UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





x
            Quarterly Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
quarterly period ended June 30, 2010 or





o
            Transition Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the
transition period from __________________ to
______________________.





Commission
file number 0-26285





CNS
RESPONSE, INC.


(Exact
name of registrant as specified in its charter)




Delaware
              87-0419387(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)





85
Enterprise, Suite 410


Aliso
Viejo, CA 92656


(Address
of principal executive offices)(Zip Code)





(714)
545-3288


(Registrant’s
telephone number, including area code)





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


Yes 
x
          No o





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


Yes 
o
         No o





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




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





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





As of
August 13, 2010, the issuer had 56,023,921 shares of common stock, par value
$.001 per share, issued and outstanding.












CNS
RESPONSE, INC.





INDEX
TO FORM 10-Q





PagePART
      I
                  FINANCIAL
      INFORMATION
                  3Item
      1.
                  Financial
      Statements
                  3Unaudited
      Condensed Consolidated Statements of Operations for the three and nine
      months ended June 30, 2010 and 2009
                  3Condensed
      Consolidated Balance Sheets as of June 30, 2010 (unaudited) and September
      30, 2009
                  4Unaudited
      Condensed Consolidated Statements of Cash Flows for the nine months ended
      June 30, 2010 and 2009
                  5Unaudited
      Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for
      the nine months ended June 30, 2010 and 2009
                  6Notes
      to Unaudited Condensed Consolidated Financial Statements
                  7Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  24Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  40Item
      4.
                  Controls
      and Procedures
                  41PART
      II
                  OTHER
      INFORMATION
                  42Item
      1.
                  Legal
      Proceedings
                  42Item
      1A.
                  Risk
      Factors
                  42Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  43Item
      6.
                  Exhibits
                  44




2




PART
I


FINANCIAL
INFORMATION





Item
1.      Financial
Statements




CNS
RESPONSE, INC.


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





For the three months ended
                                            June 30,
                                          
                                          
                                          For the nine months ended
                                            June 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009REVENUESLaboratory
      Information Services
                                          
                                          $
                                          39,900
                                          
                                          
                                          $
                                          26,700
                                          
                                          
                                          $
                                          96,700
                                          
                                          
                                          $
                                          86,300Clinical
      Services
                                          
                                          
                                          119,300
                                          
                                          
                                          
                                          133,700
                                          
                                          
                                          
                                          384,300
                                          
                                          
                                          
                                          441,900159,200
                                          
                                          
                                          
                                          160,400
                                          
                                          
                                          
                                          481,000
                                          
                                          
                                          
                                          528,200OPERATING
      EXPENSESCost
      of laboratory services revenues
                                          
                                          
                                          32,800
                                          
                                          
                                          
                                          30,700
                                          
                                          
                                          
                                          101,900
                                          
                                          
                                          
                                          99,800Research
      and development
                                          
                                          
                                          302,400
                                          
                                          
                                          
                                          480,800
                                          
                                          
                                          
                                          843,600
                                          
                                          
                                          
                                          1,628,500Sales
      and marketing
                                          
                                          
                                          201,600
                                          
                                          
                                          
                                          161,300
                                          
                                          
                                          
                                          603,800
                                          
                                          
                                          
                                          708,100General
      and administrative
                                          
                                          
                                          1,081,700
                                          
                                          
                                          
                                          867,500
                                          
                                          
                                          
                                          3,639,900
                                          
                                          
                                          
                                          2,360,100Total
      operating expenses
                                          
                                          
                                          1,618,500
                                          
                                          
                                          
                                          1,540,300
                                          
                                          
                                          
                                          5,189,200
                                          
                                          
                                          
                                          4,796,500OPERATING
      LOSS
                                          
                                          
                                          (1,459,300
                                          )
                                          
                                          
                                          (1,379,900
                                          )
                                          
                                          
                                          (4,708,200
                                          )
                                          
                                          
                                          (4,268,300
                                          )OTHER
      INCOME (EXPENSE):Interest
      income (expense), net
                                          
                                          
                                          (40,900
                                          )
                                          
                                          
                                          (126,300
                                          )
                                          
                                          
                                          (42,600
                                          )
                                          
                                          
                                          (129,900
                                          )Financing
      premium (expense), net
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (90,000
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (90,000
                                          )Total
      other income
                                          
                                          
                                          (40,900
                                          )
                                          
                                          
                                          (216,300
                                          )
                                          
                                          
                                          (42,600
                                          )
                                          
                                          
                                          (219,900
                                          )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                                          
                                          
                                          (1,500,200
                                          )
                                          
                                          
                                          (1,596,200
                                          )
                                          
                                          
                                          (4,750,800
                                          )
                                          
                                          
                                          (4,488,200
                                          )Income
      taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,300
                                          
                                          
                                          
                                          2,400
                                          
                                          
                                          
                                          7,200NET
      LOSS
                                          
                                          $
                                          (1,500,200
                                          )
                                          
                                          $
                                          (1,600,500
                                          )
                                          
                                          $
                                          (4,753,200
                                          )
                                          
                                          $
                                          (4,495,400
                                          )NET
      LOSS PER SHARE:Basic
                                          
                                          $
                                          (0.03
                                          )
                                          
                                          $
                                          (0.06
                                          )
                                          
                                          $
                                          (0.09
                                          )
                                          
                                          $
                                          (0.18
                                          )Diluted
                                          
                                          $
                                          (0.03
                                          )
                                          
                                          $
                                          (0.06
                                          )
                                          
                                          $
                                          (0.09
                                          )
                                          
                                          $
                                          (0.18
                                          )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                                          
                                          
                                          56,023,921
                                          
                                          
                                          
                                          25,782,277
                                          
                                          
                                          
                                          51,028,185
                                          
                                          
                                          
                                          25,460,457Diluted
                                          
                                          
                                          56,023,921
                                          
                                          
                                          
                                          25,782,277
                                          
                                          
                                          
                                          51,028,185
                                          
                                          
                                          
                                          25,460,457




The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


3


CNS
RESPONSE, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30,
                                                2010
                                              
                                              
                                              September 30,
                                                2009(unaudited)ASSETSCURRENT
      ASSETSCash
                                              
                                              $
                                              35,100
                                              
                                              
                                              $
                                              988,100Accounts receivable (net
      of  allowance for doubtful accounts of $11,100 (unaudited)
      as of June 30, 2010 and $11,200 as
      of  September 30, 2009)
                                              
                                              
                                              56,300
                                              
                                              
                                              
                                              61,700Prepaid
      and other
                                              
                                              
                                              105,600
                                              
                                              
                                              
                                              89,500Total current assets
                                              
                                              
                                              197,000
                                              
                                              
                                              
                                              1,139,300Furniture
      and Fittings
                                              
                                              
                                              19,200
                                              
                                              
                                              
                                              17,500Other
      Assets
                                              
                                              
                                              18,700
                                              
                                              
                                              
                                              4,100TOTAL
      ASSETS
                                              
                                              $
                                              234,900
                                              
                                              
                                              $
                                              1,160,900LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable  (including amounts due to related parties of $25,600 (unaudited) as
      of  June 30, 2010 and $7,000 as of September 30,
      2009)
                                              
                                              $
                                              1,116,300
                                              
                                              
                                              $
                                              1,285,600Accrued
      liabilities
                                              
                                              
                                              325,700
                                              
                                              
                                              
                                              261,400Deferred compensation
      (including  $92,000 (unaudited) and $81,200 to related parties as
      of  June 30,  2010 and September 30, 2009
      respectively)
                                              
                                              
                                              237,600
                                              
                                              
                                              
                                              220,100Accrued
      patient costs
                                              
                                              
                                              144,000
                                              
                                              
                                              
                                              305,500Accrued
      consulting fees (including $18,000 (unaudited) and $18,000 to related
      parties as of June 30, 2010 and September 30, 2009
      respectively)
                                              
                                              
                                              75,000
                                              
                                              
                                              
                                              72,100Accrued
      Interest
                                              
                                              
                                              1,800
                                              
                                              
                                              
                                              -Secured
      convertible promissory note, net of discount of $187,500
                                              
                                              
                                              62,500
                                              
                                              
                                              
                                              -Current
      portion of long-term debt
                                              
                                              
                                              51,000
                                              
                                              
                                              
                                              95,900Total
      current liabilities
                                              
                                              
                                              2,013,900
                                              
                                              
                                              
                                              2,240,600LONG
      –TERM LIABILITIESNote
      payable to officer
                                              
                                              
                                              -
                                              
                                              
                                              
                                              24,800Capital
      lease
                                              
                                              
                                              4,000
                                              
                                              
                                              
                                              5,600Total
      long term liabilities
                                              
                                              
                                              4,000
                                              
                                              
                                              
                                              30,400TOTAL
      LIABILITIES
                                              
                                              
                                              2,017,900
                                              
                                              
                                              
                                              2,271,000COMMITMENTS
      AND CONTINGENCIESStockholders’
      equity (deficit):Common stock, $0.001 par value;
      authorized, 750,000,000 shares,
      issued  and, 56,023,921 and 41,781,129 shares outstanding as of
      June 30, 2010 and September 30, 2009 respectively
                                              
                                              
                                              56,000
                                              
                                              
                                              
                                              41,800Additional
      paid-in capital
                                              
                                              
                                              28,110,100
                                              
                                              
                                              
                                              24,044,000Accumulated
      deficit
                                              
                                              
                                              (29,949,100
                                              )
                                              
                                              
                                              (25,195,900
                                              )Total
      stockholders’ equity (deficit)
                                              
                                              
                                              (1,783,000
                                              )
                                              
                                              
                                              (1,110,100
                                              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                              
                                              $
                                              234,900
                                              
                                              
                                              $
                                              1,160,900





The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


4





CNS
RESPONSE, INC.


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





For the nine months ended
                                          June 30,2010
                                        
                                        
                                        2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                        
                                        $
                                        (4,753,200
                                        )
                                        
                                        $
                                        (4,495,400
                                        )Adjustments
      to reconcile net loss to
                                          net
      cash used in operating activities:Depreciation
      and Amortization
                                        
                                        
                                        7,200
                                        
                                        
                                        
                                        6,700Amortization
      of note discount
                                        
                                        
                                        37,500
                                        
                                        
                                        
                                        107,500Stock-based
      compensation
                                        
                                        
                                        859,900
                                        
                                        
                                        
                                        644,200Write-off
      of doubtful accounts
                                        
                                        
                                        13,400
                                        
                                        
                                        
                                        22,700Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (8,000
                                        )
                                        
                                        
                                        (27,300
                                        )Prepaids
      and other current assets
                                        
                                        
                                        (16,100
                                        )
                                        
                                        
                                        (12,000
                                        )Accounts
      payable
                                        
                                        
                                        (169,300
                                        )
                                        
                                        
                                        437,200Accrued
      liabilities
                                        
                                        
                                        69,000
                                        
                                        
                                        
                                        112,700Deferred
      compensation
                                        
                                        
                                        17,500
                                        
                                        
                                        
                                        (48,800
                                        )Accrued
      patient costs
                                        
                                        
                                        (161,500
                                        )
                                        
                                        
                                        126,700Security
      deposits on leases
                                        
                                        
                                        (14,600
                                        )
                                        
                                        
                                        -Net
      cash used in operating activities
                                        
                                        
                                        (4,118,200
                                        )
                                        
                                        
                                        (3,125,800
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of office furniture
                                        
                                        
                                        (8,900
                                        )
                                        
                                        
                                        (2,000
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (8,900
                                        )
                                        
                                        
                                        (2,000
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      from Secured Convertible notes
                                        
                                        
                                        250,000
                                        
                                        
                                        
                                        1,700,000Repayment
      of note
                                        
                                        
                                        (69,800
                                        )
                                        
                                        
                                        (114,400
                                        )Repayment
      of lease
                                        
                                        
                                        (1,500
                                        )
                                        
                                        
                                        (1,400
                                        )Funds
      pending exercise of options
                                        
                                        
                                        -
                                        
                                        
                                        
                                        280,500Cash
      from exercise of warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14,400Proceeds
      from sale of common stock, net of offering costs
                                        
                                        
                                        2,995,400
                                        
                                        
                                        
                                        -Net
      cash provided by financing activities
                                        
                                        
                                        3,174,100
                                        
                                        
                                        
                                        1,879,100Net
      decrease in cash
                                        
                                        
                                        (953,000
                                        )
                                        
                                        
                                        (1,248,700
                                        )Cash,
      beginning of period
                                        
                                        
                                        988,100
                                        
                                        
                                        
                                        1,997,000Cash,
      end of period
                                        
                                        $
                                        35,100
                                        
                                        
                                        $
                                        748,300SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash  paid
      during the period for:Interest
                                        
                                        $
                                        8,200
                                        
                                        
                                        $
                                        61,500Income
      taxes
                                        
                                        $
                                        2,400
                                        
                                        
                                        $
                                        7,200





The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


5




CNS
RESPONSE, INC.


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





For
      the nine months ended June 30, 2010
                        
                        Common
      Stock
                        
                        
                        Additional
                          Paid-in
                        
                        
                        AccumulatedShares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Deficit
                        
                        
                        TotalBALANCE
      - September 30, 2009
                        
                        
                        41,781,129
                        
                        
                        $
                        41,800
                        
                        
                        $
                        24,044,000
                        
                        
                        $
                        (25,195,900
                        )
                        
                        $
                        (1,110,100
                        )Stock-
      based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        859,900
                        
                        
                        
                        -
                        
                        
                        
                        859,900Issuance
      of stock in connection with the Maxim PIPE net of offering costs of
      $540,600
                        
                        
                        11,786,666
                        
                        
                        
                        11,800
                        
                        
                        
                        2,983,600
                        
                        
                        
                        -
                        
                        
                        
                        2,995,400Warrants
      issued in association with the Maxim PIPE
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,615,100
                        
                        
                        
                        -
                        
                        
                        
                        7,615,100Offering
      cost pertaining to the Maxim PIPE
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,615,100
                        )
                        
                        
                        -
                        
                        
                        
                        (7,615,100
                        )Value
      of warrants surrendered for cashless exercise
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (415,800
                        )
                        
                        
                        -
                        
                        
                        
                        (415,800
                        )Stock
      issued for cashless exercise
                        
                        
                        2,456,126
                        
                        
                        
                        2,400
                        
                        
                        
                        413,400
                        
                        
                        
                        -
                        
                        
                        
                        415,800Beneficial
      conversion feature
                          -
      Secured convertible promissory note
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        225,000
                        
                        
                        
                        -
                        
                        
                        
                        225,000Net
      loss for the nine months ended June 30, 2010
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,753,200
                        )
                        
                        
                        (4,753,200
                        )Balance
      at June 30, 2010
                        
                        
                        56,023,921
                        
                        
                        $
                        56,000
                        
                        
                        $
                        28,110,100
                        
                        
                        $
                        (29,949,100
                        )
                        
                        $
                        (1,783,000
                        )





For the
      nine months ended June 30, 2009
              
              Common
      Stock
              
              
              Additional
                Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBALANCE
      - September 30, 2008
              
              
              25,299,547
              
              
              $
              25,300
              
              
              $
              17,701,300
              
              
              $
              (16,673,700
              )
              
              $
              1,052,900Exercise
      of $0.01 warrants in June, 2009
              
              
              1,448,189
              
              
              
              1,400
              
              
              
              13,000
              
              
              
              -
              
              
              
              14,400Issuance
      of 3,433,333 warrants associated with bridge financings valued
      at
              
              
              -
              
              
              
              -
              
              
              
              1,058,000
              
              
              
              -
              
              
              
              1,058,000Stock-
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              644,200
              
              
              
              -
              
              
              
              644,200Net
      loss for the nine months ended June 30, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,495,400
              )
              
              
              (4,495,400
              )Balance
      at June 30, 2009
              
              
              26,747,736
              
              
              $
              26,700
              
              
              $
              19,416,500
              
              
              $
              (21,169,100
              )
              
              $
              (1,725,900
              )




The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


6





CNS
RESPONSE, INC.


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2010





1.
            NATURE OF OPERATIONS AND BASIS
      OF PRESENTATION




Organization
and Nature of Operations




CNS
Response, Inc. (the “Company”) was incorporated as Strativation, Inc. in
Delaware on July 10, 1984.  In connection with a merger on March 7,
2007 with CNS Response, Inc., a California corporation, the Company changed its
name to its current name and commenced its current operations.  The
Company utilizes a patented system that guides psychiatrists and other
physicians to determine a personalized regimen for patients with mental,
behavioral and/or addictive disorders.  The Company also intends to
identify, develop and commercialize new indications of approved drugs and drug
candidates for this patient population.




