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 March 31, 2010 or
 
 
              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

 
 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 
          No 
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
      accelerated filer 
              
              Accelerated
      filer Non-accelerated
      filer 
              (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        No x
 
 As of May
13, 2010, the issuer had 56,023,921 shares of common stock, par value $.001 per
share, issued and outstanding.
 1
 
 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 six
      months ended March 31, 2010 and 2009
                3Condensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and September
      30, 2009
                4Unaudited
      Condensed Consolidated Statements of Cash Flows for the six months ended
      March 31, 2010 and 2009
                5Unaudited
      Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for
      the six months ended March 31, 2010 and 2009
                6Notes
      to Unaudited Condensed Consolidated Financial Statements
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                20Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                33Item
      4.
                Controls
      and Procedures
                33PART
      II
                OTHER
      INFORMATION
                34Item
      1A.
                Risk
      Factors
                34Item
      6.
                Exhibits
                34
  2
 
 PART
I
 FINANCIAL
INFORMATION
  Item
      1.
              Financial
      Statements
  CNS
RESPONSE, INC.
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 For
      the three months ended
                                            March
      31,
                                          
                                          
                                          For
      the six months ended
                                            March
      31,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009REVENUESLaboratory
      Information Services
                                          
                                          $
                                          34,400
                                          
                                          
                                          $
                                          31,200
                                          
                                          
                                          $
                                          56,800
                                          
                                          
                                          $
                                          59,700Clinical
      Services
                                          
                                          
                                          143,900
                                          
                                          
                                          
                                          152,600
                                          
                                          
                                          
                                          265,000
                                          
                                          
                                          
                                          295,800178,300
                                          
                                          
                                          
                                          183,800
                                          
                                          
                                          
                                          321,800
                                          
                                          
                                          
                                          355,500OPERATING
      EXPENSESCost
      of laboratory services revenues
                                          
                                          
                                          39,400
                                          
                                          
                                          
                                          35,600
                                          
                                          
                                          
                                          69,100
                                          
                                          
                                          
                                          69,100Research
      and development
                                          
                                          
                                          318,700
                                          
                                          
                                          
                                          521,800
                                          
                                          
                                          
                                          541,300
                                          
                                          
                                          
                                          1,147,800Sales
      and marketing
                                          
                                          
                                          202,500
                                          
                                          
                                          
                                          283,700
                                          
                                          
                                          
                                          402,800
                                          
                                          
                                          
                                          547,000General
      and administrative
                                          
                                          
                                          1,009,800
                                          
                                          
                                          
                                          798,500
                                          
                                          
                                          
                                          2,557,500
                                          
                                          
                                          
                                          1,478,500Total
      operating expenses
                                          
                                          
                                          1,570,400
                                          
                                          
                                          
                                          1,639,600
                                          
                                          
                                          
                                          3,570,700
                                          
                                          
                                          
                                          3,242,400OPERATING
      LOSS
                                          
                                          
                                          (1,392,100
                                          )
                                          
                                          
                                          (1,455,800
                                          )
                                          
                                          
                                          (3,248,900
                                          )
                                          
                                          
                                          (2,886,900
                                          )OTHER
      INCOME (EXPENSE):Interest
      income (expense), net
                                          
                                          
                                          (100
                                          )
                                          
                                          
                                          (4,700
                                          )
                                          
                                          
                                          (1,700
                                          )
                                          
                                          
                                          (3,500
                                          )Total
      other income
                                          
                                          
                                          (100
                                          )
                                          
                                          
                                          (4,700
                                          )
                                          
                                          
                                          (1,700
                                          )
                                          
                                          
                                          (3,500
                                          )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                                          
                                          
                                          (1,392,200
                                          )
                                          
                                          
                                          (1,460,500
                                          )
                                          
                                          
                                          (3,250,600
                                          )
                                          
                                          
                                          (2,890,400
                                          )Income
      taxes
                                          
                                          
                                          1,600
                                          
                                          
                                          
                                          800
                                          
                                          
                                          
                                          2,400
                                          
                                          
                                          
                                          2,800NET
      LOSS
                                          
                                          $
                                          (1,393,800
                                          )
                                          
                                          $
                                          (1,461,300
                                          )
                                          
                                          $
                                          (3,253,000
                                          )
                                          
                                          $
                                          (2,893,200
                                          )NET
      LOSS PER SHARE:Basic
                                          
                                          $
                                          (0.03
                                          )
                                          
                                          $
                                          (0.06
                                          )
                                          
                                          $
                                          (0.07
                                          )
                                          
                                          $
                                          (0.11
                                          )Diluted
                                          
                                          $
                                          (0.03
                                          )
                                          
                                          $
                                          (0.06
                                          )
                                          
                                          $
                                          (0.07
                                          )
                                          
                                          $
                                          (0.11
                                          )WEIGHTED
      AVERAGE SHARES OUTSTANDING:Basic
                                          
