Chen,  respectively.  The Company is  obligated  to provide a
corporate  house for the  Consultants  while working in the United  States.  All
previous fees incurred through November 13, 2006 have been waived.

Litigation

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

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

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

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

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

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

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


                                       38
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


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

Registration of Company's Shares of Common Stock

     Until the Company successfully completes its pending registration statement
on SEC Form SB-2, the Company is subject to liquidated  damages (see Notes D and
H). In connection with the $1,465,000 and $7,371,000  million  convertible  debt
financing  during the  quarters  ended  December  31,  2004 and March 31,  2005,
respectively,  the Company was obligated to deliver registered shares underlying
the  convertible  notes  and  warrants  by July  2005  (see  Note C).  Since the
registration  was not effective by July 2005,  the Company has been accruing and
charging to operations  the stipulated  liquidated  damages in shares of Company
stock accruing at the rate of 3.5% per month on the face value of the previously
issued convertible notes.  During the year ended September 30, 2006, the Company
has  paid  and  charged  to  operations  penalties  of  $773,958  in the form of
unregistered  shares of its common  stock to the former  note  holders,  and has
accrued and charged to operations an additional  $5,129,011  representing unpaid
penalties through December 31, 2006.

Matters Voluntarily Reported to the SEC and Securities Act Violations

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

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


                                       39
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS

     The accompanying condensed consolidated financial statements as of December
31, 2005 and the three  months  ended  December  31, 2005 have been  restated to
correct the following errors in its previously issued financial statements.

     o    In connection with our review of our outstanding  warrants and options
          to acquire our  Company's  stock during the year ended  September  30,
          2005,  the Company  determined  it  erroneously  classified  as equity
          warrants that should have been  classified as derivative  liabilities.
          The Company  determined the warrants have registration  rights for the
          underlying  common  shares  and the  contract  must be  settled by the
          delivery of registered  shares.  Since the delivery of the  registered
          shares is not  controlled  by the  Company,  pursuant  to EITF  00-19,
          "Accounting  for  Derivative  Financial  Instruments  Indexed  to, and
          Potentially Settled in, a Company's Own Stock", the warrants are to be
          recorded as a  derivative  liability  and valued at fair market  value
          until the Company  meets the criteria  under EITF 00-19 for  permanent
          equity.  The net value of the  warrants  at the date of  issuance  was
          recorded as a warrant liability on the balance sheet and the change in
          fair  value  from  the  date  of  issuance  to  December  31,  2005 of
          $6,788,790  has been  included  in other  income  in the  accompanying
          restated financial statements.

     o    In connection with our review of our outstanding  warrants and options
          to acquire our Company's  stock,  the Company  determined  $329,700 of
          liquidated  damages payable to investors  pursuant to the terms of the
          Registration  Rights Agreement had not been accounted for and recorded
          as a selling, general and administrative expense.

     o    In connection with our review of our outstanding  warrants and options
          to acquire our Company's stock, the Company determined the issuance of
          5,500,000 warrants to acquire the Company's common stock in connection
          with the issuance of debt was  erroneously  valued at $563,750 and was
          erroneously  charged to selling,  general and administrative  expense;
          the fair value of the warrants was  $1,758,900 and has been charged to
          interest expense.

     The impact of these restatement adjustments is to decrease the reported net
loss by $5,263,940 from a loss of $2,444,489 to net income of $2,819,451 for the
three  months ended  December 31, 2005.  There was no effect on total cash flows
provided by (used in) operations, investing or financing activities.

     The following are reconciliations of the Company's  condensed  consolidated
statements  of income  for the three  months  ended  December  31,  2005 and the
condensed  consolidated  statement  of cash  flows  for the three  months  ended
December 31, 2005:

     (1)  Under Selling, general and administrative:

          a.   Recording three month  liquidation  damages  relating to December
               2004 Convertible note discussed in Note C above of $153,825

          b.   Recording three month liquidation damages relating to 2003 bridge
               Convertible note discussed in Note C above of $175,875.

          c.   The  Company  originally  recorded  under  Selling,  general  and
               administrative  an estimate of the fair value of warrants  issued
               in  conjunction  with  the  November  2005  convertible  notes of
               $563,950

     The net effect to selling,  general and  administrative  is a reduction  of
$234,250, net of items a, b and c above.


                                       40
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


     (2)  Under Net gain/loss on  reevaluation  of debt  derivative  and warrant
          liability:

          Recording of the change in warrant  valuation  from September 30, 2005
          (previous reporting period) to December 31, 2005 of $6,788,790

     (3)  Under Interest Income (expense):

          In  conjunction   with  raising   capital   through  the  issuance  of
          Convertible   Notes,   the  Company  has  issued  warrants  that  have
          registration rights for the underlying shares. As the contract must be
          settled by the delivery of  registered  shares and the delivery of the
          registered  shares is not controlled by the Company,  pursuant to EITF
          00-19,  "Accounting for Derivative  Financial  Instruments Indexed to,
          and Potentially  Settled in, a Company's Own Stock",  the net value of
          the  warrants  at the  date of  issuance  was  recorded  as a  warrant
          liability on the balance sheet $1,758,900 and charged to operations as
          interest  expense.  Upon the  registration  statement  being  declared
          effective,  the  fair  value  of the  warrant  on  that  date  will be
          reclassified  to equity.  The Company  initially  valued the  warrants
          using the Black-Scholes pricing model with the following  assumptions:
          (1)  dividend  yield of 0%;  (2)  expected  volatility  of  156%,  (3)
          risk-free interest rate of 4.55%, and (4) expected life of 5 years.