In
addition, as a result of its acquisition of Neuro-Therapy Clinic, Inc. (“NTC”)
on January 11, 2008, the Company provides behavioral health care
services.  NTC is a center for highly-advanced testing and treatment
of neuropsychiatric problems, including learning, attentional and behavioral
challenges, mild head injuries, as well as depression, anxiety, bipolar and all
other common psychiatric disorders. Through this acquisition, the Company
expects to advance neurophysiology data collection, beta-test planned
technological advances in rEEG, advance physician training in rEEG and
investigate practice development strategies associated with rEEG.




Going
Concern Uncertainty




The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America which contemplate continuation of the company as a
going concern.  The Company has a limited operating history and its
operations are subject to certain problems, expenses, difficulties, delays,
complications, risks and uncertainties frequently encountered in the operation
of a new business. These risks include the failure to develop or supply
technology or services to meet the demands of the marketplace, the ability to
obtain adequate financing on a timely basis, the failure to attract and retain
qualified personnel, competition within the industry, government regulation and
the general strength of regional and national economies.




To date,
the Company has financed its cash requirements primarily from debt and equity
financings.  It will be necessary for the Company to raise additional
funds.  The Company’s liquidity and capital requirements depend on
several factors, including the rate of market acceptance of its services, the
future profitability of the Company, the rate of growth of the Company’s
business and other factors described elsewhere in this Quarterly
Report.  The Company is currently exploring additional sources of
capital but there can be no assurances that any financing arrangement will be
available in amounts and on terms acceptable to the Company.




Basis
of Presentation




The
unaudited condensed consolidated financial statements of CNS Response, Inc.
(“CNS,” “we,” “us,” “our” or the “Company”) have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission and include all
the accounts of CNS and its wholly owned subsidiaries CNS California and
NTC.  Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to such
rules and regulations. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair statement of our financial position as of June 30, 2010 and our
operating results, cash flows, and changes in stockholders’ equity for the
interim periods presented. The September 30, 2009 balance sheet was derived from
our audited consolidated financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These unaudited condensed consolidated financial statements
and the related notes should be read in conjunction with our consolidated
financial statements and notes for the year ended September 30, 2009 which are
included in our current report on Form 10-K, filed with the Securities and
Exchange Commission on December 30, 2009.


7




The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and revenues and expenses in the
financial statements. Examples of estimates subject to possible revision based
upon the outcome of future events include, among others, recoverability of
long-lived assets and goodwill, stock-based compensation, the allowance for
doubtful accounts, the valuation of equity instruments, use and other taxes.
Actual results could differ from those estimates.




The
results of operations for the nine months ended June 30, 2010 are not
necessarily indicative of the results that may be expected for future periods or
for the year ending September 30, 2010.




Reclassifications





Certain
amounts previously reported have been reclassified to conform to the current
period presentation. The reclassifications were made to change the income
statement presentation to provide the users of the financial statements
additional information related to the operating results of the Company. These
reclassifications include reclassifying the Company’s patent costs to
General and Administrative costs which were previously included in Research and
Development costs.  The reclassifications had no effect on
consolidated net income or consolidated assets and liabilities.





Fair
Value of Financial Instruments




ASC
825-10 (formerly SFAS 107, “Disclosures about Fair Value of Financial
Instruments”) defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable and accrued liabilities, to approximate their fair values because of the
short period of time between the origination of such instruments and their
expected realization.





The
Company also analyzes all financial instruments with features of both
liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”), ASC 815-10 (formerly SFAS No 133, “Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815-40 (formerly EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”).





The
Company adopted ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) on
January 1, 2008. ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as
follow:





·
            Level 1   inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active
  markets.





·
            Level 2   inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      assets or liability, either directly or indirectly, for substantially the
      full term of the financial
instruments.





·
            Level 3   inputs
      to the valuation methodology are unobservable and significant to the fair
      value.





During
the six months ended June 30, 2010, the Company issued a secured promissory
convertible note of $250,000. As of June 30, 2010, the carrying value of this
convertible note was $62,500, net of discount of $187,500. The Company used
level 3 inputs for its valuation methodology and the fair value was determined
to be approximately $257,000 using cash flows discounted at relevant market
interest rates in effect at the period close since there is no observable market
price.


8





As of
June 30, 2010 the Company did not identify any other assets or liabilities that
are required to be presented on the balance sheet at fair value in accordance
with ASC 820-10.






Recent
Accounting Pronouncements





In April
2009, the FASB issued ASC 825-10 (formerly FASB Staff Position
No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments) (“ASC 825”) , which requires that the fair value
disclosures required for all financial instruments within the scope of SFAS 107,
"Disclosures about Fair Value of Financial Instruments", be included in interim
financial statements. This FSP also requires entities to disclose the method and
significant assumptions used to estimate the fair value of financial instruments
on an interim and annual basis and to highlight any changes from prior periods.
FSP 107-1 was effective for interim periods ending after June 15, 2009, with
early adoption permitted. The adoption of FSP 107-1 did not have a material
impact on the Company’s unaudited consolidated financial
statements.





In May
2009, the FASB issued ASC 855-10 (formerly Statement No. 165, Subsequent
Events) (“ASC 855”). ASC 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In accordance
with this Statement, entities should apply the requirements to interim or annual
financial periods ending after June 15, 2009.  The adoption of this
statement did not have a material impact on the Company’s unaudited
consolidated financial statements.





In June
2009, the FASB approved its Accounting Standards Codification, or Codification,
as the single source of authoritative United States accounting and reporting
standards applicable for all non-governmental entities, with the exception of
the SEC and its staff. The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending
after September 15, 2009. Therefore, starting from fiscal year end 2009, all
references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it did not have any impact on the Company’s unaudited
consolidated financial statements.





As a
result of the Company’s implementation of the Codification during the year ended
September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current interim financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impact of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.





In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The adoption of ASU
2009-05 did not have a material impact on the Company’s unaudited consolidated
financial statements.





In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), “Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures About Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10
that requires new disclosures and provides clarification of existing
disclosures. ASU 2010-06 also includes conforming amendments to the guidance on
employers’ disclosures about postretirement benefit plans assets (Subtopic
715-20). ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is evaluating the impact of the adoption of ASU 2010-06 on
its unaudited consolidated financial statements.




In
February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU
2010-09”) as amendments to certain recognition and disclosure requirements. The
amendments remove the requirement for an SEC filer to disclose a date in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. Those amendments remove potential
conflicts with the SEC’s literature. All of the amendments in ASU 2010-09 were
effective upon issuance for interim and annual periods. The adoption of ASU
2010-09 did not have a material impact on the Company’s unaudited
consolidated financial statements.


9




In April
2010, the FASB issued Accounting Standards Update 2010-12 (“ASU 2010-12”),
“Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health
Care Reform Acts”.  After consultation with the FASB, the SEC stated
that it “would not object to a registrant incorporating the effects of the
Health Care and Education Reconciliation Act of 2010 when accounting for the
Patient Protection and Affordable Care Act.” The Company does not expect the
provisions of ASU 2010-12 to have a material impact on the Company’s unaudited
consolidated financial statements.




In April
2010, the FASB issued Accounting Standards Update 2010-13 (“ASU 2010-13”),
Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task
Force.  The amendments in this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2010.  Earlier application is permitted.  The Company
does not expect the provisions of ASU 2010-13 to have a material impact on the
Company’s unaudited consolidated financial statements.




2.
            CONVERTIBLE
      DEBT AND EQUITY FINANCING




Between
March 30 and June 12, 2009 the Company entered into three rounds of bridge
financings in the form of secured convertible promissory notes.  These
three rounds are referred to as:





(a)
            the March 30, 2009 SAIL/Brandt
      Notes


(b)
            the May 14, 2009 SAIL
      Note


(c)
            the June 12, 2009 Pappajohn
      Note





All these
notes were converted to equity as a result of a private placement transaction
that closed on August 26, 2009, which is fully described in the section
below.





The
Private Placement Transactions





Completion
of First Closing of Private Placement Transaction





On
August 26, 2009, the Company received gross proceeds of approximately $2,043,000
in a private placement transaction (the “Private Placement”) with six
investors.  Pursuant to Subscription Agreements entered into with the
investors, the Company sold approximately 38 Investment Units at $54,000 per
Investment Unit.  Each “Investment Unit” consists of 180,000 shares of
the Company’s common stock and a five year non-callable warrant to purchase
90,000 shares of the Company’s common stock at an exercise price of $0.30 per
share.  After commissions and expenses, the Company received net
proceeds of approximately $1,792,300 in the Private Placement.  These
funds were used to repay outstanding liabilities, fund the Company’s recent
clinical trial and for general working capital purposes.





A
FINRA member firm, the Maxim Group LLC (“Maxim Group”), acted as lead placement
agent in connection with the Private Placement.  For its services in
connection with the first closing of the offering, Maxim Group received (i) a
cash fee of $ 55,980, (ii) a cash expense allowance of $40,860, and (iii) a five
year non-callable warrant to purchase 274,867 shares of the Company’s common
stock at an exercise price of $0.33 per share. By
agreement dated July 23, 2010, the Company and Maxim Group agreed, among other
things, to amend the five year exercise period to begin on the date that the
registration statement covering the resale of the shares of common stock
issuable upon exercise of the placement agent warrants (among other securities)
is declared effective.




A
secondary placement agent who participated in the first closing of the private
placement received cash fees of $29,200 and five year non-callable warrants to
purchase 97,200 shares of the Company’s common stock at an exercise price
of $ 0.33 per share. The
Company has agreed to amend the five year exercise period applicable to these
warrants to begin on the effective date of the registration statement, as
described above.  10





Pursuant
to a Registration Rights agreement entered into with each investor, the Company
agreed to file a registration statement covering the resale of the common stock
and the common stock underlying the warrants sold in the Private Placement, as
well as the common stock underlying the warrants issued to Maxim Group by the
later of October 26, 2009 or the 20th calendar day after the termination of the
offering.  The Registration Rights agreement was subsequently amended
to permit the filing of the registration statement no later that 10
business days following the Company’s filing of its Annual Report on Form 10-K
for its September 30, 2009 year end, or the 20th calendar day after
termination of the private offering.  The Registration Statement was
filed with the Securities and Exchange Commission (SEC) on February 1,
2010.  Amendment No. 1 to the Registration Statement was filed with
the SEC on July 6, 2010.





In
addition, the Company agreed to use its best efforts to have the registration
statement declared effective no later than 180 days following the final closing
of the offering, or July 3, 2010, and maintain such effectiveness until the
earlier of the second anniversary of the date of such effectiveness or the date
that all of the securities covered by the registration statement may be sold
without restriction.  The registration statement has not yet been
declared effective.





Events
Relating to Private Placement Transaction




(a)




On March
30, 2009, the Company entered into two Senior Secured Convertible Promissory
Notes, each in the principal amount of $250,000 (each a “March Note” and,
collectively, the “March Notes”), with Brandt Ventures, GP (“Brandt”) and SAIL
Venture Partners, LP (“SAIL”). Leonard Brandt, a former member of the Company’s
board of directors, is the general partner of Brandt and David B. Jones, a
current member of the Company’s board of directors, is a managing member of SAIL
Venture Partners, LLC, which is the general partner of SAIL. The terms of the
March Notes provided that in the event the Company consummates an equity
financing transaction of at least $1,500,000 (excluding any and all other debt
that is converted), then the principal and all accrued, but unpaid interest
outstanding under the notes shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 90% of the per share
price paid by the investors in such financing.  In accordance with the
terms of the March Notes, at the closing of the Private Placement, the Company
issued to each of Brandt and SAIL 956,164 shares of common stock and a five year
non-callable warrant to purchase 478,082 shares of its common stock at an
exercise price of $0.30 per share.





(b)         Conversion of the May 14, 2009 SAIL
Note





On
May 14, 2009, the Company entered into a Bridge Note and Warrant Purchase
Agreement (the “SAIL Purchase Agreement”) with SAIL. Pursuant to the SAIL
Purchase Agreement, on May 14, 2009 SAIL purchased a Secured Promissory Note in
the principal amount of $200,000 from the Company (the “May SAIL
Note”).  In order to induce SAIL to purchase the note, the Company
issued to SAIL a warrant to purchase up to 100,000 shares of the Company’s
common stock at a purchase price equal to $0.25 per share.  The
warrant expires on May 31, 2016.





The terms
of the May SAIL Note provided that in the event the Company consummates an
equity financing transaction of at least $1,500,000 (excluding any and all other
debt that is converted), then the principal and all accrued, but unpaid interest
outstanding under the note shall be automatically converted into the securities
issued in the equity financing by dividing such amount by 85% of the per share
price paid by the investors in such financing.  In accordance with the
terms of the May SAIL Note, at the first closing of the Private Placement on
August 26, 2009, the Company issued to SAIL 802,192 shares of its common stock
and a five year non-callable warrant to purchase 401,096 shares of its common
stock at an exercise price of $0.30 per share.





(c)         Conversion of the June 12, 2009
Pappajohn Note





On June
12, 2009, John Pappajohn entered into a Bridge Note and Warrant Purchase
Agreement (the “Pappajohn Purchase Agreement”) with the
Company.  Pursuant to the Pappajohn Purchase Agreement, Mr. Pappajohn
purchased a Secured Convertible Promissory Note in the principal amount of
$1,000,000 from the Company.  In order to induce Mr. Pappajohn to
purchase the note, the Company issued to Mr. Pappajohn a warrant to
purchase up to 3,333,333 shares of the Company’s common stock at a purchase
price equal to $0.30 per share.  The warrant expires on June 30,
2016.


11




The note
issued pursuant to the Pappajohn Purchase Agreement provided that the principal
amount of $1,000,000 together with a single payment of $90,000 (the “Premium
Payment”) would be due and payable, unless sooner converted into shares of the
Company’s common stock (as described below), upon the earlier to occur of: (i) a
declaration by Mr. Pappajohn on or after June 30, 2010 or (ii) an Event of
Default (as defined in the note).  The note was secured by a lien on
substantially all of the assets (including all intellectual property) of the
Company.  In the event of a liquidation, dissolution or winding
up of the Company, unless Mr. Pappajohn informed the Company otherwise, the
Company was required to pay Mr. Pappajohn an amount equal to the product of 250%
multiplied by the then outstanding principal amount of the note and the Premium
Payment.




The
Pappajohn Purchase Agreement also provided that in the event the Company
consummated an equity financing transaction of at least $1,500,000 (excluding
any and all other debt that is converted), the then outstanding principal amount
of the note (but excluding the Premium Payment, which would be repaid in cash at
the time of such equity financing) would be automatically converted into the
securities issued in the equity financing by dividing such amount by the per
share price paid by the investors in such financing.  The note also
provided that the securities issued upon conversion of the note would be
otherwise issued on the same terms as such shares are issued to the lead
investor that purchases shares of the Company in the qualified
financing.




On August
26, 2009, at the closing of the Private Placement, the Company paid the Premium
Payment to Mr. Pappajohn, and the outstanding principal amount of Mr.
Pappajohn’s note ($1,000,000 as of August 26, 2009) converted into 3,333,334
shares of the Company’s common stock. In addition, in accordance with the terms
of his note, Mr. Pappajohn was issued a five year non-callable warrant to
purchase 1,666,667 shares of the Company’s common stock at an exercise price of
$0.30 per share.





Upon the
abovementioned conversions, the Company evaluated the terms and calculated the
fair value of the common stock (by using the closing market price on the
respective original issuance dates of the convertible notes) and warrants
(through the use of the Black-Scholes Model) issued upon the conversions and
determined that the notes were converted with a beneficial conversion feature
amounting to $642,000. As a result, for the year ended September 30, 2009, the
Company recorded $642,000 as interest expense.





Completion
of Second, Third and Fourth Closings of Private Placement
Transaction




On
December 24 and 31, 2009 and January 4, 2010, the Company completed a second,
third and fourth and final closing of its private placement (the first closing
having occurred on August 26, 2009), resulting in additional gross proceeds to
the Company of $2,996,000, $432,000 and $108,000 respectively from accredited
investors.





Pursuant
to Subscription Agreements entered into with the investors, the Company sold
approximately 65 Investment Units in the three closings at $54,000 per
Investment Unit. Each “Investment Unit” consists of 180,000 shares of the
Company’s common stock and a five year non-callable warrant to purchase 90,000
shares of the Company’s common stock at an exercise price of $0.30 per
share.





After
commissions and expenses, the Company received net proceeds of approximately
$2,650,400 million at the second closing, $380,200 at the third and $95,000 at
the fourth and final closing.  The Company intends to use the proceeds
from these closings of its private placement for general corporate purposes,
including clinical trial expenses, research and development expenses, and
general and administrative expenses, including the payment of accrued legal
expenses incurred in connection with the Company’s litigation with Mr.
Brandt.