                                          
                                          54,512,337
                                          
                                          
                                          
                                          25,299,547
                                          
                                          
                                          
                                          48,530,317
                                          
                                          
                                          
                                          25,299,547Diluted
                                          
                                          
                                          54,512,337
                                          
                                          
                                          
                                          25,299,547
                                          
                                          
                                          
                                          48,530,317
                                          
                                          
                                          
                                          25,299,547
  
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
 3
 
 CNS
RESPONSE, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 March
      31,
                                  2010
                                
                                
                                September
      30, 2009ASSETS
                                
                                (unaudited)CURRENT
      ASSETSCash
                                
                                $
                                682,800
                                
                                
                                $
                                988,100Accounts
      receivable (net of  allowance for doubtful accounts of $6,600
      (unaudited) as of March 31, 2010 and $11,200 as of  September
      30, 2009)
                                
                                
                                69,200
                                
                                
                                
                                61,700Prepaid
      and other
                                
                                
                                120,700
                                
                                
                                
                                89,500Total current assets
                                
                                
                                872,700
                                
                                
                                
                                1,139,300Furniture
      and Fittings
                                
                                
                                21,100
                                
                                
                                
                                17,500Other
      Assets
                                
                                
                                18,700
                                
                                
                                
                                4,100TOTAL
      ASSETS
                                
                                $
                                912,500
                                
                                
                                $
                                1,160,900LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable  (including amounts due to related parties of $0
      (unaudited) as of  March 31, 2010 and $7,000 as of September 30,
      2009)
                                
                                $
                                955,600
                                
                                
                                $
                                1,285,600Accrued
      liabilities
                                
                                
                                337,100
                                
                                
                                
                                261,400Deferred
      compensation (including  $69,100 (unaudited) and $81,200 to
      related parties as of  March 31,  2010 and September
      30, 2009 respectively)
                                
                                
                                228,700
                                
                                
                                
                                220,100Accrued
      patient costs
                                
                                
                                193,100
                                
                                
                                
                                305,500Accrued
      consulting fees
                                
                                
                                66,100
                                
                                
                                
                                72,100Current
      portion of long-term debt
                                
                                
                                74,700
                                
                                
                                
                                95,900Total
      current liabilities
                                
                                
                                1,855,300
                                
                                
                                
                                2,240,600LONG
      –TERM LIABILITIESNote
      payable to officer
                                
                                
                                -
                                
                                
                                
                                24,800Capital
      lease
                                
                                
                                4,500
                                
                                
                                
                                5,600Total
      long term liabilities
                                
                                
                                4,500
                                
                                
                                
                                30,400COMMITMENTS
      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
      March 31, 2010 and September 30, 2009 respectively
                                
                                
                                56,000
                                
                                
                                
                                41,800Additional
      paid-in capital
                                
                                
                                27,445,600
                                
                                
                                
                                24,044,000Accumulated
      deficit
                                
                                
                                (28,448,900
                                )
                                
                                
                                (25,195,900
                                )Total
      stockholders’ equity (deficit)
                                
                                
                                (947,300
                                )
                                
                                
                                (1,110,100
                                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
                                $
                                912,500
                                
                                
                                $
                                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 six months ended
                                      March
      31,2010
                                    
                                    
                                    2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                    
                                    $
                                    (3,253,000
                                    )
                                    
                                    $
                                    (2,893,200
                                    )Adjustments
      to reconcile net loss to
                                      net
      cash used in operating activities:Depreciation
      and Amortization
                                    
                                    
                                    5,300
                                    
                                    
                                    
                                    4,500Stock-based
      compensation
                                    
                                    
                                    420,400
                                    
                                    
                                    
                                    441,500Doubtful
      debt write-off
                                    
                                    
                                    5,800
                                    
                                    
                                    
                                    -Changes
      in operating assets and liabilities:Accounts
      receivable
                                    
                                    
                                    (13,300
                                    )
                                    
                                    
                                    4,500Prepaids
      and other current assets
                                    
                                    
                                    (31,200
                                    )
                                    
                                    
                                    19,000Accounts
      payable
                                    
                                    
                                    (330,000
                                    )
                                    
                                    
                                    336,500Accrued
      liabilities
                                    
                                    
                                    69,700
                                    
                                    
                                    
                                    128,100Deferred
      compensation
                                    
                                    
                                    8,600
                                    
                                    
                                    
                                    (15,700
                                    )Accrued
      patient costs
                                    
                                    
                                    (112,400
                                    )
                                    
                                    
                                    83,600Security
      deposits on leases
                                    
                                    
                                    (14,600
                                    )
                                    
                                    
                                    -Net
      cash used in operating activities
                                    
                                    
                                    (3,244,700
                                    )
                                    
                                    
                                    (1,891,200
                                    )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of office furniture
                                    
                                    
                                    (8,900
                                    )
                                    
                                    
                                    -Net
      cash used in investing activities
                                    
                                    
                                    (8,900
                                    )
                                    