                                       41
<PAGE>


                            APPLIED DNA SCIENCES, INC
                          (a development stage company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2006
                                   (Unaudited)


NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS


               Condensed Consolidated Statement of Income (Losses)
                  For the Three Months Ended December 31, 2005
<TABLE>
<CAPTION>
                                                     As previously
                                                        Reported        Adjustment       Reference      As Restated
                                                     -------------     ------------      --------      -------------
<S>                                                   <C>              <C>                <C>          <C>
Selling, general & administrative                     $  2,078,727     $   (234,250)        1          $   1,844,477
Research and development                              $    342,699     $                                     342,699
Depreciation                                          $     16,270     $                               $      16,270
Total operating expenses                              $  2,437,696     $   (234,250)        1          $   2,203,446
Net loss from operations                              $ (2,437,696)    $   (234,250)        1          $  (2,203,446)
Net gain (loss) in fair value of debt derivative and
   warrant liability                                  $          -     $  6,788,790         2          $   6,788,790
Other income (expense)                                $     13,013     $                               $      13,013
Interest income (expense)                             $    (19,806)    $ (1,758,900)        3          $  (1,778,906)
Net income (loss)                                     $ (2,444,489)    $  5,263,940       1,2,3        $   2,819,451
Net income (loss) per share-basic                     $      (0.02)          0.05                      $      0.03
Net income (loss) per share-fully diluted                       NA           0.02                      $      0.02

                                   Condensed Consolidated Statement of Cash Flows
                                    For the Three Months Ended December 31, 2005

Cash flows from operating activities
Net income (loss)                                     $ (2,444,489)    $  5,263,940       1,2,3        $   2,819,451
Adjustments to reconcile to net used in operating
   activities
Depreciation and amortization                         $    336,942     $                               $     336,942
Warrants issued to consultants                        $    563,750     $   (563,750)        1          $         -
Income attributable to repricing of warrants and debt
   derivatives                                        $          -     $ (6,788,790)        2          $  (6,788,790)
Financing costs attributable to issuance of warrants  $          -     $  1,758,900         3          $   1,758,900
Common stock issued in exchange for services          $     75,000     $                               $      75,000
Common stock issued as penalty in connection with
   financing                                          $    257,986     $                               $     257,986
Common stock canceled-previously issued for services
   rendered                                           $   (210,000)    $                               $    (210,000)
Increase in other assets                              $     (4,975)    $                               $      (4,975)
Increase in due related parties                       $     53,805     $                               $      53,805
Increase (decrease) in accounts payable and accrued
   liabilities                                        $    958,611     $    329,700         1          $   1,288,311
Net cash used in operating activities                 $   (413,370)    $                               $    (413,370)
Cash flows from investing activities:
Payments for patent filing                            $      6,103                                             6,103
Capital expenditures                                  $     (9,397)    $                               $      (9,397)
Net cash used in investing activities                 $     (3,294)    $                               $      (3,294)
Cash flows from financing activities
Proceeds from loans                                   $    550,000     $                               $     550,000
Net cash provided by financing activities             $    550,000     $                               $     550,000
Net increase in cash and cash equivalents             $    133,336     $                               $     133,336
Cash and cash equivalents at beginning of period      $     31,190     $                               $      31,190
Cash and cash equivalents at end of period            $    164,526     $                               $     164,526
</TABLE>


                                        42

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

         o        discuss our future expectations;

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

         o        state other "forward-looking" information.

         We believe it is important to communicate  our  expectations.  However,
forward  looking  statements  involve  risks and  uncertainties  and our  actual
results and the timing of certain  events  could  differ  materially  from those
discussed  in  forward-looking  statements  as  a  result  of  certain  factors,
including those set forth under "Risk Factors," "Business" and elsewhere in this
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 provide  botanical  DNA  encryption,  embedment  and  authentication
solutions  that can help  protect  companies,  governments  and  consumers  from
counterfeiting,   fraud,   piracy,   product  diversion,   identity  theft,  and
unauthorized  intrusion  into physical  locations and  databases.  Our SigNature
Program provides a secure,  accurate and  cost-effective  means for customers to
incorporate  our  SigNature  DNA  Markers  in,  and then  quickly  and  reliably
authenticate  and  identify,  a  broad  range  of  items  such  as  artwork  and
collectibles,   fine  wine,   consumer   products,   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.

         Our   SigNature    Program    enables   our   potential    clients   to
cost-effectively:

         o        assure manufacturers,  suppliers, distributors,  retailers and
                  end-users  that  their  products  are  authentic  and  can  be
                  forensically authenticated;

         o        integrate our  SigNature  DNA Markers with  existing  security
                  solutions  such as barcodes,  radio  frequency  identification
                  (RFID)  tags,  holograms,   microchips  and  other  securities
                  measures; and

         o        add value to the  "bottom-line" by helping to diminish product
                  diversion and counterfeiting.