A FINRA
member firm, the Maxim Group acted as lead placement agent in connection with
the second, third and fourth closings of the private placement.  For
its services in connection with the second closing, the Maxim Group received (i)
a cash fee of $195,200, (ii) a cash expense allowance of $59,920, and (iii) a
five year non-callable warrant to purchase 672,267 shares of the Company’s
common stock at an exercise price of $ 0.33 per share. For the third
closing the Maxim Group received (i) a cash fee of $4,300, (ii) a cash expense
allowance of $8,600, and (iii) a five year non-callable warrant to
purchase 14,400 shares of the Company’s common stock at an exercise price
of $ 0.33 per share. For the fourth closing the Maxim Group received (i) a cash
fee of $1,100, (ii) a cash expense allowance of $2,100, and (iii) a five year
non-callable warrant to purchase 3,600 shares of the Company’s common stock at
an exercise price of $ 0.33 per share. By
agreement dated July 23, 2010, the Company and Maxim Group agreed, among other
things, to amend the five year exercise period applicable to the placement agent
warrants in the second, third and fourth closings of the private placement to
begin on the date that the registration statement covering the resale of the
shares of common stock issuable upon exercise of the placement agent warrants
(among other securities) is declared effective.  12




Secondary
placement agents who participated in the second closing of the private placement
received cash fees of $75,200 and five year non-callable warrants to
purchase 250,800 shares of the Company’s common stock at an exercise price
of $ 0.33 per share.  For the third closing, the secondary placement
agents received cash fees of $38,900 and five year non-callable warrants to
purchase 129,600 shares of the Company’s common stock at an exercise price
of $ 0.33 per share.  For the fourth closing, the secondary placement
agents received cash fees of $9,700 and five year non-callable warrants to
purchase 32,400 shares of the Company’s common stock at an exercise price
of $ 0.33 per share. The
Company has agreed to amend the five year exercise period applicable to these
warrants to begin on the effective date of the registration statement, as
described above.


In
connection with the second, third and fourth closing of the Company’s private
placement, each investor who participated in the financing became party to the
abovementioned Registration Rights agreement, which was filed with the
Securities and Exchange Commission on February 1, 2010, and received the same
rights and benefits as the investors in the first closing of the Company’s
Private Placement on August 26, 2009.





2010
Promissory Note Transactions





On June
3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with John
Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”) in
the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010.  On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the
second Bridge Note.  In connection with his purchase of the second
Bridge Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares
of our common stock.  The exercise price of the warrant (subject to
customary anti-dilution adjustments) is $0.50 per share.




Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into
shares of our common stock at a conversion price of $0.50.  The
conversion price is subject to customary anti-dilution adjustments,
but will never be less than $0.30.  We have also agreed to enter
into a registration rights agreement covering the securities issuable upon
exercise of the warrant and conversion of the Bridge Notes.  The beneficial
conversion feature of the June 3, 2010 Bridge Note was valued at $225,000 which
is amortized over the six-month period of the note. The Bridge Note is
shown as a secured convertible promissory note net of the unamortized discount
of $187,500.





Each
Bridge Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount at the earliest of (i) the
maturity date; (ii) prepayment of the Bridge Note at the option of the Company
(iii) closing of a financing in which the aggregate proceeds to the Company are
not less than $3,000,000 or (iv) the occurrence of an Event of Default (as
defined in the Bridge Note).  The Purchase Agreement and each Bridge
Note grants the investor a senior security interest in and to all of the
Company’s existing and future right, title and interest in its tangible and
intangible property.




3.
            STOCKHOLDERS’
      EQUITY




Common
and Preferred Stock




As of
June 30, 2010 the Company is authorized to issue 750,000,000 shares of common
stock.


13






As of
June 30, 2010, CNS California is authorized to issue 100,000,000 shares of two
classes of stock, 80,000,000 of which was designated as common shares and
20,000,000 of which was designated as preferred shares.




As of
June 30, 2010, Colorado CNS Response, Inc. is authorized to issue 1,000,000
shares of common stock.




As of
June 30, 2010, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado
CNS Response, Inc., is authorized to issue ten thousand (10,000) shares of
common stock, no par value per share.




Stock-Option
Plan




On August
3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan
(the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form
of restricted shares, stock options (which may constitute incentive stock
options (ISO) or non-statutory stock options (NSO), stock appreciation rights
and stock unit grants to eligible employees, directors and consultants and is
administered by the board of directors. A total of 10 million shares of stock
were initially reserved for issuance under the 2006
Plan.




The 2006
Plan initially provided that in any calendar year, no eligible employee or
director shall be granted an award to purchase more than 3 million shares of
stock. The option price for each share of stock subject to an option shall be
(i) no less than the fair market value of a share of stock on the date the
option is granted, if the option is an ISO, or (ii) no less than 85% of the fair
market value of the stock on the date the option is granted, if the option is a
NSO; provided, however, if the option is an ISO granted to an eligible employee
who is a 10% shareholder, the option price for each share of stock subject to
such ISO shall be no less than 110% of the fair market value of a share of stock
on the date such ISO is granted. Stock options have a maximum term of ten years
from the date of grant, except for ISOs granted to an eligible employee who is a
10% shareholder, in which case the maximum term is five years from the date of
grant. ISOs may be granted only to eligible employees. The Company has adopted
ASC 718-20 (formerly, SFAS No. 123R-revised 2004, “Share-Based Payment”), and
related interpretations. Under ASC 718-20, share-based compensation cost is
measured at the grant date based on the calculated fair value of the award. The
Company estimates the fair value of each option on the grant date using the
Black-Scholes model.




On March 3, 2010, the Board of
Directors approved an amendment to the 2006 Plan which increased the number of
shares reserved for issuance under the 2006 Plan from 10 million to 20 million
shares of stock.  The amendment also increased the limit on shares
issued within a calendar year to any eligible employee or director from 3
million to 4 million shares of stock.  The amendment was approved by
shareholders at the annual meeting held on April 27, 2010.




On March 3, 2010, the Board of
Directors also approved the grant of 9,150,000 options to staff members,
directors, advisors and consultants, of which 8,650,000 were in fact
granted.  For staff members the options will vest equally over a 48
month period while for directors, advisors and consultants the options will vest
equally over a 36 month period.  The effective grant date for
accredited investors was March 3, 2010 and the exercise price of $0.55 per share
was based on the quoted closing share price of the Company’s stock at the time
of grant.  For non-accredited investors the grant date will be
determined after obtaining a permit from the State of California allowing the
granting of options to non-accredited investors.  This permit was
granted by the State of California in July 2010.





As of June 30, 2010, 2,124,740 options
were exercised and there were 14,870,973 options and 183,937 restricted shares
outstanding under the amended 2006 Plan leaving 2,820,350 shares available for
issuance of future awards.





Stock-based
compensation expense is recognized over the employees’ or service provider’s
requisite service period, generally the vesting period of the award. Stock-based
compensation expense included in the accompanying statements of operations for
the periods ended June 30, 2010 and 2009 is as follows:


14




For the three months ended
                      June 30,2010
                    
                    
                    2009Cost
      of laboratory services revenues
                    
                    $
                    6,600
                    
                    
                    $
                    4,000Research
      and development
                    
                    
                    107,000
                    
                    
                    
                    65,200Sales
      and marketing
                    
                    
                    58,700
                    
                    
                    
                    27,000General
      and administrative
                    
                    
                    267,200
                    
                    
                    
                    106,500Total
                    
                    $
                    439,500
                    
                    
                    $
                    202,700








For the nine months ended
                          June 30,2010
                        
                        
                        2009Cost
      of laboratory services revenues
                        
                        $
                        15,500
                        
                        
                        $
                        12,100Research
      and development
                        
                        
                        250,700
                        
                        
                        
                        195,600Sales
      and marketing
                        
                        
                        123,900
                        
                        
                        
                        107,000General
      and administrative
                        
                        
                        469,800
                        
                        
                        
                        329,500Total
                        
                        $
                        859,900
                        
                        
                        $
                        644,200





Total
unrecognized compensation expense as of June 30, 2010 amounted to
$4,640,200





A summary
of stock option activity is as follows:





Number of
                  Shares
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at September 30, 2009
                
                
                6,662,014
                
                
                $
                0.76Granted
                
                
                -
                
                
                $
                -Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                (191,041
                )
                
                $
                1.14Outstanding
      at December 31, 2009
                
                
                6,470,973
                
                
                $
                0.74Granted
                
                
                8,650,000
                
                
                $
                0.55Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                (250,000
                )
                
                
                0.55Outstanding
      at March 31, 2010
                
                
                14,870,973
                
                
                $
                0.63Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2010
                
                
                14,870,973
                
                
                $
                0.63Weighted
      average fair value of options granted during:Three
      months ended June 30, 2010
                
                
                
                
                
                
                -Nine
      months ended June 30, 2010
                
                
                
                
                
                $
                0.55




15




The
following is a summary of the status of options outstanding at June 30,
2010:




Exercise
      Price
                              
                              Number
      of Shares
                              
                              Weighted
      Average
                                Contractual
      Life
                              
                              Weighted
      Average
                                Exercise
      Price$0.12
                              
                              
                              859,270
                              
                              10
      years
                              
                              $
                              0.12$0.132
                              
                              
                              987,805
                              
                              7
      years
                              
                              $
                              0.132$0.30
                              
                              
                              135,700
                              
                              10
      years
                              
                              $
                              0.30$0.59
                              
                              
                              28,588
                              
                              10
      years
                              
                              $
                              0.59$0.80
                              
                              
                              140,000
                              
                              10
      years
                              
                              $
                              0.80$0.89
                              
                              
                              968,875
                              
                              10
      years
                              
                              $
                              0.89$0.96
                              
                              
                              496,746
                              
                              10
      years
                              
                              $
                              0.96$1.09
                              
                              
                              2,513,549
                              
                              10
      years
                              
                              $
                              1.09$1.20
                              
                              
                              243,253
                              
                              5
      years
                              
                              $
                              1.20$0.51
                              
                              
                              41,187
                              
                              10
      years
                              
                              $
                              0.51$0.40
                              
                              
                              56,000
                              
                              10
      years
                              
                              $
                              0.40$0.55
                              
                              
                              8,400,000
                              
                              10
      years
                              
                              $
                              0.55Total
                              
                              
                              14,870,973
                              
                              
                              
                              $
                              0.63








Warrants
to Purchase Common Stock




At
September 30, 2008, there were warrants outstanding to purchase 6,899,353 shares
of the Company’s common stock at exercise prices ranging from $0.01 to $1.812
with a weighted average exercise price of $1.04.  The warrants expire
at various times through 2017.




During
the year ended September 30, 2009, 1,498,986 warrants with an exercise price of
$0.01 were exercised.




During
the year ended September 30, 2009, the following additional 10,137,118 warrants
were granted as follows:





Warrants
      to Purchase
                              
                              Exercise
                                Price
                              
                              Issued
      in Connection With:100,000
      shares
                              
                              $
                              0.25
                              
                              A
      $200,000 bridge note with SAIL on May 14, 2009 as described in Note
      23,333,333
      shares
                              
                              $
                              0.30
                              
                              A
      $1,000,000 bridge note with Pappajohn on June 12, 2009 as described
      in Note 23,404,991
      shares
                              
                              $
                              0.30
                              
                              Associated
      with the August 26, 2009 private placement transaction of 6,810,002 shares
      at $0.30 with 50% warrant coverage as described in Note
  23,023,927
      shares
                              
                              $
                              0.30
                              
                              Associated
      with the automatic conversion of$1,700,000
      of convertible promissory notes and$20,900
      accrued interest upon completion an equityfinancing
      in excess of $1,500,000 as described  in Note
  2274,867
      shares
                              
                              $
                              0.33
                              
                              The
      placement agent for private placement as described in Note
    2




16




At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares.  During the nine months ended June 30, 2010, a further
7,093,601 warrants were granted and 3,333,333 warrants were exercised as
follows:





5,893,334
      shares
                    
                    $
                    0.30
                    
                    Associated
      with the second, third and fourth closing of the private placement
      transaction of 11,786,667 shares at $0.30 with 50% warrant coverage as
      described in Note 21,200,267
      shares
                    
                    $
                    0.33
                    
                    Associated
      with warrants for the lead and secondary placement agents for private
      placement as described in Note 2(3,333,333)
      shares
                    
                    $
                    0.30
                    
                    These
      warrants were surrendered in a net issue exercise and 2,456,126 shares
      were issued in lieu of
cash.




At June
30, 2010, there were warrants outstanding to purchase 19,297,753 shares of the
Company’s common stock at exercise prices ranging from $0.01 to $1.812 with a
weighted average exercise price of $0.59.  The warrants expire at
various times through 2017.




4.  RELATED
PARTY TRANSACTIONS





As at
June 30, 2010 accounts payable included the following: $18,000 of accrued fees
due to a director in accordance with a consulting agreement.  During
the nine months ended June 30, 2010 a payment of $24,000 was made to a director
for consulting services per an agreement and $36,000 was paid, with board
approval, to a family member of the Company’s Chief Executive Officer, who
provided data discovery consulting services in support of the Company’s
litigation with Mr. Brandt.





On June
3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with John
Pappajohn to purchase two secured promissory notes in the aggregate principal
amount of $500,000. For further detail, please refer to the section 2010 Promissory Note Transactionsin Note 2 above.





5. LONG-TERM DEBT





During
the year ended September 30, 2008 the Company issued a note payable to an
officer in connection with the acquisition of NTC.  The note is
non-interest bearing and the Company determined its fair value by imputing
interest at an annual rate of 8%.  As of June 30, 2010 and September
30, 2009 the note has an outstanding principal balance in the amount of $48,900
and $118,600 respectively.  The entire balance is current as of June
30, 2010.





6. REPORTABLE
SEGMENTS





The
Company operates in two business segments: Laboratory Information Services and
Clinic.  Laboratory Information Services provide reports (“rEEG
Reports”) that assist physicians with treatment strategies for patients with
behavioral (psychiatric and/or addictive) disorders based on the patient’s own
physiology.  Clinic operates NTC, a full service psychiatric
practice.


17





The
following tables show operating results for the Company’s reportable segments,
along with reconciliation from segment gross profit to (loss) from operations,
the most directly comparable measure in accordance with generally accepted
accounting principles in the United States, or GAAP:




Three
      Months ended June 30, 2010Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  
                  45,300
                  
                  
                  
                  119,300
                  
                  
                  
                  (5,400
                  )
                  
                  
                  159,200Operating
      expenses:Cost
      of revenues
                  
                  
                  32,800
                  
                  
                  
                  5,400
                  
                  
                  
                  (5,400
                  )
                  
                  
                  32,800Research
      and development
                  
                  
                  302,400
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  302,400Sales
      and marketing
                  
                  
                  187,500
                  
                  
                  
                  14,100
                  
                  
                  
                  -
                  
                  
                  
                  201,600General
      and administrative
                  
                  
                  899,600
                  
                  
                  
                  182,100
                  
                  
                  
                  -
                  
                  
                  
                  1,081,700Total
      operating expenses
                  
                  
                  1,422,300
                  
                  
                  
                  201,600
                  
                  
                  
                  (5,400
                  )
                  
                  
                  1,618,500Income
      (Loss) from operations
                  
                  
                  (1,377,000
                  )
                  
                  
                  (82,300
                  )
                  
                  
                  -
                  
                  
                  
                  (1,459,300
                  )




Three
      Months ended June 30, 2009Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  32,000
                  
                  
                  $
                  133,700
                  
                  
                  $
                  (5,300
                  )
                  
                  $
                  160,400Operating
      expenses:Cost
      of revenues
                  
                  
                  30,700
                  
                  
                  
                  5,300
                  
                  
                  
                  (5,300
                  )
                  
                  
                  30,700Research
      and development
                  
                  
                  480,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  480,800Sales
      and marketing
                  
                  
                  159,600
                  
                  
                  
                  1,700
                  
                  
                  
                  -
                  
                  
                  
                  161,300General
      and administrative
                  
                  
                  683,100
                  
                  
                  
                  184,400
                  
                  
                  
                  -
                  
                  
                  
                  867,500Total
      operating expenses
                  
                  $
                  1,354,200
                  
                  
                  $
                  191,400
                  
                  
                  $
                  (5,300
                  )
                  
                  $
                  1,540,300Income
      (Loss) from operations
                  
                  $
                  (1,322,200
                  )
                  
                  $
                  (57,700
                  )
                  
                  $
                  -
                  
                  
                  $
                  (1,379,900
                  )




Nine
      Months ended June 30, 2010Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  
                  112,100
                  
                  
                  
                  417,600
                  
                  
                  
                  (48,700
                  )
                  
                  
                  481,000Operating
      expenses:Cost
      of revenues
                  
                  
                  101,900
                  
                  
                  
                  15,400
                  
                  
                  
                  (15,400
                  )
                  
                  
                  101,900Research
      and development
                  
                  
                  843,600
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  843,600Sales
      and marketing
                  
                  
                  587,800
                  
                  
                  
                  16,000
                  
                  
                  
                  -
                  
                  
                  
                  603,800General
      and administrative
                  
                  
                  3,150,900
                  
                  
                  
                  522,300
                  
                  
                  
                  (33,300
                  )
                  
                  
                  3,639,900Total
      operating expenses
                  
                  
                  4,684,200
                  
                  
                  
                  553,700
                  
                  
                  
                  (48,700
                  )
                  
                  
                  5,189,200Income
      (Loss) from operations
                  
                  
                  (4,572,200
                  )
                  
                  
                  (136,100
                  )
                  
                  
                  -
                  
                  
                  
                  (4,708,200
                  )




18





Nine
      Months ended June 30, 2009Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  98,800
                  
                  
                  $
                  463,400
                  
                  
                  $
                  (34,000
                  )
                  
                  $
                  528,200Operating
      expenses:Cost
      of revenues
                  
                  
                  99,800
                  
                  
                  
                  12,500
                  
                  
                  
                  (12,500
                  )
                  
                  
                  99,800Research
      and development
                  
                  
                  1,628,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,628,500Sales
      and marketing
                  
                  
                  702,500
                  
                  
                  
                  5,600
                  
                  
                  
                  -
                  
                  
                  
                  708,100General
      and administrative
                  
                  
                  1,879,800
                  
                  
                  
                  501,800
                  
                  
                  
                  (21,500
                  )
                  
                  
                  2,360,100Total
      operating expenses
                  
                  $
                  4,310,600
                  
                  
                  $
                  519,900
                  
                  
                  $
                  (34,000
                  )
                  
                  $
                  4,796,500Income
      (Loss) from operations
                  
                  $
                  (4,211,800
                  )
                  
                  $
                  (56,500
                  )
                  
                  $
                  -
                  
                  
                  $
                  (4,268,300
                  )




The
following table includes selected segment financial information as of June 30,
2010, related to goodwill and total assets:





Laboratory
                    Information Services
                  
                  
                  Clinic
                  
                  
                  TotalGoodwill
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      assets
                  
                  $
                  181,200
                  
                  
                  $
                  53,700
                  
                  
                  $
                  234,900




7.
            EARNINGS
      PER SHARE




In
accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per
Share”), basic net income (loss) per share is computed by dividing the net
income (loss) to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period.  For the three months and nine months
ended June 30, 2010 and 2009, the Company has excluded all common equivalent
shares from the calculation of diluted net loss per share as such securities are
anti-dilutive.