                                    
                                    -CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      from Secured Convertible notes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    500,000Repayment
      of note
                                    
                                    
                                    (46,100
                                    )
                                    
                                    
                                    (42,500
                                    )Prepayment
      of lease
                                    
                                    
                                    (1,000
                                    )
                                    
                                    
                                    (900
                                    )Proceeds
      from sale of common stock, net of offering costs
                                    
                                    
                                    2,995,400
                                    
                                    
                                    
                                    -Net
      cash from financing activities
                                    
                                    
                                    2,948,300
                                    
                                    
                                    
                                    456,600Net
      decrease in cash
                                    
                                    
                                    (305,300
                                    )
                                    
                                    
                                    (1,434,600
                                    )Cash,
      beginning of period
                                    
                                    
                                    988,100
                                    
                                    
                                    
                                    1,997,000Cash,
      end of period
                                    
                                    $
                                    682,800
                                    
                                    
                                    $
                                    562,400
 SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONCash  paid
      during the period for:Interest
                    
                    $
                    1,700
                    
                    
                    $
                    7,900Income
      taxes
                    
                    $
                    2,400
                    
                    
                    $
                    2,800
 
 
 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 six months ended March 31, 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
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                420,400
                                
                                
                                
                                -
                                
                                
                                
                                420,400Issuance
      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
                                
                                
                                
                                -
                                
                                
                                
                                415,800Net
      loss for the six months ended March 31, 2010
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3,253,000
                                )
                                
                                
                                (3,253,000
                                )Balance
      at March 31,
      2010
                                
                                
                                56,023,921
                                
                                
                                $
                                56,000
                                
                                
                                $
                                27,445,600
                                
                                
                                $
                                (28,448,900
                                )
                                
                                $
                                947,300
  For the
      six months ended March 31, 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
                        )
                        
                        $
                        1,052,900Stock-
      based
      compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        441,500
                        
                        
                        
                        -
                        
                        
                        
                        441,500Net
      loss for the six months ended March 31, 2009
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,893,200
                        )
                        
                        
                        (2,893,200
                        )Balance
      at March 31,
      2009
                        
                        
                        25,299,547
                        
                        
                        $
                        25,300
                        
                        
                        $
                        18,142,800
                        
                        
                        $
                        (19,566,900
                        )
                        
                        $
                        (1,398,800
                        )
 
 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
 
 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 March 31, 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.
  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.
  7
 The
results of operations for the six months ended March 31, 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.
 
 As of
March 31, 2010 the Company did not identify any 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.
 
 8
  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.
  
  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.
 
 9
  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, first exercisable no earlier than
February 26, 2010.
 
 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, first exercisable no earlier than February 26,
2010.
 
 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 on February 1,
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 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.  To date, the registration statement has not been
declared effective.
 
 
 Events Relating to Private Placement
Transaction
 
 (a)
              Conversion
      of the March 30, 2009 SAIL/Brandt
Notes
 
 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.
  10
  (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.
  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, first exercisable no
earlier than June 24, 2010.  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, first
exercisable no earlier than June 30, 2010.  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, first
exercisable no earlier than July 4, 2010
 
 11
  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, first exercisable no earlier than June 24,
2010.  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, first exercisable no earlier than June 30,
2010.  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,
first exercisable no earlier than July 4, 2010.
 
 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, pursuant to which a registration
statement on Form S-1 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.
 
  3.           STOCKHOLDERS’
EQUITY
  Common
and Preferred Stock
  As of
March 31, 2010 the Company is authorized to issue 750,000,000 shares of common
stock.
  As of
March 31, 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
March 31, 2010, Colorado CNS Response, Inc. is authorized to issue 1,000,000
shares of common stock.
  As of
March 31, 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.
  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.
  Originally, a total of 10 million
shares of common stock were reserved for issuance under the 2006
Plan.  The 2006 Plan also originally 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. On March 3, 2010, the Board of Directors
approved an amendment to the 2006 Plan which increased the number of shares of
common stock reserved for issuance under the 2006 Plan from 10 million to 20
million shares and increased the limit on shares underlying awards granted
within a calendar year to any eligible employee or director from 3 million to 4
million shares of common stock.  The amendment was approved by
shareholders at the annual meeting held on April 27, 2010.
  12
  On March
3, 2010, the Board of Directors also approved the grant of 9,450,000 options to
staff members, directors, advisors and consultants.  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 common stock on that day.  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.
  As of
March 31, 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
and further 575,000 options approved but not yet granted, leaving 2,245,350
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 March 31, 2010 and 2009 is as
follows:
  For
      the three months ended
                        March
      31,2010
                      
                      
                      2009Cost
      of laboratory services revenues
                      
                      $
                      4,900
                      
                      
                      $
                      4,000Research
      and development
                      
                      
                      78,800
                      
                      
                      
                      65,200Sales
      and marketing
                      
                      
                      35,600
                      
                      
                      