         Counterfeit  and diverted  products  continue to pose a significant and
growing  problem  with  consumer  packaged  goods,  especially  for prestige and
established  brands worldwide.  Piracy,  identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media,  fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:

         o        continuing  to improve and  customize our solution to meet our
                  potential customers' needs;

         o        continuing  to develop  and enhance  our  existing  DNA marker
                  authentication technologies;


                                       43
<PAGE>

         o        expanding  our customer base both  domestically  and abroad by
                  targeting high volume markets; and

         o        augmenting  our   competitive   position   through   strategic
                  acquisitions and alliances.

Plan of Operations

General

         We expect to generate revenues  principally from sales of our SigNature
Program. We are currently  attempting to develop business in six target markets:
art and collectibles,  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 April 2007. We believe we will be required to
seek  additional   capital  to  sustain  or  expand  our  prototype  and  sample
manufacturing, and sales and marketing activities, and to otherwise continue our
business  operations  beyond that date.  We have no  commitments  for any future
funding,  and may not be able to obtain additional  financing or grants on terms
acceptable  to  us,  if at  all,  in the  future.  If we are  unable  to  obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations.  Additionally, while a reduction
in our business  operations  may prolong our ability to operate,  that reduction
would harm our ability to implement our business strategy.  If we can obtain any
equity  financing,  it may involve  substantial  dilution  to our then  existing
shareholders.

Product Research and Development

         We anticipate spending  approximately $200,000 for product research and
development  activities  during the next  twelve  (12)  months.  This  projected
expenditure for product  research and  development  activities is dependent upon
our ability to obtain  sources of financing  or generate  revenues . There is no
guarantee that we will be successful in raising the funds required or generating
revenues sufficient to fund the projected research and product development costs
during the next twelve (12) months.

Acquisition of Plant and Equipment and Other Assets

         We do not  anticipate  the  sale of any  material  property,  plant  or
equipment  during the next 12 months.  We do anticipate  spending  approximately
$200,000 on the acquisition of leasehold improvements during the next 12 months.
This  projected  expenditure  for leasehold  improvements  is dependent upon our
ability  to obtain  sources  of  financing  or  generate  revenues.  There is no
guarantee that we will be successful in raising the funds required or generating
revenues  sufficient to fund the projected  costs of the leasehold  improvements
during the next 12 months.

Number of Employees

         We currently  have seven  employees  and two  part-time  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.
Specifically,  the company expects to increase its staffing  dedicated to sales,
product  prototyping,  manufacturing of DNA Markers and forensic  authentication
services. In order for us to attract and retain quality personnel, we anticipate
we will have to offer  competitive  salaries.  Any such increase in personnel is
dependent upon our ability to generate  sufficient revenues or obtain sources of
financing. There is no guarantee that we will be successful in raising the funds
required or generating  revenues sufficient to fund an increase in the number of
our  employees.  If we expand  by hiring  additional  employees,  we will  incur
additional costs for such 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.


                                       44
<PAGE>

While all these significant  accounting  policies impact our financial condition
and  results of  operations,  we view  certain of these  policies  as  critical.
Policies  determined  to be  critical  are  those  policies  that  have the most
significant  impact  on  our  consolidated   financial  statements  and  require
management to use a greater degree of judgment and estimates. Actual results may
differ from those estimates.

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

         The accounting policies identified as critical are as follows:

         o        Equity issued with registration rights

         o        Warrant liability

         o        Fair value of intangible assets


Equity Issued with Registration Rights

         In connection with the placements 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,  and
accordingly   has  been  reflected   between   liabilities  and  equity  in  the
accompanying  consolidated  balance sheet until such time as the  conditions are
eliminated.

Warrant Liability

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

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

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

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

Fair Value of Intangible Assets

         We have adopted SFAS No. 142,  Goodwill  and Other  Intangible  Assets,
whereby we periodically test our intangible assets for impairment.  On an annual
basis,  and when  there is  reason  to  suspect  that  their  values  have  been
diminished or impaired, these assets are tested for impairment,  and write-downs
will be included  in results  from  operations.  On July 12,  2005,  we acquired
certain intellectual properties from Biowell through an Asset Purchase Agreement
in exchange for 36 million shares of our restricted


                                       45
<PAGE>

common stock  having an  aggregate  fair value at the date of issuance of $24.12
million.  The value of the acquired  intangible assets was $9,430,900,  with the
balance of the purchase price,  or $14,689,100,  charged to operations as a cost
of the transaction.

         During  the year ended  September  30,  2006,  the  Company  management
preformed 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, 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.

         The identifiable  intangible  assets acquired and their carrying values
at December 31, 2006 are:
<TABLE>
<CAPTION>

                                                                                               Weighted
                                                                                               Average
                    Gross             Accumulated                                            Amortization
                   Carrying         Amortization and                        Residual            Period
                    Amount         Impairment Charge           Net           Value             (Years)
<S>               <C>                  <C>                 <C>              <C>              <C>
Amortizable
Intangible
Assets:

Intellectual
Property          $9,430,900           $7,339,100          $2,091,800          --                  7

Patents             34,237               18,574              15,663            --                  5

Total
Amortized
Identifiable
Intangible        $9,465,137           $7,357,674          $2,107,463          --                 6.99
</TABLE>

         Total  amortization  expense charged to operations for the three months
ended December 31, 2006 and 2005 were $92,661 and $338,545.