A summary
of the net income (loss) and shares used to compute net income (loss) per share
for the three months and nine months ended June 30, 2010 and 2009 are as
follows:




For the Three Months ended June 30,2010
                    
                    
                    2009Net
      loss for computation of basic net loss per share
                    
                    $
                    (1,500,200
                    )
                    
                    $
                    (1,600,500
                    )Net
      loss for computation of dilutive net loss per share
                    
                    $
                    (1,500,200
                    )
                    
                    $
                    (1,600,500
                    )Basic
      net loss per share
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.06
                    )Diluted
      net loss per share
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.06
                    )Basic
      weighted average shares outstanding
                    
                    
                    56,023,921
                    
                    
                    
                    25,782,277Dilutive
      common equivalent shares
                    
                    
                    -
                    
                    
                    
                    -Diluted
      weighted average common shares
                    
                    
                    56,023,921
                    
                    
                    
                    25,782,277




19





For the Nine Months ended June 30,2010
                  
                  
                  2009Net
      loss for computation of basic net loss per share
                  
                  $
                  (4,753,200
                  )
                  
                  $
                  (4,495,400
                  )Net
      loss for computation of dilutive net loss per share
                  
                  $
                  (4,753,200
                  )
                  
                  $
                  (4,495,400
                  )Basic
      net loss per share
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.18
                  )Diluted
      net loss per share
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.18
                  )Basic
      weighted average shares outstanding
                  
                  
                  51,028,185
                  
                  
                  
                  25,460,457Dilutive
      common equivalent shares
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average common shares
                  
                  
                  51,028,185
                  
                  
                  
                  25,460,457





Anti-dilutive
common equivalent shares not included in the computation of dilutive net loss
per share:





For the Three Months ended June 30,2010
                    
                    
                    2009Convertible
      Debt
                    
                    
                    150,000
                    
                    
                    
                    -Warrants
                    
                    
                    19,297,753
                    
                    
                    
                    7,594,401Options
                    
                    
                    14,870,973
                    
                    
                    
                    8,869,545For
      the Nine Months ended June 30,2010
                    
                    
                    2009Convertible
      Debt
                    
                    
                    50,000
                    
                    
                    
                    -Warrants
                    
                    
                    18,904,516
                    
                    
                    
                    7,131,036Options
                    
                    
                    9,781,463
                    
                    
                    
                    8,885,551




8.
            COMMITMENTS
      AND CONTINGENT LIABILITIES




Litigation




From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the ordinary course of business. Other than as set forth below, we
are not currently party to any legal proceedings, the adverse outcome of which,
in our management’s opinion, individually or in the aggregate, would have a
material adverse effect on our results of operations or financial
position.


20


Since
June of 2009, we have been involved in litigation against Leonard J. Brandt, a
stockholder, former director and our former Chief Executive Officer (“Brandt”)
in the Delaware Chancery Court and the United States District Court for the
Central District of California.  At the conclusion of a two-day
trial that commenced December 1, 2009, the Chancery Court entered
judgment for the Company and dismissed with prejudice Brandt's action
brought pursuant to Section 225 of the Delaware General Corporation Law, which
sought to oust the incumbent directors other than Brandt.  The Chancery
Court thereby found that the purported special meeting of stockholders convened
by Brandt on September 4, 2009 was not valid and that the directors purportedly
elected at that meeting are not entitled to be seated.  On January 4,
2010, Brandt filed an appeal with the Supreme Court of the State of Delaware in
relation to the case.  On April 20, 2010, the Delaware Supreme Court
affirmed the ruling of the Chancery Court.




The Chancery
Court also denied an injunction sought by Mr. Brandt to prevent the voting
of shares issued by the Company in connection with our bridge financing in
June 2009, and securities offering in August 2009, and dismissed
Brandt's claims regarding those financings and stock issuances. 
On January 4, 2010, Brandt also filed an appeal in relation to this ruling with
the Delaware Supreme Court which, on April 20, 2010, affirmed the ruling of the
Chancery Court.




The
Chancery Court also dismissed with prejudice another action brought by Mr.
Brandt, in which he claimed he had not been provided with information owed to
him.




In July
2009, we filed an action in the United States District Court for the Central
District of California against Mr. Brandt and certain
others.  Our complaint alleged a variety of violations of federal
securities laws, including anti-fraud based claims under Rule 14a-9,
solicitation of proxies in violation of the filing and disclosure dissemination
requirements of Regulation 14A, and material misstatements and omissions in
and failures to promptly file amendments to
Schedule 13D.  Mr. Brandt and the other defendants filed
counterclaims against us, alleging violations of federal securities laws
relating to alleged actions and statements taken or made by us or our officers
and directors in connection with Mr. Brandt’s proxy and consent
solicitations.  On March 10, 2010, we dismissed the Company’s claims
against EAC, and EAC dismissed its claims against us and Mr.
Carpenter.  On April 10, 2010, Mr. Brandt's attorneys moved to
withdraw from representing Mr. Brandt in the case.  On July 7, 2010,
Mr. Brandt moved to dismiss his counterclaims against the Company and the
Company consented to dismiss its complaint against Mr. Brandt.  On
July 13, 2010, all of the Company’s claims and Mr. Brandt’s counterclaims in
such action were dismissed.  This resolved all pending actions between
the Company and Mr. Brandt.




We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt.  We do not know whether Mr. Brandt
will institute new claims against us and the defense of any such claims could
involve the expenditure of additional resources by the Company.




Lease
Commitments




The
Company leased its headquarters and Laboratory Information Services space under
an operating lease which terminated on November 30, 2009. The Company continued
to lease the space on a month-to-month basis through January 22, 2010 at which
time the Company moved to its new premises.




On
December 30, 2009 the Company entered a three year lease, commencing February 1,
2010 and terminating on January 30, 2013 for its new Headquarters and Laboratory
Information Services business premises located at 85 Enterprise, Aliso Viejo,
California 92656.  The 2,023 square foot facility has an average cost
for the lease term of $3,600 per month.




The
Company leases space for its Clinical Services operations under an operating
lease. The base rental as of December 31, 2009 was $6,000 per
month.  This lease terminated on February 28, 2010 and a 37 month
extension to the lease was negotiated commencing April 1, 2010 and terminating
April 30, 2013. The 3,542 square foot facility has an average cost for the lease
term of $5,100 per month.




The
Company also sub-leased space for its Clinical Services operations on a
month-to-month basis for $1,000 per month up until March 2010 when it terminated
this sub-lease and gave up the space.




The
Company leases a copier for $200 per month which it accounts for as a capital
lease with an interest rate of 9% per year. The lease terminates in February
2013, at which time the copier can be purchased at fair value.


21





The
Company incurred rent expense of $19,600 and $38,500 for the three months
ended June 30, 2010 and 2009 and $83,000 and $108,400 for the nine months ended
June 30, 2010 and 2009






9.     SUBSEQUENT
EVENTS





Events
subsequent to June 30, 2010 have been evaluated through the date these financial
statements were issued, to determine whether they should be disclosed to keep
the financial statements from being misleading.  The following events
have occurred since June 30, 2010.




Publication
of our results




On July
3, 2010, a paper with the results of our study, which had been peer-reviewed by
the Journal of Psychiatric Research, was published on-line at its website while
awaiting hard-copy publication. The study, the largest in our history, was a
randomized, single blinded, controlled, parallel group, multicenter
study.  The patients in the study experienced depression treatment
failure of one or more selective serotonin reuptake inhibitors (SSRIs) and/or
had failure with at least two classes of antidepressants.  The
patients fell into two groups:  1) those treated with rEEG
medication guidance, and 2) those treated with the modified STAR*D
treatment algorithm. The 12-week study, which included 114 patients at
12 medical sites, including Harvard, Stanford, Cornell, UCI and Rush, found
that rEEG significantly outperformed the modified STAR*D treatment
algorithm.  The difference, or separation, between rEEG and the
control group was 50 and 100 percent for the study’s two primary
endpoints.  Typically, separation between a new treatment and a
control group is less than 10 percent in antidepressant
studies.




Secured
Convertible Debt Financings




On July
5, 2010, we issued two unsecured promissory notes (each, a “Deerwood Note”) in
the aggregate principal amount of $250,000 to Deerwood Partners LLC and Deerwood
Holdings LLC, with each investor purchasing a note in the aggregate principal
amount of $125,000.  The Deerwood Notes mature on December 15,
2010.  We received $250,000 in gross proceeds from the issuance of
these notes.  SAIL Venture Partners L.P. (“SAIL”), of which our
director David Jones is a managing partner, issued an unconditional guaranty to
each of these investors, guaranteeing the prompt and complete payment when due
of all principal, interest and other amounts under each Deerwood
Note.  We have agreed to indemnify SAIL and grant to SAIL a security
interest in our assets in connection with the guaranties.




Each
Deerwood Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount at the earliest of (i) the
maturity date; (ii) prepayment of the Deerwood Note at our option (iii) closing
of a financing in which the aggregate proceeds to us are not less than
$3,000,000 or (iv) the occurrence of an Event of Default (as defined in the
Deerwood Note).  In addition, pursuant to a separate agreement that we
entered into with each of the Deerwood investors, each investor will have the
right to convert its note into shares of our common stock at a conversion price
of $0.50.  The conversion price is subject to customary anti-dilution
adjustments, but will never be less than $0.30.




The
managing members of each of Deerwood Partners LLC and Deerwood Holdings LLC are
George J. Kallins, M.D., who joined the Company’s Board of Directors on July 5,
2010, and his spouse Bettina Kallins.




On June
3, 2010, we had entered into a Bridge Note and Warrant Purchase Agreement with
John Pappajohn, pursuant to which Mr. Pappajohn agreed to purchase two secured
promissory notes (each, a “Bridge Note”) in the aggregate principal amount of
$500,000, with each Bridge Note in the principal amount of $250,000 maturing on
December 2, 2010.  On June 3, 2010, Mr. Pappajohn loaned the Company
$250,000 in exchange for the first Bridge Note (there were no warrants issued in
connection with this first note) and on July 25, 2010, Mr. Pappajohn loaned the
Company $250,000 in exchange for the second Bridge Note.  In
connection with his purchase of the second Bridge Note, Mr. Pappajohn received a
warrant to purchase up to 250,000 shares of our common stock in accordance with
the Bridge Note and Warrant Purchase Agreement.  The exercise price of
the warrant (subject to customary anti-dilution adjustments) is $0.50 per
share.


22




Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into
shares of our common stock at a conversion price of $0.50.  The
conversion price is subject to customary anti-dilution adjustments,
but will never be less than $0.30.  We have also agreed to enter
into a registration rights agreement covering the securities issuable upon
exercise of the warrant and on conversion of the Bridge
Notes.





Each Bridge Note accrues interest at a
rate of 9% per annum which will be paid together with the repayment of the
principal amount at the earliest of (i) the maturity date; (ii) prepayment of
the Bridge Note at the option of the Company (iii) closing of a financing in
which the aggregate proceeds to the Company are not less than $3,000,000 or (iv)
the occurrence of an Event of Default (as defined in the Bridge
Note).  The Purchase Agreement and each Bridge Note grants the
investor a senior security interest in and to all of the Company’s existing and
future right, title and interest in its tangible and intangible
property.




Grant of Warrants and Options to
purchase common stock




On July
5, 2010, the Board of Directors granted warrants to purchase 500,000 shares of
common stock to Mr. Brian Thompson for consulting services he had rendered to
the Company, advising on and assisting with fund raising
activities.  Mr. Thompson is an employee of Equity Dynamics, Inc., a
company owned by Mr. Pappajohn.   These warrants have an exercise
price of $0.30 cents per share, are exercisable from the date of grant and have
a term of 10 years from the date of grant.  At the same meeting, the
Board also approved the grant of 800,000 options in total to a new member of
management, Michael Darkoch, EVP and Chief Marketing Officer, a new director,
Dr. Kallins, and a new advisor to the Company. The options have an exercise
price of $0.40 and a term of 10 years.  In the case of Mr. Darkoch,
the options, the grant of which took effect upon commencement of his employment
on July 6, 2010, vest evenly over a period of 48 months.  The options
for Dr. Kallins and the advisor vest evenly over a 36 month period.




Letter
from the FDA





On July
27, 2010, we received a letter from the FDA division that was reviewing our
510(k) submission.  This letter informed us that the FDA had
determined that our rEEG service was not substantially equivalent ("NSE") to the
predicate devices that had been granted 510(k) clearance.  The FDA
concluded that the rEEG service had new indications for use, which alters the
diagnostic effect and impacts safety and effectiveness.  Consequently,
the FDA suggests that the rEEG service is a class III device which requires an
approved premarket approval application (PMA) before it can be marketed legally,
unless it is otherwise reclassified.  A statement of classification as
a class III device is standard procedure for any 510(k) submission that receives
an NSE letter, and does not represent a final FDA action classifying the product
into class III.





We
currently plan to continue marketing as a non-device laboratory information
service, while continuing to discuss alternative approaches with the
FDA.  Alternative approaches, which are not mutually exclusive, may
consist of (1) filing a request for reconsideration of the NSE letter
and/or (2) submitting a new 510(k) with revised claims for rEEG and/or
additional information about the predicate devices.   There is
some risk that the FDA will seek to take enforcement action against rEEG based
upon the agency's position that rEEG is a medical device if we continue to
market our service.  The Company and its advisors continue to believe
that the Company’s activities consist of medication sensitivity reference
testing, as is performed by commercial laboratories and clinical review
organizations, which is not subject to regulation by the
FDA.


23




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




The
information contained in this Form 10-Q is intended to update the information
contained in our Annual Report on Form 10-K for the year ended September 30,
2009 and presumes that readers have access to, and will have read, the
“Management's Discussion and Analysis or Plan of Operation” and other
information contained in such Form 10-K. The following discussion and analysis
also should be read together with our consolidated financial statements and the
notes to the consolidated financial statements included elsewhere in this Form
10-Q.