                      38,200General
      and administrative
                      
                      
                      117,400
                      
                      
                      
                      106,500Total
                      
                      $
                      236,700
                      
                      
                      $
                      213,900
 
 For
      the six months ended
                        March
      31,2010
                      
                      
                      2009Cost
      of laboratory services revenues
                      
                      $
                      8,900
                      
                      
                      $
                      8,000Research
      and development
                      
                      
                      143,700
                      
                      
                      
                      130,400Sales
      and marketing
                      
                      
                      65,200
                      
                      
                      
                      80,000General
      and administrative
                      
                      
                      202,600
                      
                      
                      
                      223,100Total
                      
                      $
                      420,400
                      
                      
                      $
                      441,500
 
 Total
unrecognized compensation expense as of March 31, 2010 amounted to
$5,098,900
 
 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
                  
                  
                  $
                  0.63Weighted
      average fair value of options granted during:Three
      months ended March 31, 2010
                  
                  
                  
                  
                  
                  $
                  0.55Six
      months ended March 31, 2010
                  
                  
                  
                  
                  
                  $
                  0.55
 
 13
  The
following is a summary of the status of options outstanding at March 31,
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
  At
September 30, 2009, there were warrants outstanding to purchase 15,537,485
shares.  During the six months ended March 31, 2010, a further
7,093,601 warrants were granted and 3,333,333 warrants were exercised as
follows:
  14
 
 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 exercise method and 2,456,126 shares
      were issued in lieu of cash.
  At March
31, 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
March 31, 2010 deferred compensation included the following: $9,000 of
accrued fees due to a director in accordance with a consulting agreement. 
During the six months ended March 31, 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.
 
 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 March 31, 2010 and September
30, 2009 the note has an outstanding principal balance in the amount of $72,600
and $118,600 respectively.  The entire balance is current as of March
31, 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.
 
 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 March 31, 2010Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  40,400
                  
                  
                  $
                  143,900
                  
                  
                  $
                  (6,000
                  )
                  
                  $
                  178,300Operating
      expenses:Cost
      of revenues
                  
                  
                  39,400
                  
                  
                  
                  6,000
                  
                  
                  
                  (6,000
                  )
                  
                  
                  39,400Research
      and development
                  
                  
                  318,700
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  318,700Sales
      and marketing
                  
                  
                  201,900
                  
                  
                  
                  600
                  
                  
                  
                  -
                  
                  
                  
                  202,500General
      and administrative
                  
                  
                  818,800
                  
                  
                  
                  191,000
                  
                  
                  
                  -
                  
                  
                  
                  1,009,800Total
      operating expenses
                  
                  $
                  1,378,800
                  
                  
                  $
                  197,600
                  
                  
                  $
                  -
                  
                  
                  $
                  1,570,400Income
      (Loss) from operations
                  
                  $
                  (1,338,400
                  )
                  
                  $
                  53,700
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,392,100
                  )
 
 15
  Three
      Months ended March 31, 2009Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  34,600
                  
                  
                  $
                  180,100
                  
                  
                  $
                  (30,900
                  )
                  
                  $
                  183,800Operating
      expenses:Cost
      of revenues
                  
                  
                  35,600
                  
                  
                  
                  3,400
                  
                  
                  
                  (3,400
                  )
                  
                  
                  35,600Research
      and development
                  
                  
                  521,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  521,800Sales
      and marketing
                  
                  
                  282,300
                  
                  
                  
                  1,400
                  
                  
                  
                  -
                  
                  
                  
                  283,700General
      and administrative
                  
                  
                  657,700
                  
                  
                  
                  168,300
                  
                  
                  
                  (27,500
                  )
                  
                  
                  798,500Total
      operating expenses
                  
                  $
                  1,497,400
                  
                  
                  $
                  173,100
                  
                  
                  $
                  (30,900
                  )
                  
                  $
                  1,639,600Income
      (Loss) from operations
                  
                  $
                  (1,462,800
                  )
                  
                  $
                  7,000
                  
                  
                  $
                  -
                  
                  
                  $
                  (1,455,800
                  )
 
 
 
 Six
      Months ended March 31, 2010Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  66,800
                  
                  
                  $
                  298,300
                  
                  
                  $
                  (43,300
                  )
                  
                  $
                  321,800Operating
      expenses:Cost
      of revenues
                  
                  
                  69,100
                  
                  
                  
                  10,000
                  
                  
                  
                  (10,000
                  )
                  
                  
                  69,100Research
      and development
                  
                  
                  541,300
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  541,300Sales
      and marketing
                  
                  
                  400,300
                  
                  
                  
                  2,500
                  
                  
                  
                  
                  
                  
                  
                  402,800General
      and administrative
                  
                  
                  2,251,300
                  
                  
                  
                  339,500
                  
                  
                  
                  (33,300
                  )
                  