         Estimated amortization expense as of December 31, 2006 is as follows:

          2007                 $   370,643
          2008                     370,643
          2009                     365,753
          2010                     363,792
          2011 and after           636,632
          Total                $ 2,107,463

Use of Estimates

         In  preparing  financial   statements  in  conformity  with  accounting
principles generally accepted in


                                       46
<PAGE>

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

Restatement of Consolidated Financial Statements

         The Company has restated its  consolidated  financial  statements as of
and for the year ended  September 30, 2005 and the quarterly  unaudited data for
the first three quarters of 2006 and all of 2005.

         These  restatements  and resulting  revisions  relate to the accounting
treatment  for and  disclosure  regarding the issuance by the Company of options
and  warrants to acquire the  Company's  common  stock.  In addition the Company
corrected  certain errors in accounting for the exchange of its common stock for
previously  incurred debt with a Company director.  These errors were discovered
in connection with comments raised by the SEC in their review and comment on the
Company's Registration Statement on Form SB-2, as amended.

         In this regard,  you should rely on the restated  financial results for
the fiscal year ended  September  30,  2005 and for each of the  quarters in the
year 2005 and the  first,  second and third  quarters  of 2006.  As the  Company
previously  reported in its Current  Report on Form 8-K, dated May 16, 2006, you
should  not  rely on the  Company's  previously  issued  consolidated  financial
statements and other financial information for these reporting periods.

         The  consolidated  financial  statements  for the  three  months  ended
December 31, 2005 have been  restated  from the amounts  previously  reported to
correct  the  accounting  for  financial  derivatives.  While the  effect of the
corrections to the financial statements is fully described in accompanying notes
to the restated consolidated financial statements, the following is a summary of
the net effect of the errors on these consolidated financial statements:

         o        the Company's net loss for the three months ended December 31,
                  2005 decreased by $5,263,940  from a net loss of $2,444,489 to
                  a net income of $2,819,451.


Comparison of Results of Operations for the Three Months Ended December 31, 2006
and 2005 Revenues

         From our inception on September 16, 2002, we have not generated
significant revenues from operations.


Costs and Expenses

Selling, General and Administrative

         Selling, general and administrative expenses for the three months ended
December  31, 2006  compared to the same  period in 2005  increased  from $1.844
million to $2.054  million in the same period last year.  This increase of $0.21
million,  or 11.4%,  is primarily  attributable  to costs incurred in connection
with professional services.


                                       47
<PAGE>

Research and Development

         Research and development expenses increased by $13,036 from $16,270 to
$29,306 for the three months ended December 31, 2006 compared to the same period
in 2005 primarily due to increased independent testing costs.

Depreciation and Amortization

         In  the  three  months  ended  December  31,  2006,   depreciation  and
amortization  decreased  by $234,820  from  $342,699 to $107,879  for the period
compared to the same period in 2005. The decrease is attributable to the reduced
amortization  of our  intellectual  property due to our  impairment  recorded in
September 30, 2006.

Total Operating Expenses

         Total operating  expenses decreased to $2.19 million from $2.2 million,
or a decrease of $0.01 million as a result of the  combination of factors listed
above.

Other Income/Loss

         Gain on reevaluation of debt derivative and warrant liability decreased
by $4.7  million  from $6.8  million to $2.1  million for the three months ended
December 31, 2006 as compared to the same period in 2005.

Interest Expenses

         Interest expense for the three months ended December 31, 2006 decreased
by $1.2 million to $0.58  million from $1.78 million in the same period of 2005.
In the three months  ended  December 31,  2005,  we incurred  non-cash  interest
expense  relating to the fair value of warrants  issued in conjunction  with our
November 2005 financing of $1.79 million.

Net Income (loss)

         Net loss for the three  months ended  December 31, 2006  increased to a
loss of $0.67  million from a net income of $2.82 million in the prior period as
a result of the combination of 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.

         In fiscal 2005, we completed two private placements of convertible debt
and  associated  warrants.  In November  and  December,  2004 we issued and sold
$1.465 million in aggregate principal amount of promissory notes, convertible at
$0.50 per share,  and associated  warrants to purchase up to 2,930,000 shares of
our common stock, exercisable at $0.75 per share for three years from their date
of issuance,  to 13 investors (the "December 2004  Placement").  Each promissory
note was automatically convertible into shares of our common stock at a price of
$0.50 per share upon the closing of a subsequent  private placement by us for at
least $1  million.  In January and  February of 2005,  we issued and sold $7.371
million in  aggregate  principal  amount of 10% Secured  Convertible  Promissory
Notes, convertible at $0.50 per share, and associated warrants to purchase up to
14,742,000 shares of our common stock, exercisable at $0.75 per share until five
years from their date of issuance,  to 61 investors  (the  "January and February
2005  Placement").  Upon the closing of the January and February 2005  Offering,
the notes issued in the December 2004 Placement  automatically converted into an
aggregate of 2,930,000  shares of our common stock,  and upon the filing of this
registration statement on February 15, 2005, the notes issued in the January and
February 2005 Placement  automatically converted into an aggregate of 14,742,000
shares of our common stock.  Additional private placements in fiscal 2005 raised
$243,000. We also received proceeds of $60,000 from the exercise of a warrant to
purchase  100,000  shares of our