This
discussion
summarizes the significant factors affecting the condensed consolidated
operating results, financial condition and liquidity and cash flows of CNS
Response, Inc. for the three and nine months ended June 30, 2010 and
2009.  Except for historical information, the matters discussed in
this management's discussion and analysis or plan of operation and elsewhere in
thisQuarterly Report on Form 10-Q, are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of
resources.  These forward-looking statements include, without
limitation, statements regarding: proposed new products or services; our
statements concerning litigation or other matters; statements concerning
projections, predictions, expectations, estimates or forecasts for our business,
financial and operating results and future economic performance; statements of
management’s goals and objectives; trends affecting our financial condition,
results of operations or future prospects; our financing plans or growth
strategies; and other similar expressions concerning matters that are not
historical facts.  Words such as “may,” “will,” “should,” “could,”
“would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”
“future,” “intends,” “plans,” “believes” and “estimates,” and similar
expressions, as well as statements in future tense, identify forward-looking
statements.




Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements
are based on information available at the time they are made and/or management’s
good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include, but
are not limited to:




·
            our inability to raise
      additional funds to support operations and capital
      expenditures;





·
            our inability to achieve
      greater and broader market acceptance of our products and services in
      existing and new market
segments;





·
            our inability to successfully
      compete against existing and future
  competitors;





·
            our inability to manage and
      maintain the growth of our
business;





·
            our inability to protect our
      intellectual property rights;
and





·
            other factors discussed under
      the headings “Risk Factors” and “Business” in our Annual Report on Form
      10-K and this Quarterly Report on Form
  10-Q.




Forward-looking statements speak only
as of the date they are made. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting forward-looking information, except to the extent required by
applicable securities laws.  If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.




Overview




We are a
life sciences company with two distinct business segments. Our Laboratory
Information Services business operated by CNS California, which we consider our
primary business, is focused on the commercialization of a patented system that
guides psychiatrists and other physicians in determining a proper treatment for
patients with behavioral (psychiatric and/or addictive)
disorders.  Our Clinical Services business operated by Neuro-Therapy
Clinic ("NTC"), is a full service psychiatric clinic.


24





Laboratory
Information Services




Traditionally,
prescription of medication for the treatment of behavioral disorders (such as
depression, bipolar disorders, eating disorders, addiction, anxiety disorders,
ADHD and schizophrenia) has been primarily based on symptomatic factors, while
the underlying physiology and pathology of the disorder can rarely be analyzed,
often resulting in multiple ineffective, costly, and often lengthy, courses of
treatment before effective medications are identified.  Some patients
never find effective medications.




We
believe that our technology offers an improvement upon traditional methods for
determining a course of medication for patients suffering from non-psychotic
behavioral disorders because our technology is designed to correlate the success
of courses of medication with the neurophysiological characteristics of a
particular patient. Our technology provides medical professionals with
medication sensitivity data for a subject patient based upon the identification
and correlation of treatment outcome information from other patients with
similar neurophysiologic characteristics.   This treatment
outcome information is contained in a proprietary outcomes database that
consists of over 17,000 medication trials for patients with psychiatric or
addictive problems (the “CNS
Database”).  For each patient in the CNS Database, we have
compiled electroencephalographic (“EEG”) scans, symptoms and
outcomes often across multiple treatments from multiple psychiatrists and
physicians.  This patented technology, called “Referenced-EEG®” or
“rEEG®”, represents an innovative approach to identifying effective medications
for patients suffering from debilitating behavioral disorders.




With
rEEG®, physicians order a digital EEG for a patient, which is then evaluated
with reference to the CNS Database.  By providing this reference
correlation, an attending physician can choose a treatment strategy with the
knowledge of how other patients having similar brain function have previously
responded to a myriad of treatment alternatives.  Analysis of this
complete data set yielded a platform of 74 quantitative biomarkers that have
shown utility in characterizing patient response to diverse
medications.  This platform then allows a new patient to be
characterized, based on these 74 biomarkers, and the database to be queried to
understand the statistical probability of how patients with similar brain
patterns have previously responded to the medications currently in the database.
This technology allows us to create and provide simple reports (“rEEG Reports”) to the
prescriber that summarizes historical treatment success of specific medications
for those patients with similar brain patterns.   It provides
neither a diagnosis nor specific treatment, but like all lab results, objective,
evidenced-based information to help the prescriber in their
decision-making.




Our
Laboratory Information Services business is focused on increasing the demand for
our rEEG Reports. We believe the key factors that will drive broader adoption of
our rEEG Reports will be acceptance by healthcare providers and patients of
their benefit, demonstration of the cost-effectiveness of using our technology,
reimbursement by third-party payers, expansion of our sales force and increased
marketing efforts.




In
addition to its utility in providing psychiatrists and other
physicians/prescribers with medication sensitivity guidance, rEEG provides us
with significant opportunities in the area of pharmaceutical development. 
rEEG, in combination with the information contained in the CNS Database, has the
potential to be able to identify novel uses for neuropsychiatric medications
currently on the market and in late stages of clinical development, as well as
aid in the identification of neurophysiologic characteristics of clinical
subjects that may be successfully treated with neuropsychiatric medications in
the clinical testing stage. We intend to enter into relationships with
established drug and biotechnology companies to further explore these
opportunities, although no relationships are currently
contemplated.  The development of biomarkers as the new method for
identifying the correct patient population to research is being encouraged by
both The National Institute of Mental Health (NIMH) and The Food and Drug
Administration (FDA).





Clinical
Services





In
January 2008, we acquired our then-largest customer, the Neuro-Therapy Clinic,
Inc.  Upon the completion of the transaction, NTC became a
wholly-owned subsidiary of ours. NTC operates one of the largest psychiatric
medication management practices in the state of Colorado, with six full time and
four part time employees including psychiatrists and clinical nurse specialists
with prescribing privileges.  Daniel A. Hoffman, M.D. is the medical
director at NTC, and, after the acquisition, became our Chief Medical Officer
and more recently, our President.


25






NTC,
having performed a significant number of rEEGs, serves as an important resource
in our product development, the expansion of our CNS Database, production system
development and implementation, along with the integration of our rEEG services
into a medical practice.  Through NTC, we also expect to develop
marketing and patient acquisition strategies for our Laboratory Information
Services business. Specifically, NTC is learning how to best communicate the
advantages of rEEG to patients and referring physicians in the local
market.  We will share this knowledge and developed communication
programs learned through NTC with other physicians using our services, which we
believe will help drive market acceptance of our services.  In
addition, we plan to use NTC to train practitioners across the country in the
uses of rEEG technology.





We view
our Clinical Services business as secondary to our Laboratory Information
Services business, and we have no current plans to expand this
business.





Business
operations




Since our
inception, we have generated significant net losses. As of June 30, 2010, we had
an accumulated deficit of $29.9 million. We incurred operating losses of $4.71
million and $4.27 million for the nine months ended June 30, 2010 and 2009,
respectively.  We expect our net losses to continue for at least the
next couple of years.





As of
June 30, 2010, our current liabilities of approximately $2.0 million exceeded
our current assets of approximately $0.2 million and our net losses will
continue for the foreseeable future.  We will need substantial
additional funds immediately to continue our operations and substantial
additional funds before we can increase demand for our rEEG
services.  We are currently exploring additional sources of capital;
however, we do not know whether additional funding will be available on
acceptable terms, or at all, especially given the economic conditions that
currently prevail.  In addition, any additional equity funding may
result in significant dilution to existing stockholders, and, if we incur
additional debt financing, a substantial portion of our operating cash flow may
be dedicated to the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities.  If adequate
funds are not available, we may be required to delay or curtail significantly
our development and commercialization activities.  This would have a
material adverse effect on our business, financial condition and/or results of
operations, and could ultimately cause us to have to cease
operations.





We
anticipate that a substantial portion of our capital resources and efforts will
be focused on research and development, scale up of our commercial organization,
and other general corporate purposes, including the payment of legal fees
associated with our litigation.  Research and development projects
include the completion of more clinical trials which are necessary to further
validate the efficacy of our products and services relating to our rEEG
technology across different type of behavioral disorders, the enhancement of the
CNS Database and, to a lesser extent, the identification of new medications that
are often combinations of approved drugs.  We anticipate that future
research and development projects will be funded by grants or third-party
sponsorship.





Recent
Events





The
Private Placement Transactions





2009
Private Placement Transactions




On
August 26, 2009, we received gross proceeds of approximately $2,043,000 in the
first closing of our private placement transaction with six
investors.  Pursuant to Subscription Agreements entered into with the
investors, we sold approximately 38 Investment Units at $54,000 per Investment
Unit.  Each “Investment Unit” consists of 180,000 shares of our common
stock and a five year non-callable warrant to purchase 90,000 shares of our
common stock at an exercise price of $0.30 per share.  After
commissions and expenses, we received net proceeds of approximately
$1,792,300 upon the first closing of our private placement.  On
December 24, 2009, we had a second closing of our private placement in which we
received additional gross proceeds of approximately $2,996,000 from 24
investors.  At the second closing, we sold approximately 55 Investment
Units on the same terms and conditions as the Investment Units sold at the first
closing.  After commissions and expenses, we received net proceeds of
approximately $2,650,400 in connection with this second closing of our private
placement.  On December 31, 2009, we had a third closing of our
private placement in which we received additional gross proceeds of
approximately $432,000 from five investors.  At the third
closing, we sold 8 Investment Units on the same terms and conditions as the
Investment Units sold at the first closing. After commissions and expenses, we
received net proceeds of approximately $380,200 in connection with this third
closing of our private placement.  On January 4, 2010, the Company
completed its fourth and final closing of its private placement, resulting in
additional gross proceeds to the Company of $108,000 from two investors. 
At this fourth closing, we sold 2 Investment Units on the same terms and
conditions as the Investment Units sold at the first closing. After commissions
and expenses, we received net proceeds of approximately $95,000 in connection
with this final closing of our private placement.   These private
placement transactions are described in further detail in Note 2 to the
unaudited condensed consolidated financial statements.


26






Prior
to our private placement, we raised aggregate proceeds of $1,700,000 in fiscal
year 2009 through the issuance of secured convertible promissory notes on each
of March 30, May 14, and June 12, 2009.  Upon the first closing of our
private placement on August 26, 2009, these notes were converted into shares of
our common stock, as more fully described in Note 2 of the unaudited condensed
consolidated financial statements.





2010
Private Placement Transactions





On June
3, 2010, we entered into a Bridge Note and Warrant Purchase Agreement with John
Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”) in
the aggregate principal amount of $500,000, with each Bridge Note in the
principal amount of $250,000 maturing on December 2, 2010.  On June 3,
2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge
Note (there were no warrants issued in connection with this first note) and on
July 25, 2010, Mr. Pappajohn loaned us $250,000 in exchange for the second
Bridge Note.  In connection with his purchase of the second Bridge
Note, Mr. Pappajohn received a warrant to purchase up to 250,000 shares of our
common stock.  The exercise price of the warrant (subject to customary
anti-dilution adjustments) is $0.50 per share.




Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into
shares of our common stock at a conversion price of $0.50.  The
conversion price is subject to customary anti-dilution adjustments,
but will never be less than $0.30.  We have also agreed to enter
into a registration rights agreement covering the securities issuable upon
exercise of the warrant and conversion of the Bridge Notes.  The Bridge
Notes are described in further detail in Note 2 to the unaudited condensed
consolidated financial statements.





Matters
Involving our Former Chief Executive Officer and Former Director, Leonard
Brandt




On April
10, 2009, our Board of Directors voted to remove Len Brandt as the CEO of the
Company and appointed George Carpenter as our CEO. On the same date, Mr.
Brandt resigned as Chairman of the Board, but retained his seat on the Board of
Directors.  On June 19, 2009, Mr. Brandt informed us of his
intention to call a special meeting of Company stockholders in lieu of an annual
meeting, for the purpose of unseating the other members of the Board and
replacing them with his nominees.  Subsequently, Mr. Brandt made
multiple mailings to stockholders purporting to give notice of a meeting,
scheduled multiple dates for the meeting and attempted to call and adjourn
meetings on at least six occasions.  Mr. Brandt failed to convene
a quorum or take any action at any of these meetings.




Mr. Brandt
finally attempted to call a special meeting of stockholders to be held on
September 4, 2009, and purportedly held a meeting on that date, at which he
claimed to have elected his own slate of directors.  Subsequent to
this purported meeting, Mr. Brandt filed an action under Section 225
of the Delaware General Corporation Law (“DGCL”) seeking to validate the results
of that purported meeting.  Mr. Brandt also filed several other
actions in the Delaware Chancery Court.  He filed claims for breach of
fiduciary duty in connection with the approval by our Board of the May 14, 2009
and June 18, 2009 bridge loans and the first closing of the private placement on
August 26, 2009, and made a motion to preliminarily enjoin the voting of certain
shares of our common stock and to prevent action by written consent by such
stockholders.  Mr. Brandt also sought a permanent injunction against
the voting of these shares and to rescind their issuance.  While these
actions were pending, we were operating under what is commonly referred to as a
“status quo” order, which maintained the Board of Directors in place immediately
prior to the purported September 4 meeting (Messrs. Carpenter, Jones, Pappajohn,
Thompson and Brandt, and Drs. Harbin and Vaccaro).  The status quo
order also placed certain restrictions on certain corporate actions during the
pendency of the Section 225 action described above.


27




On
December 2, 2009, following a two day trial, the Delaware Court of Chancery
entered judgment for the Company and its incumbent directors in the Section 225
action and dismissed the action with prejudice.  The entry of Judgment
for the Company in the Section 225 action and dismissal of that action
terminated the “status quo” order, including its restrictions on the Company’s
ability to engage in certain corporate actions.  The Chancery Court
also denied Brandt’s motion for an injunction that sought to prevent the voting
of shares issued by us in connection with our bridge financings in May and June
of 2009 and the securities offering in August 2009, dismissed Mr. Brandt's
counterclaims alleging breaches of duties in connection with those transactions,
and dismissed with prejudice another action brought by Mr. Brandt that
claimed he had not been provided information owed to him.  Finally,
the Court dismissed our claims against Mr. Brandt without
prejudice.




On
January 4, 2010, Mr. Brandt filed an appeal with the Supreme Court of the State
of Delaware from the Chancery Court's ruling in the Section 225
action.  Mr. Brandt also appealed the denial of his requested
injunction and the dismissal of his claims regarding the financings and stock
issuances, but he dismissed this appeal on February 25, 2010, and that ruling
thereby became final and un-appealable.  On April 20, 2010 the
Delaware Supreme Court summarily affirmed the ruling of the Chancery Court
dismissing the Section 225 action.




On
September 29, 2009, the company held its first annual meeting of Stockholders at
which each of George Carpenter, Henry Harbin, M.D., David Jones, John Pappajohn,
Jerome Vaccaro, M.D. and Tommy Thompson were elected as directors.  On
April 27, 2010, the company held its 2010 annual meeting of Stockholders and
five of the six directors were reelected. The sixth, Tommy Thompson, had
resigned from the board.




We filed
an action in the United States District Court for the Central District of
California against Mr. Brandt and certain others in July 2009 and Mr. Brandt
subsequently counterclaimed.  On July 7, 2010 Mr. Brandt moved to
dismiss his counterclaims against the Company and the Company consented
to dismiss its complaint against Mr. Brandt and on July 13, 2010, all of
the Company’s claims and Mr. Brandt’s counterclaims in such action were
dismissed. This resolved all pending actions between the Company and its
former CEO.




We have
expended substantial resources to pursue the defense of legal proceedings
initiated by Mr. Brandt.  We do not know whether Mr. Brandt will
institute new claims against us and the defense of any such claims could involve
the expenditure of additional resources by the Company.




Publicly
Announced Results of Clinical Trial





On
November 2, 2009, we reported the results of a landmark study presented by
Charles DeBattista, D.M.H, M.D., at the U.S. Psychiatric and Mental Health
Congress.  The poster presentation, titled Referenced-EEG® (rEEG)
Efficacy Compared to STAR*D For Patients With Depression Treatment
Failure:  First Look At Final Results, highlighted a dramatic
improvement in outcomes for patients with treatment resistant
depression.  In this study, our rEEG technology proved effective at
predicting medication response for mostly treatment-resistant patients
approximately 65 percent of the time.





The study
included 114 patients at 12 medical sites, including Harvard,
Stanford, Cornell, UCI and Rush.  The 12-week study found that rEEG
significantly outperformed the modified STAR*D treatment
algorithm.  The difference, or separation, between rEEG and the
control group was 50 and 100 percent for the study’s two primary
endpoints.  Typically, separation between a new treatment and a
control group is less than 10 percent in antidepressant
studies.





The
study, the largest in our history, was a randomized, single blinded, controlled,
parallel group, multicenter study.  The patients in the study
experienced depression treatment failure of one or more SSRIs and/or had failure
with at least two classes of antidepressants.  The patients fell into
two groups:  1) those treated with rEEG medication guidance, and
2) those treated with the modified STAR*D treatment algorithm.





A paper
with the results of this study has been peer-reviewed by the Journal of
Psychiatric Research, has been published on-line at its website as of July 3,
2010 and is awaiting hard-copy publication.