                  
                  2,557,500Total
      operating expenses
                  
                  $
                  3,192,900
                  
                  
                  $
                  352,000
                  
                  
                  $
                  (33,300
                  )
                  
                  $
                  3,570,700Income
      (Loss) from operations
                  
                  $
                  (3,195,200
                  )
                  
                  $
                  (53,700
                  )
                  
                  $
                  -
                  
                  
                  $
                  (3,248,900
                  )
 
 
 
 Six
      Months ended March 31, 2009Laboratory
                    Information
                    Services
                  
                  
                  Clinic
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  66,800
                  
                  
                  $
                  329,700
                  
                  
                  $
                  (41,000
                  )
                  
                  $
                  355,500Operating
      expenses:Cost
      of revenues
                  
                  
                  69,100
                  
                  
                  
                  7,100
                  
                  
                  
                  (7,100
                  )
                  
                  
                  69,100Research
      and development
                  
                  
                  1,147,800
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,147,800Sales
      and marketing
                  
                  
                  542,900
                  
                  
                  
                  4,100
                  
                  
                  
                  
                  
                  
                  
                  547,000General
      and administrative
                  
                  
                  1,195,300
                  
                  
                  
                  317,100
                  
                  
                  
                  (33,900
                  )
                  
                  
                  1,478,500Total
      operating expenses
                  
                  $
                  2,955,100
                  
                  
                  $
                  328,300
                  
                  
                  $
                  (41,100
                  )
                  
                  $
                  3,242,400Income
      (Loss) from operations
                  
                  $
                  (2,888,300
                  )
                  
                  $
                  1,400
                  
                  
                  $
                  -
                  
                  
                  $
                  (2,886,900
                  )
 
 16
 
 The
following table includes selected segment financial information as of March 31,
2010, related to goodwill and total assets:
 
 Laboratory
                    Information
      Services
                  
                  
                  Clinic
                  
                  
                  TotalGoodwill
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      assets
                  
                  $
                  861,400
                  
                  
                  $
                  51,100
                  
                  
                  $
                  912,500
 
  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 six months ended March 31, 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 six months ended March 31, 2010 and 2009 are as
follows:
  For
      the Three Months ended March 31,2010
                                                  
                                                  
                                                  2009Net
      loss for computation of basic net loss per share
                                                  
                                                  $
                                                  (1,393,800
                                                  )
                                                  
                                                  $
                                                  (1,461,300
                                                  )Net
      loss for computation of dilutive net loss per share
                                                  
                                                  $
                                                  (1,393,800
                                                  )
                                                  
                                                  $
                                                  (1,461,300
                                                  )Basic
      net loss per share
                                                  
                                                  $
                                                  (0.03
                                                  )
                                                  
                                                  $
                                                  (0.06
                                                  )Diluted
      net loss per share
                                                  
                                                  $
                                                  (0.03
                                                  )
                                                  
                                                  $
                                                  (0.06
                                                  )Basic
      weighted average shares outstanding
                                                  
                                                  
                                                  54,512,337
                                                  
                                                  
                                                  
                                                  25,299,547Dilutive
      common equivalent shares
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Diluted
      weighted average common shares
                                                  
                                                  
                                                  54,512,337
                                                  
                                                  
                                                  
                                                  25,299,547For
      the Six Months ended March 31,2010
                                                  
                                                  
                                                  2009Net
      loss for computation of basic net loss per share
                                                  
                                                  $
                                                  (3,253,000
                                                  )
                                                  
                                                  $
                                                  (2,893,200
                                                  )Net
      loss for computation of dilutive net loss per share
                                                  
                                                  $
                                                  (3,253,000
                                                  )
                                                  
                                                  $
                                                  (2,893,200
                                                  )Basic
      net loss per share
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.11
                                                  )Diluted
      net loss per share
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.11
                                                  )Basic
      weighted average shares outstanding
                                                  
                                                  
                                                  48,530,317
                                                  
                                                  
                                                  
                                                  25,299,547Dilutive
      common equivalent shares
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Diluted
      weighted average common shares
                                                  
                                                  
                                                  48,530,317
                                                  
                                                  
                                                  
                                                  25,299,547Anti-dilutive
      common equivalent shares not included in the computation of dilutive net
      loss per share:For
      the Three Months ended March 31,2010
                                                  
                                                  
                                                  2009Convertible
      debt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,995,000Warrants
                                                  
                                                  
                                                  21,326,499
                                                  
                                                  
                                                  
                                                  6,899,353Options
                                                  
                                                  
                                                  7,870,973
                                                  
                                                  
                                                  
                                                  8,740,087For
      the Six Months ended March 31,2010
                                                  
                                                  
                                                  2009Convertible
      debt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,995,000Warrants
                                                  
                                                  
                                                  18,707,898
                                                  
                                                  
                                                  
                                                  6,899,353Options
                                                  
                                                  
                                                  7,236,708
                                                  
                                                  
                                                  