                                       48
<PAGE>

common stock in fiscal 2005.  The $9.135  million in gross  proceeds  from these
private placements and warrant exercises were used to fund commissions, fees and
expenses associated with the placements, consultants and public reporting costs,
salaries and wages, royalties, research and development,  facility costs as well
as general working capital needs. Since the conversion price of the notes issued
in the November and December 2003,  December 2004, December 2005 and the January
and February 2005 placements were less than the market price of our common stock
at the time these notes were  issued,  we  recognized  a charge  relating to the
beneficial  conversion  feature of these notes  during the quarter in which they
are issued.

         In fiscal 2006, we completed  three  additional  private  placements of
convertible  debt and  associated  warrants.  On November 3, 2005, we issued and
sold  a  promissory  note  in  the  principal   amount  of  $550,000  to  Allied
International  Fund, Inc.  ("Allied").  Allied in turn financed a portion of the
making  of this loan by  borrowing  $450,000  from  certain  persons,  including
$100,000 from James A. Hayward, a director and our Chief Executive Officer.  The
terms of the promissory note provided that we issue upon the funding of the note
warrants to purchase  5,000,000  shares of our common stock at an exercise price
of $0.50 per share to certain persons designated by Allied. On November 9, 2005,
we issued  nine  warrants  to Allied  and eight  other  persons to  purchase  an
aggregate of 5,500,000  shares of our common stock at an exercise price of $0.50
per share.  These warrants included a warrant to purchase  1,100,000 shares that
was issued to James A. Hayward, a director and our Chief Executive  Officer.  We
paid $55,000 in cash to VC Arjent,  Ltd. for its services as the placement agent
with respect to this  placement.  All principal and accrued but unpaid  interest
under the promissory note was paid in full shortly after the closing of and from
the proceeds of a private  placement we completed on March 8, 2006.  On March 8,
2006,  we issued and sold an aggregate of 30 units  consisting  of (i) a $50,000
principal amount secured convertible promissory note bearing interest at 10% per
annum and convertible at $0.50 per share, and (ii) a warrant to purchase 100,000
shares  of our  common  stock  at an  exercise  price of $0.50  per  share,  for
aggregate  gross  proceeds  of $1.5  million.  The units were sold  pursuant  to
subscription  agreements by and between each of the  purchasers  and Applied DNA
Operations  Management,   Inc.,  a  Nevada  corporation  and  our  wholly  owned
subsidiary (our  "Subsidiary").  The $2.050 million in gross proceeds from these
first two offerings were held by our Subsidiary for our benefit and used to fund
commissions,  fees and expenses  associated  with the  placements,  to repay the
outstanding promissory note described above plus accrued interest thereunder, to
fund financing fees, consultants and public reporting costs, salaries and wages,
research and development,  facility costs as well as and general working capital
needs. On March 24, 2006, we commenced an offering (the "Offshore  Offering") of
up to 140 units,  at a price of $50,000 per unit,  for a maximum  offering of $7
million for sale to "accredited investors" who are not "U.S. persons." The units
being sold as part of the Offshore  Offering consist of (i) a $50,000  principal
amount  secured  convertible  promissory  note,  and (ii) a warrant to  purchase
100,000  shares of our  common  stock at a price of $0.50 per  share.  On May 2,
2006, we closed on the first  tranche of the Offshore  Offering in which we sold
20 units for aggregate  gross  proceeds of  $1,000,000.  We paid Arjent  Limited
$375,000 in commissions,  fees and expenses from these gross  proceeds.  On June
15, 2006, we completed the second  tranche of the Offshore  Offering in which we
sold 59 units for aggregate gross proceeds of $2,950,000. We paid Arjent Limited
$442,500  in   commissions,   fees  and  expenses  from  these  gross  proceeds.
Additionally,  on July 10, 2006 we issued 2.4 million shares of our common stock
to Arjent Limited at $0.001 per share as partial  consideration for its services
in connection with the Offshore Offering.

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


                                       49
<PAGE>

         As of  December  31,  2006,  we had  $4,217,171  in  outstanding  notes
payables.  Please see  "Management's  Discussion  and Analysis -- Liquidity  and
Capital  Resources"  and Note C to the financial  statements  in this  quarterly
report for a full description of the terms of the outstanding promissory notes.

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

         As  of  December  31,  2006,  we  had  a  working  capital  deficit  of
approximately  $10.26 million.  For the three months ended December 31, 2006, we
generated  a net  cash  flow  deficit  from  operating  activities  of  $561,156
consisting  primarily of year to date losses of $671,222.  Non-cash  adjustments
included  $952,054 in depreciation and amortization  charges net with a non-cash
reduction of $2,098,471 attributable to the repricing of the debt derivative and
warrant  liability.  Additionally,  we had a net  decrease in current  assets of
$39,023 and a net increase in current  liabilities of  $1,217,460.  Cash used in
investing  activities  totaled  $11,039,  which was utilized for  acquisition of
property  and  equipment.  We did  not  have  any  cash  provided  by  financing
activities for the three months ended December 31, 2006.