28


Correspondence
with FDA and Decision to Seek 510(k) Clearance





Since
April of 2008, we have been in a dialogue with the FDA regarding whether rEEG
constitutes a medical device which is subject to regulation by the
FDA.  On April 10, 2008 we received correspondence from the FDA in
which the FDA indicated it believed, based in part on the combination of certain
marketing statements it read on our website, together with the delivery of our
rEEG Reports, that we were selling a software product to aid in diagnosis, which
constituted a “medical device” requiring pre-market approval or 510(k) clearance
by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (the
“Act”).  We do not believe that sales of our Laboratory Information
Services, including our rEEG Reports, are subject to regulatory pre-market
approval or 510(k) clearance.  We responded to the FDA on April 24,
2008 indicating that we believed it had incorrectly understood our product
offering, and clarified that our Laboratory Information Services are not
diagnostic and thus do not constitute a medical device.  On December
14, 2008, the FDA again contacted us and indicated that, based upon its review
of our description of our intended use of the rEEG Reports on our website, it
continued to maintain that the rEEG Reports met its definition of medical
devices. In response to the FDA communications, we made a number of changes to
our website and other marketing documents to reflect that rEEG is a service
to aid in medication selection and is not an aid to
diagnosis.  On September 4, 2009, through our regulatory counsel, we
responded to the December 14, 2008 FDA letter explaining our position in more
detail.





On
December 28, 2009 we received a response from Jeffrey Shuren M.D., J.D., Acting
Director of FDA's Center for Devices and Radiological Health ("CDRH"). 
This letter stated that FDA still believed that rEEG was a device subject to FDA
regulation.  Dr. Shuren stated that FDA believed that rEEG would fit into
the regulatory scheme under an existing regulation and classification for class
II devices and thus be subject to 510(k) clearance.  Dr. Shuren's letter
suggested several possible similar devices.





Based in
part on Dr. Shuren's letter, on April 1, 2010 we filed an application to obtain
510(k) clearance for our rEEG service based upon its equivalence to
predicate devices that already have FDA clearance.





Since
submitting our 510(k) application on April 1, 2010 we have been in routine
communication with the FDA and were responding to their comments.  On July
27, 2010 we received a letter from the FDA division that was reviewing the
submission.  This letter informed us that they had determined that our rEEG
service was not substantially equivalent ("NSE") to the predicate devices that
had been granted 510(k) clearance.  The FDA concluded that the rEEG service
had new indications for use, which alters the diagnostic effect and impacts
safety and effectiveness.  Consequently, the FDA suggests that the rEEG
service is a class III device which requires an approved premarket approval
application (PMA) before it can be marketed legally, unless it is otherwise
reclassified.  A statement of classification as a class III device is
standard procedure for any 510(k) submission that receives an NSE letter, and
does not represent a final FDA action classifying the product into class
III.





We
currently plan to continue marketing as a non-device laboratory information
service, while continuing to discuss alternative approaches with the
FDA.  Alternative approaches, which are not mutually exclusive, may
consist of (1) filing a request for reconsideration of the NSE letter
and/or (2) submitting a new 510(k) with revised claims for rEEG and/or
additional information about the predicate devices.   There is
some risk that the FDA will seek to take enforcement action against rEEG based
upon the agency's position that rEEG is a medical device if we continue to
market our service.  The Company and its advisors continue to believe
that the Company’s activities consist of medication sensitivity reference
testing, as is performed by commercial laboratories and clinical review
organizations, which is not subject to regulation by the FDA.





2010
Annual Meeting





On April
27, 2010, the Company held its 2010 annual meeting of stockholders and five of
the six directors originally elected in September 2009 were reelected; the
sixth, Tommy Thompson, had previously resigned from the board. In addition, the
2006 Stock Incentive Plan was amended to increase the number of shares reserved
for issuance under the plan from 10 million to 20 million shares of common stock
and to increase the maximum number of shares of common stock issuable within a
calendar year to any eligible employee or director from 3 million to 4 million
shares.


29





Critical
Accounting Policies and Significant Judgments and Estimates




This
management’s discussion and analysis of financial condition and results of
operations is based on our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these unaudited
condensed consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenues and expenses during the
reporting periods. We evaluate our estimates and judgments on an ongoing basis.
We base our estimates on historical experience and on various other factors we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results could therefore
differ materially from those estimates under different assumptions or
conditions.




The
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our unaudited condensed consolidated
financial statements.




Revenue
Recognition




We have
generated limited revenues since our inception.  Revenues for our
Laboratory Service product are recognized when a rEEG Report is delivered to a
client-physician.  For our Clinical Services, revenues are recognized
when the services are performed.




Stock-based
Compensation Expense




Stock-based
compensation expense, which is a non-cash charge, results from stock option
grants.  Compensation cost is measured at the grant date based on the
calculated fair value of the award.  We recognize stock-based
compensation expense on a straight-line basis over the vesting period of the
underlying option. The amount of stock-based compensation expense expected to be
amortized in future periods may decrease if unvested options are subsequently
cancelled or may increase if future option grants are made.





Results
of Operations for the three months ended June 30, 2010 and 2009





As
earlier described, we operate in two business segments: Laboratory Information
Services and Clinical Services.  Our Laboratory Information Services
business focuses on the delivery of reports ("rEEG Reports") that assist
physicians with treatment strategies for patients with behavioral (psychiatric
and/or addictive) disorders based on the patient's own physiology. Our Clinical
Services business, operated through NTC, provides full service psychiatric
services.




The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.




Three Months Ended June 30,2010
                              
                              
                              2009Revenues
                              
                              
                              100
                              %
                              
                              
                              100
                              %Cost
      of revenues
                              
                              
                              21
                              
                              
                              
                              19Gross
      profit
                              
                              
                              78
                              
                              
                              
                              81Research
      and development
                              
                              
                              190
                              
                              
                              
                              300Sales
      and marketing
                              
                              
                              127
                              
                              
                              
                              101General
      and administrative expenses
                              
                              
                              679
                              
                              
                              
                              541Operating
      loss
                              
                              
                              (917
                              )
                              
                              
                              (860
                              )Other
      income (expense), net
                              
                              
                              (26
                              )
                              
                              
                              (138
                              )Net
      income (loss)
                              
                              
                              (942
                              )%
                              
                              
                              (998
                              )%




30





Revenues




Three Months Ended June 30,2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    Percent
                                                      ChangeLaboratory
      Information Service Revenues
                                                    
                                                    $
                                                    39,900
                                                    
                                                    
                                                    $
                                                    26,700
                                                    
                                                    
                                                    
                                                    49
                                                    %Clinical
      Services Revenues
                                                    
                                                    
                                                    119,300
                                                    
                                                    
                                                    
                                                    133,700
                                                    
                                                    
                                                    
                                                    (11
                                                    )%Total
      Revenues
                                                    
                                                    $
                                                    159,200
                                                    
                                                    
                                                    $
                                                    160,400
                                                    
                                                    
                                                    
                                                    (1
                                                    )%





With respect to our Laboratory
Information Services business, the number of non-clinical study related paid
rEEG Reports delivered increased from 69 for the quarter ended June 30, 2009 to
101 for the quarter ended June 30, 2010, while the average revenue per report
increased from approximately $387 to $395 for each respective
period.  The total number of free rEEG reports, which were not
associated with our clinical trial, increased from 49 for the quarter ended June
30, 2009 to 67 for the quarter ended June 30, 2010.  These free
reports are for training, database-enhancement and compassionate-use
purposes.  Now that our multi-site clinical study, which validates the
efficacy of our service, has been published we do anticipate a modest increase
in revenue given that there has, to date, only been limited marketing support
for these revenues.  We are also starting to focus on contracts with
insurance payers and the military, which should increase the number of reports
processed.  Furthermore, we will also start offering our services to
pharmaceutical companies to assist them with their product development
activities.





On July
27, 2010 we received a letter from the FDA division that was reviewing our
510(k) submission suggesting that the rEEG service, unless otherwise
reclassified, is a class III device which, as standard procedure, would requires
an approved premarket approval application (PMA) before it can be marketed
legally.  We are currently evaluating our alternatives in response to
the FDA letter.  We will continue to discuss alternative approaches
with the FDA.  During the pendency of these proceedings, we will be
able to continue to market our service as a non-device laboratory information
service.  There is some risk that the FDA will seek to take
enforcement action against rEEG based upon the Agency's position that rEEG is a
medical device if we continue to market our service.  For more detail
on this please refer to the section above on Correspondence with FDA and Decision
to Seek 510(k) Clearance.





Our
Clinical Services revenue declined by $14,400 for the quarter ended June 30,
2010, as compared to the corresponding prior year period, because of a reduction
in the hours available by the prescribing staff to attend to new patients. To
rectify this, we have recruited a new psychiatrist, who started working with our
Clinical Services at the beginning of August, 2010.  We anticipate
that new patient volume, and therefore revenues, will start increasing in the
fourth quarter of this calendar year.  We do not plan to materially expand
our Clinical Services business beyond its current potential, and therefore we do
not anticipate a significant increase in revenues generated by this business
segment beyond revenues that would permit this business to remain a
self-sustaining, stand-alone clinic.





Cost
of Revenues





Three Months Ended June 30,2010
                      
                      
                      2009
                      
                      
                      Percent
                        ChangeCost
      of Laboratory Information Services revenues
                      
                      $
                      32,800
                      
                      
                      $
                      30,700
                      
                      
                      
                      7
                      %


Cost of
Laboratory Information Services revenues consists of payroll costs, consulting
costs, and other miscellaneous charges.Consulting costs
primarily represent external costs associated with the processing and analysis
of rEEG Reports and range between $75 and $100 per rEEG Report. For the quarter ended
June 30, 2010, cost of revenues consisted primarily of direct labor and benefit
costs (including stock-based compensation costs) of $27,500, and consulting fees
of $6,900.  For the quarter ended June 30, 2009, cost of revenues
included direct labor and benefit costs (including stock based compensation
costs) of $24,600, and consulting fees of $5,900.  Direct labor
and benefits remained consistent for the two periods; the minor increase was due
to stock-based compensation.  Consulting fees increased in 2010 due to
the higher number of rEEG Reports delivered.  We ultimately expect
cost of revenues to decrease as a percentage of revenues as operating
efficiencies improve with the volume of reports processed.


31





Research
and Development




Three Months Ended June 30,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeLaboratory
      Information Services research and development
                                
                                $
                                302,400
                                
                                
                                $
                                480,800
                                
                                
                                
                                (37
                                )%


Research
and development expenses consist of clinical studies, training of doctors in the
use of our rEEG reports and research studies, consulting fees, payroll costs
(including stock-based compensation costs), expenses related to database
enhancements and maintenance, and other miscellaneous costs.  Research and development
costs for the quarter ended June 30, 2010, primarily consisted of the
following: payroll and benefit costs (including stock based
compensation) of $234,200, consultant costs of $42,600, database costs of
$9,600 and other miscellaneous costs of $16,000.  For the comparable
period for 2009, research and development costs included: payroll and benefit
costs (including stock based compensation) of $198,400, consultant costs of
$33,200, database costs of $3,200 and other miscellaneous costs of $13,500.
Additionally, as the clinical study was in progress for the 2009 quarter only,
clinical study patient costs were $204,400 and patient marketing and recruitment
costs were $28,100.





Comparing
the three months ended June 30, 2010 with the corresponding period in
2009, clinical study patient costs and patient marketing and recruitment
costs were eliminated in the 2010 quarter as the study was completed in
September 2009.  Consequently, the focus of the research and
development department moved from the clinical study to data analysis, the
preparation of scientific papers for publications and the generation of grant
applications for research funding.  Additionally, the focus was also
moved to enhancing the rEEG production system and the application for 510(k)
clearance with the FDA.  With these shifts in focus, consulting fees
increased slightly by $9,500 with $17,400 being spent on research and $25,500
being spent on product enhancements.  Payroll and benefits increased
by $35,800 in the 2010 quarter primarily due a reassignment of a staff member
between departments and an increase in stock based compensation.  The
increase in database costs was as a result of credits to our network of rEEG
users for patient outcome data to enhance our database.





Sales
and marketing





Three Months Ended June 30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        Percent
                                          ChangeSales
      and MarketingLaboratory
      Information Services
                                        
                                        $
                                        187,500
                                        
                                        
                                        $
                                        159,600
                                        
                                        
                                        
                                        17
                                        %Clinical
      Services
                                        
                                        
                                        14,100
                                        
                                        
                                        
                                        1,700
                                        
                                        
                                        
                                        729
                                        %Total
      Sales and
      Marketing
                                        
                                        $
                                        201,600
                                        
                                        
                                        $
                                        161,300
                                        
                                        
                                        
                                        25
                                        %




Sales and
marketing expenses associated with our Laboratory Information Services business
consist primarily of payroll and benefit costs, including stock-based
compensation; advertising and marketing; consulting fees and conference and
travel expenses.  Sales and
marketing expenses for the quarter ended June 30, 2010 primarily
consisted of the following expenses: payroll and benefits $126,400 advertising
and marketing $748, consulting $38,700 and conferences and travel $11,800. For
the comparable period in 2009 expenses were as follows: payroll and benefits
$136,900, advertising and marketing $8,400, consulting $6,600 and conferences
and travel $3,400.


32




Comparing
the three month period ended June 30, 2010 with the similar quarter in
2009, payroll and benefits decreased by $10,600 in the 2010 quarter as
a result of the reassignment of staff to another
department.  Advertising and marketing expenses decreased by $7,700 as
advertising was curtailed while the Company applied for its 510(k) clearance and
marketing efforts were largely limited to planning and network development.
Consulting expenses increased largely due to the use of a consulting resource to
undertake network development activities. Conference and travel expenses
increased by $8,300 in the 2010 quarter as a result of attendance at the
American Psychiatric Association (APA) annual convention, where the Company
first presented its prototype iPad application which interfaces with the rEEG
system user portal.





The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic. In the quarter ending June 30, 2010, Clinical
Services also invested in re-launching its updated website and the development
of a new marketing strategy.  We anticipate a moderate increase in
marketing expenditure to attract new patients to the clinic as the capacity to
see patients has increased with the addition of a second
psychiatrist.





General
and administrative





Three Months Ended June 30,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeGeneral
      and administrativeLaboratory
      Information Services
                                
                                $
                                899,600
                                
                                
                                $
                                683,100
                                
                                
                                
                                32
                                %Clinical
      Services
                                
                                $
                                182,100
                                
                                
                                
                                184,400
                                
                                
                                
                                (1
                                )%Total
      General and administrative
                                
                                $
                                1,081,700
                                
                                
                                $
                                867,500
                                
                                
                                
                                25
                                %





General
and administrative expenses for our Laboratory Information Services business are
largely comprised of payroll and benefit costs, including stock based
compensation, legal, patent costs, other professional and consulting fees,
general administrative and occupancy costs, conference and travel and
miscellaneous costs.  For the quarter ended June 30, 2010,
General and Administrative costs consisted of salaries and benefit costs of
$409,600; legal fees of $266,500; other professional and consulting fees of
$96,600; general administrative and occupancy costs of $90,300; patent costs
$18,200 and conference and travel costs of $18,200.   For the
corresponding period in 2009, General and Administrative costs consisted of
the following: salaries and benefit costs of $171,400; legal fees of
$258,900; other professional and consulting fees of $105,800; general
administrative and occupancy costs of $102,900; patent costs of $23,600 and
conference and travel expenses of $20,400.





With
respect to our Laboratory Information Services business, payroll and benefit
expenses increased by a net $238,200 for the quarter ended June 30, 2010
compared to the prior year quarter, due to a change in the staff mix, primarily
because the Chief Financial Officer joined the Company in the 2010
quarter.  Additionally stock compensation increased by $160,700 as the
Company expensed the vested options which were granted in March 2010 (as
disclosed in Note 3) to management, directors, advisors and
consultants.  Professional and consulting fees decreased by a net
$9,200; part of the decrease was a due to the hiring the CFO, who was formerly a
consultant; this reduction in fees was largely offset by consulting resources
engaged to assist with the Company’s publicity and insurance payer strategies.
Legal fees increased by a net $7,600, consisting of lower regular legal fees of
$55,800, which were more than offset by litigation fees of $63,400 associated
with the Brandt appeal and the wrap up of the litigation in the California
Supreme Court (see Matters
Involving our Former Chief Executive Officer and Former Director, Leonard
Brandt). General and administrative costs decreased by a net $12,600
largely due to a reduction in bad debt write-downs.  Patent expenses
and conference and travel costs did not change substantially quarter over
quarter.





General
and administrative expenses for our Clinical Services business include all costs
associated with operating NTC.  This includes payroll costs, medical
supplies, occupancy costs and other general and administrative costs. 
These costs remained constant for the quarter ended June 30, 2010 compared to
the same period in 2009.