                                                  8,840,843
 
 17
  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.
  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.  On February 25, 2010, Mr. Brandt voluntarily dismissed this
appeal, and the ruling of the Chancery Court thereby became final and
non-appealable.
  The
Chancery Court also dismissed with prejudice another action brought by Mr.
Brandt, in which he claimed he had not been provided information owed to
him.  Mr. Brandt did not appeal this dismissal.
  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 in July
2009.  Our complaint alleges 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. On September 17, 2009, 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 December 14, 2009, the
Company answered the counterclaims in the case.  On March 10, 2010, we
dismissed the Company’s claims against the defendants other than Mr. Brandt, and
they dismissed their claims against us and the other counterclaim
defendants.  On April 10, 2010 Mr. Brandt's attorneys moved to
withdraw from representing Mr. Brandt in the case.  The District Court
action continues with respect to our claims against Mr. Brandt and Mr. Brandt’s
counterclaims against us and the other counterclaim defendants.  We
are vigorously prosecuting our claims and vigorously defending Mr. Brandt’s
counterclaims.
 
  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.
  18
  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.
 
 The
Company incurred rent expense of $34,300 and $32,000 for the three months ended
March 31, 2010 and 2009 and $71,800 and $62,500 for the six months ended March
31, 2010 and 2009
 
 
 9.     SUBSEQUENT
EVENTS
 
 Events
subsequent to March 31, 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 March 31, 2010.
  On April
1, 2010, the Company filed its application for 510(k) clearance with the FDA and
has engaged in routine correspondence with the FDA regarding the
filing.
  On April
20, 2010, as detailed in Note 8 and on page 23 (see Matters Involving our Former Chief
Executive Officer and Former Director, Leonard Brandt), the Delaware
Supreme Court ruled on an appeal filed by Mr. Brandt on January 4,
2010.  The Delaware Supreme Court affirmed the ruling in favor of the
Company by the Chancery Court of Delaware.
 
 On April
27, 2010, as mentioned in Note 3, the amendment to the 2006 Stock Incentive Plan
was approved by shareholders at the annual meeting.  The amendment
increased the number of shares of common stock reserved for issuance under the
2006 Plan from 10 million to 20 million shares and increased the limit on shares
underlying awards granted within a calendar year to any eligible employee or
director from 3 million to 4 million shares of common stock.
  19
  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 six months ended March 31, 2010 and
2009. Except for historical information, the matters discussed in this
management's discussion and analysis or plan of operation are “forward-looking
statements” that involve risks and uncertainties and are based upon judgments
concerning various factors that are beyond our control. Actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other things, the factors referred to below under the caption
“Risk Factors.”
  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.
  Laboratory
Information Services
  In
connection with our Laboratory Information Services business, we have developed
an extensive proprietary database (the “CNS Database”) consisting of over 17,000
clinical outcomes across more than 2,000 patients who had psychiatric or
addictive problems. For each patient, we have compiled electroencephalographic
(“EEG”) data, symptoms and outcomes, often across multiple treatments from
multiple psychiatrists and physicians. Using this database, our technology
compares a patient’s EEG to the outcomes in the database and ranks
treatment options based on treatment success of patients having similar
neurophysiology.
  Trademarked
as Referenced-EEG ® (“rEEG
®
”), this patented technology allows us to create and provide simple reports
(“rEEG Reports”) that specifically guide physicians to treatment strategies
based on the patient’s own physiology. The vast majority of these patients were
considered long-term “treatment-resistant”, the most challenging, high-risk and
expensive category to treat.
 
 rEEG
identifies relevant neurophysiology that is variant from the norm and identifies
medications that have successfully treated database patients having similar
aberrant physiology.  It does this by comparing a patient’s standard
digital EEG to an external normative database, which identifies the presence of
abnormalities. The rEEG process then identifies a set of patients having similar
abnormalities as recorded in our CNS Database and reports on historical relative
medication success for this stratified group. Upon completion, the physician is
provided the analysis in a report detailing and ranking classes of agents (and
specific agents within the class) by treatment success for patients having
similar abnormal electrophysiology.
  Our
business is focused on increasing the demand for our rEEG
services.  We believe the key factors that will drive broader adoption
of rEEG will be acceptance by healthcare providers of its clinical benefits,
demonstration of the cost-effectiveness of using our test, reimbursement by
third-party payers, expansion of our sales force and increased marketing
efforts.
 
 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.
 
 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.
 
 20
  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 March 31, 2010, we
had an accumulated deficit of $28.4 million. We incurred operating losses of
$3.25 million and $2.89 million for the six months ended March 31, 2010 and
2009, respectively.  We expect our net losses to continue for at least
the next couple of years.
  As of
March 31, 2010, our current liabilities of approximately $1.86 million exceeded
our current assets of approximately $0.87 million by approximately $0.98
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
2009 Private Placement Transaction
  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.  In
connection with the first closing, and as more fully described in Note 2 to the
unaudited condensed consolidated financial statements, certain promissory notes
then outstanding were converted into shares of common stock and we issued
warrants to the investors in connection with these note
conversions.
  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.
 