         From our inception on September 16, 2002 through  December 31, 2006, we
generated a cash flow deficit of  $15,602,629  from operating  activities.  Cash
flows used in investing  activities was $214,058 during this period.  We met our
cash  requirements  during this period through the private placement of $432,000
of common stock,  $12,968,900 from the issuance of convertible notes, $2,725,146
from the issuance of notes  payable (net of  repayments  and costs) and $343,750
from the proceeds from the exercise of options to acquire our common stock.

         We expect capital expenditures to be less than $200,000 in fiscal 2007.
Our primary  investments will be in laboratory  equipment to support prototyping
and our authentication services.

         We have raised  capital to meet our working  capital needs in the past,
and will likely require  additional  financing  within the next two (2) to three
(3) months in order to meet our current and  projected  cash flow  deficits from
operations and development.  We presently do not have any available credit, bank
financing or other readily  available  external sources of liquidity.  Financing
transactions  may include the issuance of equity or debt  securities,  obtaining
credit facilities, or other financing mechanisms.  However, the trading price of
our common  stock,  a downturn in the U.S. or global  stock and debt markets and
other  reasons  could make it more  difficult  to obtain  financing  through the
issuance of equity  securities or  borrowing.  Further,  if we issue  additional
equity or convertible  debt securities,  stockholders may experience  additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of our common stock. If additional financing
is not  available or is not  available on  acceptable  terms,  this could have a
material  adverse  effect on our business,  results of operations  liquidity and
financial condition.

         Our registered  independent certified public accountants have stated in
their report dated January 5, 2007,  that we have incurred  operating  losses in
the last two  years,  and that we are  dependent  upon  management's  ability to
develop profitable operations.  These factors among others may raise substantial
doubt about our ability to continue as a going concern.

         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, if we did not have a  registration  statement  registering  the
shares underlying these convertible notes and warrants declared  effective on or
before June 15, 2005, we are obligated to pay  liquidated  damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885,  until
the  registration  statement  is  declared  effective.   At  our  option,  these
liquidated damages can be paid in cash or restricted shares of our common stock.
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


                                       50
<PAGE>

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 December 31, 2006 we have accrued approximately $5.1
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.

Matters Voluntarily Reported to the SEC and Securities Act Violations

         During the months of March,  May,  July and  August  2005,  we issued a
total  of  8,550,000  shares  of our  common  stock  to  certain  employees  and
consultants  pursuant to the 2005  Incentive  Stock Plan. We engaged our outside
counsel  to  conduct  an  investigation  of the  circumstances  surrounding  the
issuance  of these  shares.  On April 26,  2006,  we  voluntarily  reported  the
findings from this  investigation to the SEC, and agreed to provide the SEC with
further information arising from the investigation. We believe that the issuance
of 8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of our board of directors.  These former  officers  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.  If  violations  of  securities  laws  occurred in
connection  with the  resale of  certain  of these  shares,  the  employees  and
consultants  or persons who  purchased  shares from them may have rights to have
their purchase  rescinded or other claims against us for violation of securities
laws,  which  could harm our  business,  results of  operations,  and  financial
condition.

Off-Balance Sheet Arrangements

         We do not have any off-balance sheet arrangements.

Inflation

         The impact of inflation  on the costs of the Company is dependent  upon
market conditions.  The Company is not aware of any inflationary  pressures that
have  had any  significant  impact  on the  Company's  operations  over the past
quarter, and the Company does not anticipate that inflationary factors will have
a significant impact on future operations.


                                       51
<PAGE>

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 auditors,  in their report dated January 5,
2007,  have expressed  substantial  doubt about our ability to continue as 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.


                                  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:

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

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 $2.4 million for the year ended September 30,
2006.  For the three months ended  December 31, 2006,  we incurred a net loss of
$671,222. 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 our interest  expense on notes and warrants we issued to obtain
financing. Our operations are subject to the risks and competition inherent in a
company moving from the development stage to a new growth enterprise. We may not
generate sufficient revenues from operations to achieve or sustain profitability
on a  quarterly,  annual or any other  basis in the  future.  Our  revenues  and
profits,  if any,  will  depend  upon  various  factors,  including  whether our
existing  products 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.

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 January 5, 2007, our independent  auditors stated
that our  financial  statements


                                       52
<PAGE>

for the year ended  September  30,  2006 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 $93 million  during the period from  September 16, 2002
(date of  inception)  to  September  30,  2006.  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.

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

We Are  Obligated to Pay  Liquidated  Damages As a Result of Our Failure to Have
the  Registration  Statement on Form SB-2 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, if we did not have a  registration  statement  registering  the
shares underlying these convertible notes and warrants declared  effective on or
before June 15, 2005, we are obligated to pay  liquidated  damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885,  until
the  registration  statement  is  declared  effective.   At  our  option,  these
liquidated damages can be paid in cash or restricted shares of our common stock.
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


                                       53
<PAGE>

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 December 31, 2006 we have accrued approximately $5.1
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.