Interest
income (expense)





Three Months Ended June 30,2010
                                              
                                              
                                              2009
                                              
                                              Percent
                                                ChangeLaboratory
      Information Services (Expense),
      net
                                              
                                              $
                                              (40,900
                                              )
                                              
                                              $
                                              (216,300
                                              )
                                              (81
                                              )%Clinical
      Services (Expense)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              *Total
      interest income (expense)
                                              
                                              $
                                              (40,900
                                              )
                                              
                                              $
                                              (216,300
                                              )
                                              (81
                                              )%*
      not
      meaningful




33




With
respect to our Laboratory Information Services business, we earned interest
income of $400 for the quarter ended June 30, 2010 from an interest bearing
account.  This was offset by $3,800 of interest expense on promissory
notes. Additionally, the beneficial conversion discount amortization of the June
3, 2010 Bridge Note was $37,500 for the period and charged to
interest.  For the comparable period in 2009, net interest income was
$400, while interest expenses on outstanding promissory notes were
19,200.  Additionally, we incurred warrant discount charges of
$107,500 associated with the bridge financings during the quarter ended June 30,
2009.  Furthermore, a charge of $90,000 was incurred in the quarter
ended June 30, 2009 as a financing premium in connection with the promissory
note issued to Mr. Pappajohn.





Net
Loss





Three Months Ended June 30,2010
                                            
                                            
                                            2009
                                            
                                            Percent
                                              ChangeLaboratory
      Information Services net loss
                                            
                                            $
                                            (1,417,900
                                            )
                                            
                                            $
                                            (1,541,400
                                            )
                                            (9
                                            )%Clinical
      Services net loss
                                            
                                            
                                            (82,300
                                            )
                                            
                                            
                                            (59,100
                                            )
                                            39
                                            %Total
      Net Loss
                                            
                                            $
                                            (1,500,200
                                            )
                                            
                                            $
                                            (1,600,500
                                            )
                                            (7
                                            )%


The
decrease in net loss of $100,300 in the three months ended June 30, 2010
compared to the prior year period is due primarily to net decreases in
research and development costs from the completion of the clinical trial and
decreases in our interest and financing charges. These decreases were more than
offset by increased Sales and Marketing expenditure and General and
Administration expenditure, which includes litigation expenses incurred in
defending the lawsuit brought by Mr. Brandt and by Interest expenses, which
included a beneficial conversion charge on the June 3, 2010, Bridge
Note.





Results
of Operations for the nine months ended June 30, 2010 and 2009





The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.





Nine Months Ended June 30,2010
                                
                                
                                2009Revenues
                                
                                
                                100
                                %
                                
                                
                                100
                                %Cost
      of revenues
                                
                                
                                21
                                
                                
                                
                                19Gross
      profit
                                
                                
                                79
                                
                                
                                
                                81Research
      and development
                                
                                
                                175
                                
                                
                                
                                308Sales
      and marketing
                                
                                
                                126
                                
                                
                                
                                134General
      and administrative expenses
                                
                                
                                757
                                
                                
                                
                                447Operating
      loss
                                
                                
                                (979
                                )
                                
                                
                                (808
                                )Other
      income (expense), net
                                
                                
                                (9
                                )
                                
                                
                                (43
                                )Net
      income (loss)
                                
                                
                                (988
                                )%
                                
                                
                                (851
                                )%




34





Revenues





Nine Months Ended June 30,2010
                                                
                                                
                                                2009
                                                
                                                
                                                Percent
                                                  ChangeLaboratory
      Information Service Revenues
                                                
                                                $
                                                96,700
                                                
                                                
                                                $
                                                86,300
                                                
                                                
                                                
                                                12
                                                %Clinical
      Services
      Revenues
                                                
                                                
                                                384,300
                                                
                                                
                                                
                                                441,900
                                                
                                                
                                                
                                                (13
                                                )%Total
      Revenues
                                                
                                                $
                                                481,000
                                                
                                                
                                                $
                                                528,200
                                                
                                                
                                                
                                                (9
                                                )%





With
respect to our Laboratory Information Services business the number of paid rEEG
Reports delivered increased from 222 for the nine months ended June 30, 2009, to
248 for the nine months ended June 30, 2010, while the average revenue per
report remained constant at approximately $390.  The total number of
free rEEG reports, which were not associated with our clinical trial, increased
from 123 for the nine months ended June 30, 2009, to 160 for the same period
ended June 30, 2010.  These free rEEG reports are for training,
database-enhancement and compassionate-use purposes.  Now that our
multi-site clinical study, which validates the efficacy of our service, has been
published, we do anticipate a modest increase in revenue given that there has
only been limited marketing support for these revenues to date.  We
are also starting to focus on our contracts with insurance payers and the
military, which should increase the number of eEEG reports
processed.  Furthermore, we will also start offering our services to
pharmaceutical companies to assist them with their product development
activities.





On July
27, 2010 we received a letter from the FDA division that was reviewing our
510(k) submission suggesting that the rEEG service, unless otherwise
reclassified, is a class III device which, as standard procedure, would requires
an approved premarket approval application (PMA) before it can be marketed
legally.  We are currently evaluating our alternatives in response to
the FDA letter.  We will continue to discuss alternative approaches
with the FDA.  During the pendency of these proceedings, we will be
able to continue to market our service as a non-device laboratory information
service.  There is some risk that FDA will seek to take enforcement
action against rEEG based upon the Agency's position that rEEG is a medical
device if we continue to market our service.  For more detail on this
please refer to the section above on Correspondence with FDA and Decision
to Seek 510(k) Clearance.





Our
Clinical Services revenue declined by $57,600 for the nine months ended June 30,
2010, as compared to the corresponding prior year period; this was because of a
reduction in the hours available by the prescribing staff to attend to new
patients. To rectify this we have recruited a new psychiatrist, who started
working with our Clinical Services at the beginning of August,
2010.  We anticipate that new patient volume, and therefore revenues,
will start increasing in the fourth quarter of calendar 2010.  We do not
plan to materially expand our Clinical Services business beyond its current
potential, and therefore we do not anticipate a significant increase in revenues
generated by this business segment beyond being a self-sustaining, stand-alone
clinic.





Cost
of Revenues





Nine Months Ended June 30,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeCost
      of Laboratory Information Services revenues
                                
                                $
                                101,900
                                
                                
                                $
                                99,800
                                
                                
                                
                                2
                                %


Cost of
Laboratory Information Services revenues consists of payroll costs, consulting
costs, and other miscellaneous charges.  Consulting costs primarily
represent external costs associated with the processing and analysis of rEEG
Reports and range between $75 and $100 per rEEG Report.  For the nine
months ended June 30, 2010, cost of revenues were $101,900 consisting primarily
of direct labor and benefit costs (including stock-based compensation costs) of
$77,900 and consulting fees of $24,400.  For the nine months ended
June 30, 2009, cost of revenues were $99,800, which includes direct labor and
benefit costs (including stock based compensation costs) of $75,500, and
consulting fees of $22,300.  There has been no material change in Cost
of Laboratory Information Services revenues for the two nine-month periods
ending June 30, 2010 and 2009.


35





We
ultimately expect cost of revenues to decrease as a percentage of revenues as
operating efficiencies improve with the volume of reports
processed.





Research
and Development





Nine Months Ended June 30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        Percent
                                          ChangeLaboratory
      Information Services research and development
                                        
                                        $
                                        843,600
                                        
                                        
                                        $
                                        1,628,500
                                        
                                        
                                        
                                        (48)
                                        %





Research
and development expenses consist of payroll costs (including stock-based
compensation costs), consulting fees, clinical study costs, patient marketing
and recruitment costs and other miscellaneous costs.  Research and
development costs for the nine months ended June 30, 2010, included the
following: payroll and benefit costs (including stock based
compensation) of $631,100, consultant costs of $157,400 and other
miscellaneous costs of $55,100 which include travel, database and support
costs.  There were negligible clinical study patient costs or patient
marketing and recruitment costs incurred for the nine months ended June 30
2010.  For the comparable period for 2009, research and development
costs included: payroll and benefit costs (including stock based
compensation) of $594,600, consultant costs of $49,200 and other
miscellaneous costs of $54,800 which included travel, database and support
costs.  Additionally, as the clinical study was in progress during the
2009 period, research and development costs included clinical study patient
costs of $777,600 and patient marketing and recruitment costs of
$152,400.





Comparing
the nine months ended June 30, 2010 with the corresponding period in
2009, clinical study patient costs and patient marketing and recruitment
costs were eliminated in the 2010 period as the study was completed in September
2009.  Consequently, the focus of the research and development
department moved from conducting the clinical study to analyzing the data and
drafting scientific papers for publications; the department also generated
several applications for research grants for future
funding.  Additionally, the focus moved to enhancing the rEEG
production system and the preparation of the 510(k) application with the
FDA.  With this shift in focus, consulting fees increased by $108,100;
in total $40,000 was spent on research and $157,400 was spent on product
enhancements.  Of the $157,400, $56,900 was spent on consulting
resources assisting with the filing of our 510(k) application with the FDA, the
balance, $100,500, was spent on programming resources to improve our database
and the rEEG process.  Payroll and benefits increased by $36,500 in
the 2010 period primarily due to the reassignment of a staff member between
departments and due to an increase in stock based compensation.




Sales and
marketing





Nine Months Ended June 30,2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    Percent
                                                      ChangeSales
      and MarketingLaboratory
      Information Services
                                                    
                                                    $
                                                    587,800
                                                    
                                                    
                                                    $
                                                    702,500
                                                    
                                                    
                                                    
                                                    (16)
                                                    %Clinical
      Services
                                                    
                                                    
                                                    16,000
                                                    
                                                    
                                                    
                                                    5,600
                                                    
                                                    
                                                    
                                                    186
                                                    %Total
      Sales and Marketing
                                                    
                                                    $
                                                    603,800
                                                    
                                                    
                                                    $
                                                    708,100
                                                    
                                                    
                                                    
                                                    (15)
                                                    %





Sales and
marketing expenses associated with our Laboratory Information Services business
consist primarily of payroll and benefit costs, including stock-based
compensation; advertising and marketing; consulting fees and conference and
travel expenses.  Sales and marketing expenses for the nine-month
period ended June 30, 2010 included the following expenses: payroll and
benefits $363,500, advertising and marketing $58,700, consulting $89,100 and
conferences and travel $45,600. For the comparable period in 2009 expenses were
as follows: payroll and benefits $457,900, advertising and marketing $105,100,
consulting $74,200 and conferences and travel $20,500.





Comparing
the nine months ended June 30, 2010, with the same period in 2009; payroll
and benefits decreased by $94,400 in the 2010 period as a result a
reduction in staff and the reassignment of staff to another
department.  Advertising and marketing expenses decreased by $46,400
as advertising was curtailed while the Company awaited its 510(k) clearance and
marketing efforts were largely limited to planning and network development,
whereas for the 2009 period the Company was actively executing its advertising
and marketing plans.  Conference and travel expenses increased by
$25,100 in the 2010 period as the Company conducted its first user-group
conference in January 2010.


36




The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic. In the nine months ending June 30, 2010,
Clinical Services also invested in re-launching its updated website and the
development of a new marketing strategy, which accounted for the increase in
expenditure.  We anticipate a moderate increase in marketing
expenditure to attract new patients to the clinic as the capacity to treat
patients has increased with the addition of a second psychiatrist.





General
and administrative





Nine Months Ended June 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          Percent
                                            ChangeGeneral
      and administrativeLaboratory
      Information Services
                                          
                                          $
                                          3,117,600
                                          
                                          
                                          $
                                          1,858,300
                                          
                                          
                                          
                                          68
                                          %Clinical
      Services
                                          
                                          $
                                          522,300
                                          
                                          
                                          
                                          501,800
                                          
                                          
                                          
                                          4
                                          %Total
      General and administrative
                                          
                                          $
                                          3,639,900
                                          
                                          
                                          $
                                          2,360,100
                                          
                                          
                                          
                                          54
                                          %





General
and administrative expenses for our Laboratory Information Services business are
largely comprised of payroll and benefit costs, including stock based
compensation, legal, patent costs, other professional and consulting fees,
general administrative and occupancy costs, conference and travel and
miscellaneous costs.  For the nine-months ended June 30, 2010,
General and Administrative costs included the following: salaries and
benefit costs of $774,300; legal fees of $1,484,900: other professional and
consulting fees of $381,100; general administrative and occupancy costs of
$333,200; patent costs $61,400 and conference and travel costs of
$82,400.   For the same period in 2009, General and
Administrative costs included the following: salaries and benefit costs of
$627,000; legal fees of $390,300; other professional and consulting fees of
$336,800; general administrative and occupancy costs of $345,700; patent costs
of $112,700 and conference and travel expenses of
$45,700.  Additionally other one-time miscellaneous charges of $99,700
were booked for the 2009 period.





With
respect to our Laboratory Information Services business, in the nine months
ended June 30, 2010 in comparison to the same period in 2009, payroll and
benefit expenses increased by a net $147,300 of which $140,200 was due to an
increase in stock based compensation primarily due to the accounting for vested
option grants given to employees, directors, advisors and consultants in March
2010.  The balance of the change was due to the staff mix as the
former CEO, Mr. Brandt left the Company in April 2009 and the former President,
Mr. Carpenter became the CEO.  Additionally the Chief Financial
Officer (CFO), who was previously engaged as a consultant, joined the staff in
mid February, 2010.   Professional and consulting fees increased
by a net $44,300 which is partly due to the mix of consulting services used and
increased frequency and complexity of our SEC filings requiring additional
professional services.  Additionally, consultants were hired in
connection with the Brandt litigation and private placement
financings.  Legal fees increased by a net $1,094,500 which was due to
$1,128,800 being incurred in defending against actions brought by Mr. Brandt
(see page 27 Matters Involving
our Former Chief Executive Officer and Former Director, Leonard Brandt).This was partially offset by a decrease of $34,200 on non-litigation
related legal fees.   General administrative and occupancy costs
decreased by a $12,500.  Patent costs declined by $51,200 as costs
were largely associated with patent maintenance.  Conference and
travel costs increased by $36,600 as a result of increased travel associated
with raising capital and litigation activities.  Miscellaneous
expenses incurred in the 2009 nine-month period of $99,700 were the result of a
revised IRS assessment on 2006 payroll taxes and Delaware Franchise Tax
assessments for calendar years 2007 and 2008.





General
and administrative expenses for our Clinical Services business includes all
costs associated with operating NTC.  This includes payroll costs,
medical supplies, occupancy costs and other general and administrative
costs.  These costs increased by $20,500 to $522,300 in the nine
months ending June 30, 2010 from $501,300 for the comparable period in
2009.  This increase is largely due to clinical services staff that
had worked on the clinical trial who were no longer being reimbursed by the
Laboratory Information Services for their time spent on the
study.


37





Interest
income (expense)





Nine Months Ended June 30,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeLaboratory
      Information Services (Expense), net
                                
                                $
                                (42,600
                                )
                                
                                $
                                (219,800
                                )
                                
                                
                                (81
                                )%Clinical
      Services (Expense)
                                
                                
                                (100
                                )
                                
                                
                                (100
                                )
                                
                                
                                0
                                %Total
      interest income (expense)
                                
                                $
                                (42,700
                                )
                                
                                $
                                (219,900
                                )
                                
                                
                                (81
                                )%





With
respect to our Laboratory Information Services business, we earned interest
income of $3,100 for the nine months ended June 30, 2010 from an interest
bearing account.  This was offset by $8,100 of interest expense on
promissory notes for the period.  Additionally, the beneficial
conversion discount amortization of the June 3, 2010 Bridge Note was $37,500 for
the period and charged to interest.  For the comparable period in
2009, net interest income was $8,600, while interest expenses on outstanding
promissory notes were $30,900.  Additionally, we incurred warrant
discount charges of $107,500 associated with the bridge financings during this
quarter ended June 30, 2009.  Furthermore, a charge of $90,000 was
incurred as a financing premium in connection with the promissory note issued to
Mr. Pappajohn during the quarter ended June 30, 2009.





Net
Loss





Nine Months Ended June 30,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeLaboratory
      Information Services net loss
                                
                                $
                                (4,617,000
                                )
                                
                                $
                                (4,435,300
                                )
                                
                                
                                4
                                %Clinical
      Services net loss
                                
                                
                                (136,200
                                )
                                
                                
                                (60,100
                                )
                                
                                
                                127
                                %Total
      Net Loss
                                
                                $
                                (4,753,200
                                )
                                
                                $
                                (4,495,400
                                )
                                
                                
                                6
                                %


The
increase in net loss of $257,800 in the nine months ended June 30, 2010
compared to the prior year period was primarily due to the $1.1 million
that was incurred in defending against the lawsuit brought by Mr. Brandt, the
Company’s former CEO.  For Laboratory Services over this period ended
June 30, 2010, all departments experienced a reduction in expenditures except
for those expenses associated with the litigation.  Our Clinical
Services operation experienced an increased deficit due to $57,600 reduction in
revenues and an $18,500 increase in expenditure over the period ended June 30,
2010 with a resultant $76,100 increase in net loss.