 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.
 
 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.
 
 21
  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.
 
 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 the 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 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 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. Our complaint
alleges 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 have 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 December 14, 2009, the Company answered the
counterclaims in the case.  On March 10, 2010, we dismissed the
Company’s claims against the defendants other than Mr. Brandt, and they
dismissed their claims against us and the other counterclaim
defendants.  On April 10, 2010 Mr. Brandt's attorneys moved to
withdraw from representing Mr. Brandt in the case.  The District Court
action continues with respect to our claims against Mr. Brandt and Mr. Brandt’s
counterclaims against us and the other counterclaim defendants.  We
are vigorously prosecuting our claims and vigorously defending Mr. Brandt’s
counterclaims.
  We have expended substantial resources
to pursue the defense of legal proceedings initiated by
Mr. Brandt.  Although the ruling by the Delaware Chancery Court
appeared to be definitive, we were required to expend additional resources as a
result of the appeals to the Delaware Supreme Court filed by
Brandt.  We also 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.
 
 22
  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 and has been submitted for
publication in the Journal of Psychiatric Research.
 
 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 of 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 a
diagnosis aid.  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 the FDA indicating that it still
believes rEEG constitutes a “medical device” under the Act.  Although
we continue to believe that the FDA is in error over whether rEEG is a device
and over whether the FDA has jurisdiction over us and our rEEG service, on April
1, 2010 we filed an application to obtain 510(k) clearance for our rEEG
service.  We believe that 510(k) licensure will provide us with
increased credibility within the marketplace and with investors alike by further
validating the efficacy of our service.  To date, we have spent an
aggregate of $64,100 for consulting and $56,900 for legal services to prepare
and file our 510(k) application and at this time, we do not anticipate that the
communications received from the FDA, or our decision to seek 510(k) clearance,
will have a material adverse effect on our liquidity, capital resources and
results of operations.  We anticipate that obtaining licensure will
take from three to six months based on similar application filings with 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 subject to awards
granted within a calendar year to any eligible employee or director from 3
million to 4 million shares.
 
 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.
  23
  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 March 31, 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 March 31,2010
                        
                        
                        2009Revenues
                        
                        
                        100
                        %
                        
                        
                        100
                        %Cost
      of revenues
                        
                        
                        22
                        
                        
                        
                        19Gross
      profit
                        
                        
                        78
                        
                        
                        
                        81Research
      and development
                        
                        
                        179
                        
                        
                        
                        284Sales
      and marketing
                        
                        
                        114
                        
                        
                        
                        154General
      and administrative expenses
                        
                        
                        566
                        
                        
                        
                        434Operating
      loss
                        
                        
                        (781
                        )
                        
                        
                        (792
                        )Other
      income (expense), net
                        
                        
                        (1
                        )
                        
                        
                        (3
                        )Net
      income (loss)
                        
                        
                        (782
                        )%
                        
                        
                        (795
                        )%
 
 Revenues
  Three
      Months Ended March 31,2010
                            
                            
                            2009
                            
                            
                            Percent
                              ChangeLaboratory
      Information Service Revenues
                            
                            $
                            34,400
                            
                            
                            $
                            31,200
                            
                            
                            
                            10
                            %Clinical
      Services
      Revenues
                            
                            
                            143,900
                            
                            
                            
                            152,600
                            
                            
                            
                            6
                            %Total
      Revenues
                            
                            $
                            178,300
                            
                            
                            $
                            183,800
                            
                            
                            
                            (3
                            )%
 
 With
respect to our Laboratory Information Services business, the number of
non-clinical study related paid rEEG Reports delivered increased from 79 for the
quarter ended March 31, 2009 to 89 for the quarter ended March 31, 2010, while
the average price per report decreased from approximately $394 for the quarter
ended March 31, 2009 to $387 for the quarter ended March 31, 2010 (clinical
study, training, database-enhancing and compassionate-use rEEG reports are
provided free of charge).  We do not expect to drive broader adoption of
reports based on our rEEG technology until the Company obtains FDA 510(k)
clearance and the results of our multi-site clinical study to validate the
efficacy of our products is published.  Accordingly, we anticipate
that Laboratory Services Revenues will not increase substantially in the
current fiscal year.
  24
  Our
Clinical Services revenue declined by $8,700 for the quarter ended March 31,
2010, as compared to the corresponding prior year period, because of a reduction
in the volume of patients treated as a result of a reduction in the number of
psychiatrists on staff. We have recruited a new psychiatrist who will start
working with our Clinical Services in the fourth quarter, at which time patient
volume should start increasing.  Currently, we do not plan to materially
expand our Clinical Services business, 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
  Three
      Months Ended March 31,2010
                        
                        2009
                        
                        
                        Percent
                          ChangeCost
      of Laboratory Information Services revenues
                        
                        $
                        39,400
                        
                        
                        $
                        35,600
                        
                        
                        
                        11
                        %
 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
March 31, 2010, cost of revenues consisted primarily of direct labor and benefit
costs (including stock-based compensation costs) of $25,700, and consulting fees
of $12,600.  For the quarter ended March 31, 2009, cost of revenues
included direct labor and benefit costs (including stock based compensation
costs) of $24,500, and consulting fees of $9,600.  Direct labor
and benefits remained consistent for the two periods.  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.
 