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 or no 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:

         o        availability,   quality  and  price  relative  to  competitive
                  solutions;

         o        customers' opinions of the solutions' utility;

         o        ease of use;

         o        consistency with prior practices;

         o        scientists' opinions of the solutions' usefulness;

         o        citation of the solutions in published research; and

         o        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
Dr. James A. Hayward,  our Chief Executive Officer;  and Dr. Benjamin Liang, our
Secretary and Strategic Technology


                                       54
<PAGE>

Development  Officer. We do not have employment  agreements with Drs. Hayward or
Liang.  Loss of the services of Drs. Hayward or Liang could  significantly  harm
our business,  results of operations and financial condition. We do not maintain
key-man insurance on the lives of Drs. Hayward or Liang.

The Markets for our SigNature Program are Very Competitive, and We May be Unable
to Continue to Compete Effectively in this Industry in the Future.

         The  principal   markets  for  our  SigNature   Program  are  intensely
competitive.  We  compete  with  many  existing  suppliers  and new  competitors
continue to enter the market. 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:  Applied  Optical
Technologies,  Authentix, ChemTAG, Collectors Universe Inc., Collotype, Data Dot
Technology,  Digimarc  Corp.,  DNA  Technologies,  Inc.,  Informium AG,  Inksure
Technologies, L-1 Identity Solutions, Manakoa, SmartWater Technology, SureTrace,
Tracetag and Warnex.

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

         o        product performance, features and liability;

         o        price;

         o        timing of product introductions;

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

         o        sales and distribution capabilities;

         o        technical support and service;

         o        brand loyalty;

         o        applications support; and

         o        breadth of product line.

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

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.


                                       55
<PAGE>

         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,  and  particularly  Biowell,  for the
manufacture  of some of our products to our  specifications.  The inability of a
manufacturer  to ship orders of such  products in a timely manner or to meet our
quality  standards could cause us to miss the delivery date  requirements of our
customers for those items, which could result in cancellation of orders, refusal
to accept deliveries or a reduction in purchase prices,  any of which could harm
our  business by  resulting  in  decreased  revenues or net losses upon sales of
products, if any sales could be made.

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

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

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


                                       56
<PAGE>

share for certain  products.  Intellectual  property  licenses  would  typically
subject us to various  commercialization,  sublicensing,  minimum  payment,  and
other obligations.  If we fail to comply with these requirements,  we could lose
important rights under a license. In addition,  certain rights granted under the
license  could be lost for reasons  beyond our  control,  and we may not receive
significant  indemnification  from a  licensor  against  third  party  claims of
intellectual property infringement.

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

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

         o        operations and financial systems;

         o        procedures and controls; and

         o        training and management of our employees.

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

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

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

         o        different or conflicting regulatory or legal requirements;

         o        foreign currency fluctuations; and

         o        diversion of significant time and attention of our management.

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


                                       57
<PAGE>

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

Intellectual Property Litigation Could Harm Our Business.

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

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

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


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<PAGE>

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.

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

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

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.  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


                                       59
<PAGE>

against us for  violation of  securities  laws,  which could harm our  business,
results of operations, and financial condition.

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  15,  2007,  we had  121,162,385  shares of common stock
issued  and  outstanding  and  outstanding  options  and  warrants  to  purchase
77,644,464  shares of common stock.  All of the shares issuable upon exercise of
our options and  warrants  may be sold  without  restriction.  The sale of these
shares may adversely  affect the market price of our common stock.  The issuance
of shares  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:

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

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

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

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

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

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

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


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<PAGE>

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

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

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


ITEM 3. CONTROLS AND PROCEDURES

         a) Evaluation of Disclosure Controls and Procedures: As of December 31,
2006, our management  carried out an  evaluation,  under the  supervision of the
Company's Chief Executive  Officer (who is its principal  executive  officer and
principal financial  officer),  of the effectiveness of the design and operation
of the Company's  system of disclosure  controls and procedures  pursuant to the
Securities and Exchange Act and Rules 13a-15(e) and 15d-15(e) thereunder.  Based
upon that evaluation,  the Company's Chief Executive  Officer concluded that the
Company's disclosure controls and procedures were not effective,  as of the date
of their evaluation, for the purposes of recording, processing,  summarizing and
timely reporting material  information required to be disclosed in reports filed
by the Company under the Securities Exchange Act of 1934.

         As previously  disclosed in our Current  Reports on Form 8-K,  filed on
May 18, 2006 and October 2, 2006, as a result of comments  raised by the SEC, we
determined that accounting errors were made in connection with

         o        accounting  for and  disclosing the fair value of warrants and
                  options to acquire our common stock issued to non-employees as
                  a current period expense;

         o        accounting  for and disclosing the fair value of shares issued
                  to a former Director in exchange for previously incurred debt;

         o        accounting  for and  disclosing  the fair  value  of  warrants
                  issued to note  holders and  consultants  having  registration
                  rights; and

         o        accounting  for and  disclosing  the  revaluation  for warrant
                  liabilities as of each reporting period.