Liquidity
and Capital Resources





Since our
inception, we have incurred significant losses.  As of June 30, 2010,
we had an accumulated deficit of approximately $29.9 million.  We have
not yet achieved profitability and anticipate that we will continue to incur net
losses for the foreseeable future. We expect that our research and development,
selling and marketing and general and administrative expenses will continue to
grow and, as a result, we will need to generate significant product revenues to
achieve profitability. We may never achieve profitability.




As of
June 30, 2010 we had approximately $35,100 in cash and cash equivalents and a
working capital deficit of approximately $1.8 million compared to approximately
$0.99 million in cash and cash equivalents and a working capital deficit of
approximately $1.1 million at September 30, 2009.




Operating
Capital and Capital Expenditure Requirements




Our
continued operating losses and limited capital raise substantial doubt about our
ability to continue as a going concern, and we need to raise substantial
additional funds in the next 12 months in order to continue to conduct our
business.  Until we can generate a sufficient amount of revenues to
finance our cash requirements, which we may never do, we expect to finance
future cash needs primarily through public or private equity offerings, debt
financings, borrowings or strategic collaborations.


38




We need
additional funds immediately to continue our operations and will need
substantial additional funds before we can increase demand for our rEEG
services.  We are currently exploring additional sources of capital;
however, we do not know whether additional funding will be available on
acceptable terms, or at all, especially given the economic conditions that
currently prevail.  Furthermore, any additional equity funding may result
in significant dilution to existing stockholders, and, if we incur additional
debt financing, a substantial portion of our operating cash flow may be
dedicated to the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities.  We expect to
continue to incur operating losses in the future and to make capital
expenditures to expand our research and development programs (including
upgrading our CNS Database) and to scale up our commercial operations and
marketing efforts.   If adequate funds are not available, it
would have a material adverse effect on our business, financial condition and/or
results of operations, and could ultimately cause us to have to cease
operations.




Sources
of Liquidity




Since our
inception substantially all of our operations have been financed primarily from
equity and debt financings.  Through June 30, 2010, we had received
proceeds of approximately $13.7 million from the sale of stock,
$5.0 million from the issuance of convertible promissory notes and
$220,000 from the issuance of common stock to employees in connection with
expenses paid by such employees on behalf of the company.




On July 5, 2010, we issued two
unsecured promissory notes (each, a “Deerwood Note”) in the aggregate principal
amount of $250,000 to Deerwood Partners LLC and Deerwood Holdings LLC, with each
investor purchasing a note in the aggregate principal amount of
$125,000.  The Deerwood Notes mature on December 15,
2010.  We received $250,000 in gross proceeds from the issuance of
these notes.  SAIL Venture Partners L.P. (“SAIL”), of which our
director David Jones is a managing partner, issued an unconditional guaranty to
each of these investors, guaranteeing the prompt and complete payment when due
of all principal, interest and other amounts under each Deerwood
Note.  We have agreed to indemnify SAIL and grant to SAIL a security
interest in our assets in connection with the guaranties.




Each Deerwood Note accrues interest at
a rate of 9% per annum which will be paid together with the repayment of the
principal amount at the earliest of (i) the maturity date; (ii) prepayment of
the Deerwood Note at our option (iii) closing of a financing in which the
aggregate proceeds to us are not less than $3,000,000 or (iv) the occurrence of
an Event of Default (as defined in the Deerwood Note).  In addition,
pursuant to a separate agreement that we entered into with each of the Deerwood
investors, each investor will have the right to convert their note into shares
of our common stock at a conversion price of $0.50. The conversion price is
subject to customary anti-dilution adjustments, but will never be less than
$0.30.






The managing members of each of
Deerwood Partners LLC and Deerwood Holdings LLC are George J. Kallins, M.D., who
joined the Company’s Board of Directors on July 5, 2010, and his spouse Bettina
Kallins.






On June 3, 2010, we entered into a
Bridge Note and Warrant Purchase Agreement with John Pappajohn, pursuant to
which Mr. Pappajohn agreed to purchase two secured promissory notes (each, a
“Bridge Note”) in the aggregate principal amount of $500,000, with each Bridge
Note in the principal amount of $250,000 maturing on December 2,
2010.  On June 3, 2010, Mr. Pappajohn loaned the Company $250,000 in
exchange for the first Bridge Note (there were no warrants issued in connection
with this first note) and on July 25, 2010, Mr. Pappajohn loaned us $250,000 in
exchange for the second Bridge Note.  In connection with his purchase
of the second Bridge Note, Mr. Pappajohn received a warrant to purchase up to
250,000 shares of our common stock in accordance with the Bridge Note and
Warrant Purchase Agreement.  The exercise price of the warrant
(subject to customary anti-dilution adjustments) is $0.50 per
share.






Pursuant
to a separate agreement that we entered into with Mr. Pappajohn on July 25,
2010, we have granted him a right to convert his Bridge Notes into
shares of our common stock at a conversion price of $0.50.  The
conversion price is subject to customary anti-dilution adjustments,
but will never be less than $0.30.  We have also agreed to enter
into a registration rights agreement covering the securities issuable upon
exercise of the warrant and on conversion of the Bridge
Notes.




39





Each
Bridge Note accrues interest at a rate of 9% per annum which will be paid
together with the repayment of the principal amount at the earliest of (i) the
maturity date; (ii) prepayment of the Bridge Note at the option of the Company
(iii) closing of a financing in which the aggregate proceeds to the Company are
not less than $3,000,000 or (iv) the occurrence of an Event of Default (as
defined in the Bridge Note).  The Purchase Agreement and each Bridge
Note grants the investor a senior security interest in and to all of the
Company’s existing and future right, title and interest in its tangible and
intangible property.





Cash
Flows




Net cash
used in operating activities was $4.1 million for the nine months ended June 30,
2010 compared to $3.1 million for nine months ended June 30,
2009.  The increase in cash used of $1.0 million was primarily
attributable to increased legal fees associated with the Brandt litigation of
$1.13 million.




Investing
activities consisted of an $8,900 purchase of office equipment during
the nine months ended June 30, 2010.  In the comparable period in
2009, $2,000 was used to purchase office equipment.





Net cash
proceeds from financing activities for the nine months ended June 30, 2010 were
$3.2 million.  Of this $2.99 million were raised, net of placement
agent fees, legal fees and other offering costs, on December 24 and 31, 2009 and
January 4, 2010, in connection with the second, third and fourth closings of our
private placement transaction.  Additionally, $250,000 was raised from
the exchange of a secured, convertible promissory note. These proceeds were
partly offset by the repayment of $71,300 on a promissory note issued to Daniel
Hoffman M.D. in connection with our acquisition of NTC and on a capital
lease.   Net cash proceeds from financing activities in the period
ended June 30, 2009 were $1.7 million raised in exchange of secured, convertible
promissory notes. Additionally, $294,900 was raised as a result of the exercise
of warrants and options by shareholders.  These net cash proceeds were
partially offset with the use of $50,000 to pay off a convertible promissory
note and 65,800 used to pay down the promissory note issued in connection with
our acquisition of NTC and on a capital lease.




Contractual
Obligations and Commercial Commitments




As of
June 30, 2010, we have a contractual obligation to repay Mr. Pappajohn $250,000
on a secured, convertible promissory note which bears interest at 9% per annum
and comes due on December 2, 2010.  Additionally we have an obligation
to pay the remaining balance on a promissory note to Daniel Hoffman M.D. of
$48,900 issued in connection with our acquisition of NTC, which bears interest
at a rate of 8% per annum.  Furthermore, in December 2009, we signed a
lease for our new headquarters and Laboratory Information Services premises
located in Aliso Viejo, California.  This lease expires on January 31,
2013 and our remaining rent obligation during the term of the lease is
$123,300.  In March 2010, we also signed an amendment which extends
our lease for our Clinical Services premises located in Greenwood Village,
Colorado.  This lease expires on April 30, 2013 and our total rent
obligation during the term of the lease is $ 178,100.




Income
Taxes




Since
inception, we have incurred operating losses and, accordingly, have not recorded
a provision for federal income taxes for any periods presented.  As of
September 30, 2009, we had net operating loss carryforwards for federal income
tax purposes of $20.8 million.  The net operating loss carryforwards
expire by 2028.  Utilization of net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to
restrictions contained in the Internal Revenue Code that are applicable if we
experience an “ownership change”. The annual limitation may result in the
expiration of our net operating loss and tax credit carryforwards before they
can be used.




Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements or financing activities with special purpose
entities.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk.





Not
applicable.


40




Item
4.         Controls and
Procedures.




Disclosure
Controls and Procedures




Our
management, including our principal executive officer (PEO) and principal
financial officer (PFO), conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange Act
Rules 13a-15, as of June 30, 2010, the end of the period covered by this
report.  Based on this evaluation, our PEO and PFO concluded that our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and is accumulated and communicated to our management, including our PEO and
PFO, as appropriate to allow timely decisions regarding required
disclosures.





Changes
in Internal Control Over Financial Reporting




Other
than as stated above, there are no changes in our internal control over
financial reporting or in other factors identified in connection with the
evaluation required by paragraph (d) of exchange act rules 13a-15 or 15d-15
which occurred during the quarter ended June 30, 2010.


41


PART
II


OTHER
INFORMATION




Item
1.              
Legal Proceedings




Please
see Note 8 to our Notes to Unaudited Condensed Consolidated Financial Statements
as well as the litigation summary beginning on page 27 under the heading
“Matters Involving our Former Chief Executive Officer and Former Director,
Leonard Brandt” for an update on our ongoing litigation with Leonard
Brandt.





Item
1A.            Risk
Factors




Investing
in our securities involves risks.  In addition to the other
information in this quarterly report on Form 10-Q, shareholders and potential
investors should carefully consider the risks and uncertainties discussed in the
section “Item 1.A.  Risk Factors” in our Annual Report on Form 10-K
for the year ended September 30, 2009.  If any of the risks and
uncertainties set forth therein actually materialize, our business, financial
condition and/or results of operations could be materially adversely affected,
the trading price of our common stock could decline and a stockholder could lose
all or part of his or her investment. The risks and uncertainties described in
here and in our Annual Report on Form 10-K are not the only ones we
face.  Additional risks and uncertainties not presently known to us or
that we currently consider immaterial may also impair our business
operations.




We
have been in a dialogue with the United States Food & Drug Administration
(FDA) regarding its position that our rEEG service constitutes a medical device
which is subject to regulation by the FDA.   If we continue to market
our rEEG service, there is risk that the FDA will seek enforcement action
against us based upon the FDA’s position that our rEEG service is a medical
device.  In addition, complying with regulatory requirements imposed
by the FDA will further reduce our limited operating capital.




Since
April of 2008, we have been in a dialogue with the FDA regarding its position
that our rEEG service constitutes a medical device which is subject to
regulation by the FDA.  On April 10, 2008 we received correspondence
from the FDA in which the FDA indicated it believed, based in part on the
combination of certain marketing statements it read on our website, together
with the delivery of our rEEG Reports, that we were selling a software product
to aid in diagnosis, which constituted a “medical device” requiring pre-market
approval or 510(k) clearance by the FDA pursuant to the Federal Food, Drug and
Cosmetic Act (the “Act”).  We responded to the FDA on April 24, 2008
indicating that we believed it had incorrectly understood our product offering,
and clarified that our rEEG services are not diagnostic and thus for this
as well as other reasons, do not constitute a medical device.  On
December 14, 2008, the FDA again contacted us and indicated that, based upon its
review of our description of our intended use of the rEEG Reports on our
website, it continued to maintain that our rEEG service met its definition of
medical devices. In response to the FDA communications, we made a number of
changes to our website and other marketing documents to reflect that rEEG is a
service to aid in medication selection and is not an aid to
diagnosis.  On September 4, 2009, through our regulatory counsel, we
responded to the December 14, 2008 FDA letter explaining our position in more
detail.





During
the intervening period of time, based upon conversations with FDA, we chose to
submit an application to obtain 510(k) clearance for our rEEG service, without
waiving our right to continue to take the position that our services do not
constitute a medical device.  We sought review of our rEEG service
based upon its equivalence to predicate devices that already have FDA clearance
which appeared to represent a sound mechanism to reduce regulatory
risks.





On July
27, 2010 we received a letter (the “NSE Letter”) from the FDA stating that they
determined that our rEEG service was not substantially equivalent to the
predicate devices that had previously been granted 510(k) clearance and that
among other options we could be required to file an approved premarket approval
application (PMA) before it can be marketed legally, unless it is otherwise
reclassified.





We currently plan to continue marketing
as a non-device laboratory information service, while continuing to discuss
alternative approaches with the FDA.  Alternative approaches, which
are not mutually exclusive, may consist of (1) filing a request for
reconsideration of the NSE letter and/or (2) submitting a new 510(k) with
revised claims for rEEG and/or additional information about the predicate
devices.  If we continue to market our rEEG service and the FDA
determines that we should be subject to FDA regulation, it could seek
enforcement action against the Company based upon its position that our rEEG
service is a medical device.


42


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




On June 3, 2010, we entered into a
Bridge Note and Warrant Purchase Agreement with John Pappajohn to purchase two
secured promissory notes (each, a “Bridge Note”) in the aggregate principal
amount of $500,000, with each Bridge Note in the principal amount of $250,000
maturing on December 2, 2010.  On June 3, 2010, Mr. Pappajohn loaned
the Company $250,000 in exchange for the first Bridge Note (there were no
warrants issued in connection with this first note) and on July 25, 2010, Mr.
Pappajohn loaned us $250,000 in exchange for the second Bridge
Note.  In connection with his purchase of the second Bridge Note, Mr.
Pappajohn received a warrant to purchase up to 250,000 shares of our common
stock.  The exercise price of the warrant (subject to
customary anti-dilution adjustments) is $0.50 per share.




Pursuant to a separate agreement that
we entered into with Mr. Pappajohn on July 25, 2010, we have granted him a right
to convert his Bridge Notes into shares of our common stock at a conversion
price of $0.50.  The conversion price is subject to customary
anti-dilution adjustments, but will never be less than $0.30.  We have
also agreed to enter into a registration rights agreement covering the
securities issuable upon exercise of the warrant and on conversion of the Bridge
Notes.




Each Bridge Note accrues interest at a
rate of 9% per annum which will be paid together with the repayment of the
principal amount at the earliest of (i) the maturity date; (ii) prepayment of
the Bridge Note at the option of the Company (iii) closing of a financing in
which the aggregate proceeds to the Company are not less than $3,000,000 or (iv)
the occurrence of an Event of Default (as defined in the Bridge
Note).  The Bridge Note and Warrant Purchase Agreement and each Bridge
Note grants the investor a senior security interest in and to all of the
Company’s existing and future right, title and interest in its tangible and
intangible property.




The descriptions of the terms of the
Bridge Note and Warrant Purchase Agreement, the Bridge Notes, the warrant and
the July 25, 2010 agreement are qualified by reference to the text of such
documents, which are attached as exhibits to our current report on Form 8-K,
filed on June 7, 2010, and Exhibit 10.2 to this quarterly report on Form
10-Q.




In issuing the Bridge Notes and warrant
to Mr. Pappajohn without registration under the Securities Act, we relied upon
the exemption from registration contained in Section 4(2) of the Securities Act
and in Regulation D promulgated thereunder, as the Bridge Notes and warrant were
issued to an accredited investor, without a view to distribution, and were not
issued through any general solicitation or advertisement.


43





Item
6.              Exhibits




The
following exhibits are filed as part of this report:




Exhibit
                              Number
                            
                            Exhibit Title10.1
                            
                            Amended
      and Restated 2006 Stock Incentive Plan (incorporated by reference to
      Appendix A to our Definitive Proxy Statement on Schedule 14A filed on
      April 1, 2010).10.2
                            
                            Letter
      Agreement, dated as of July 25, 2010, between the Company and John
      Pappajohn, relating to conversion rights of Bridge
  Notes.31.1
                            
                            Certification
      of Principal Executive Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                            
                            Certification
      of Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                            
                            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of
2002.




44


SIGNATURES




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




CNS
      Response, Inc.Date:
      August 16, 2010
              
              /s/ George CarpenterBy:
              George
      CarpenterIts:
              Chief
      Executive Officer(Principal
      Executive Officer)/s/ Paul
      Buck__________________________By:
              Paul
      BuckIts:
              Chief
      Financial Officer(Principal
      Financial andAccounting
      Officer)




45