         Based  on  the  impact  of the  aforementioned  accounting  errors,  we
determined to restate our consolidated  financial statements as of September 30,
2005 and for the year ended September 30, 2005 and the quarterly  unaudited data
for the first three quarters of 2006 and all of 2005.

         b) Changes in internal controls:  Except as described below, there were
no changes in internal  controls over financial  reporting that occurred  during
the  period  covered  by this  report  that  have  materially  affected,  or are
reasonably  likely to materially  effect,  our internal  control over  financial
reporting.

Changes in Internal Controls

         In addition to the remedial measures undertaken during the three months
ended  September 30, 2006, that we have  subsequently  implemented the following
additional measures to address the identified material weaknesses:


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         o        We  reviewed  all  convertible   securities  to  identify  any
                  securities  that  may  have  embedded  beneficial   conversion
                  features or derivatives; and

         o        We  have  improved  the   supervision   and  training  of  our
                  accounting  staff  to  understand  and  implement   applicable
                  accounting requirements, policies and procedures applicable to
                  the accounting  and  disclosure of convertible  securities and
                  derivatives.




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                           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.

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

         Plaintiff Paul Reep, a former  employee,  commenced this action against
us on January 10, 2006.  Mr. Reep  asserts  eight causes of action for breach of
contract, breach of an oral agreement, negligent misrepresentation, interference
with  prospective  business  advantages,   defamation,   fraud,  accounting  and
constructive  trust, unjust enrichment.  The relief sought includes  declaratory
relief,  unspecified compensatory damages, unpaid salary,  unspecified penalties
under  the  California  Labor  Code,  interest,  and  attorneys'  fees.  We have
successfully moved the court to indefinitely stay all proceedings in this matter
in light of a forum  selection  clause  designating  Nevada  state courts as the
proper forum. Attorneys for Reep have indicated that they intend to file suit in
Nevada,  but to date have not done so. We intend to  vigorously  defend any case
brought against us by Reep.

Applied DNA Sciences,  Inc. v. Paul Reep,  Adrian Butash,  John Barnett,  Chanty
Cheang, Jaime Cardona, and Angela Wiggins, Case No. CV06-2027 RGK

         We filed this action against the defendants,  Paul Reep, Adrian Butash,
John Barnett, Chanty Cheang, Jaime Cardona, and Angela Wiggins on April 4, 2006,
in the United States District Court for the Central  District of California.  In
this  matter we have  asked the court to make a judicial  determination  that an
agreement  amending the employment  contracts of all named defendants,  which we
did not  authorize  and  which is the  basis of the Reep and  Butash  litigation
against Applied DNA, is invalid and  unenforceable.  This matter is in the early
stages of discovery. Trial has been set for April 3, 2007.

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

         Plaintiffs John D. Barnett,  Jr., Adrian Butash,  Jaime A. Cardona, and
Chanty  Cheang,  our  former  employees,  filed suit  against  us,  Applied  DNA
Operations  Management,  Inc., APDN (B.V.I.),  Inc., Peter Brocklesby,  James A.
Hayward,  and Jun-Jei  Sheu in Los Angeles  County  Superior  Court on April 17,
2006.  The complaint  alleges  causes of action for breach of written  contract,
breach of oral contract,  fraud,  violations of the  California  Labor Code, and
wrongful  termination.  The complaint  seeks  $159,000  (trebled to $477,000) in
alleged unpaid salary, $546,000 in severance pay, other unspecified compensatory
and consequential  damages,  unspecified  punitive damages,  attorneys' fees and
costs,  and interest.  With the exception of Peter  Brocklesby,  all defendants,
including us, have answered the  complaint.  The trial date has been set for May
21, 2007.

In re the Unemployment Insurance Claims of Adrian Butash, John Barnett, and Paul
Reep,  California  Unemployment  Insurance  Appeals  Board  Case  Nos.  1809031,
1801356, and 1842399, respectively.

         We are in the  process  of  appealing  an  administrative  law  judge's
determination  John  Barnett,  Paul Reep,  and Adrian  Butash  are  entitled  to
unemployment  benefits  following  their  separation from employment with us and
that our unemployment  insurance account will be charged.  We will appeal on the
determination  on the grounds that the  claimants  were  terminated  for reasons
other than lack of work. We have filed a notice of appeal, and no trial date has
yet been set.


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<PAGE>

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. Plaintiff 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.


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

         On  December  12,  2006 we issued  180,000  shares  of common  stock in
exchange for our  promissory  note in  principal  amount of $410,429 and accrued
interest thereon of $8,883. We valued the shares issued at $0.09 per share for a
total of $16,200.  This issuance is considered  exempt under Section  3(a)(9) of
the Securities Act of 1933.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None.


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

         None.


ITEM 5. OTHER INFORMATION

         None.


ITEM 6. EXHIBITS


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


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


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


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


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


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


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


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




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                                   SIGNATURES

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


                                        APPLIED DNA SCIENCES, INC.

Date: February 20, 2007                  /s/JAMES A. HAYWARD
                                         -------------------
                                         James A. Hayward
                                         Chief Executive Officer
                                         (Principal Executive Officer,
                                         Principal Financial Officer
                                         and Principal Accounting Officer)










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