 Research
and Development
  Three
      Months Ended March 31,2010
                                  
                                  2009
                                  
                                  
                                  Percent
                                    ChangeLaboratory
      Information Services research and development
                                  
                                  $
                                  318,700
                                  
                                  
                                  $
                                  521,800
                                  
                                  
                                  
                                  (39
                                  )%
 Research
and development expenses consist of clinical studies, projects for training
doctors associated with our 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 March 31, 2010, primarily consisted of the
following: payroll and benefit costs (including stock based
compensation) of $207,400, consultant costs of $96,800 and other
miscellaneous costs of $14,400.  For the comparable period for 2009,
research and development costs included: payroll and benefit costs (including
stock based compensation) of $196,600, consultant costs of $6,300 and other
miscellaneous costs of $15,000. Additionally, as the clinical study was in
progress for the 2009 quarter, clinical study costs were $214,000 and patient
marketing and recruitment costs were $90,200.
 
 Comparing
the three months ended March 31, 2010 with the similar period in
2009, clinical study 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 the preparation of scientific papers
for publications, and the generation of grant applications for research
funding.  Additionally, the focus moved to the enhancing the rEEG
production system and the application for 510(k) clearance with the
FDA.  As a result of this shift in focus, consulting fees increased by
$90,500, of which $56,900 was spent on consultants hired to assist the Company
with its FDA 510(k) application filed with the FDA on April 1,
2010.  An additional $28,000 was spent on programming consultants to
enhance and document the production system; the balance of the increase was the
hiring of a technical writer to assist with a research paper.  Payroll
and benefits increased by $10,800 in the 2010 quarter primarily due a
reassignment of a staff member between departments.
  25
  Sales
and marketing
  Three
      Months Ended March 31,2010
                                              
                                              
                                              2009
                                              
                                              
                                              Percent
                                                ChangeSales
      and MarketingLaboratory
      Information Services
                                              
                                              $
                                              201,900
                                              
                                              
                                              $
                                              282,300
                                              
                                              
                                              
                                              (28)
                                              %Clinical
      Services
                                              
                                              
                                              600
                                              
                                              
                                              
                                              1,400
                                              
                                              
                                              
                                              (57)
                                              %Total
      Sales and
      Marketing
                                              
                                              $
                                              202,500
                                              
                                              
                                              $
                                              283,700
                                              
                                              
                                              
                                              (29)
                                              %
 
 
 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 March 31, 2010 primarily
consisted of the following expenses: payroll and benefits $101,500, advertising
and marketing $24,700, consulting $27,800 and conferences and travel $33,100.
For the comparable period in 2009 expenses were as follows: payroll and benefits
$148,400, advertising and marketing $75,600, consulting $48,500 and conferences
and travel $3,400.
 
 Comparing
the three month period ended March 31, 2010 with the similar quarter in
2009, payroll and benefits decreased by $46,700 in the 2010 quarter as
a result a reduction in staff and the reassignment of staff to another
department.  Advertising and marketing expenses decreased by $50,900
as advertising was curtailed while the Company awaits its 501(k) clearance and
marketing efforts were largely limited to program development, whereas for the
2009 quarter the Company was actively executing its advertising and marketing
plans.  Conference and travel expense increased by $30,600 in the 2010
quarter as the Company conducted its first user-group meeting in January
2010.
 
 The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic.  We anticipate a moderate increase in
marketing expenditure to expand our Clinical Services business in the future,
which expenditures will be tailored based on the knowledge we have acquired in
attracting patients to our clinical trials and further market
analysis.
 
 General
and administrative
 Three
      Months Ended March 31,2010
                                        
                                        
                                        2009
                                        
                                        
                                        Percent
                                          ChangeGeneral
      and administrativeLaboratory
      Information Services
                                        
                                        $
                                        818,800
                                        
                                        
                                        $
                                        630,200
                                        
                                        
                                        
                                        30
                                        %Clinical
      Services
                                        
                                        $
                                        191,000
                                        
                                        
                                        
                                        168,300
                                        
                                        
                                        
                                        13
                                        %Total
      General and administrative
                                        
                                        $
                                        1,009,800
                                        
                                        
                                        $
                                        798,500
                                        
                                        
                                        
                                        26
                                        %
 
 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 March 31, 2010,
General and Administrative costs consisted of salaries and benefit costs of
$224,100; legal fees of $340,700 and other professional and consulting fees of
$130,100; general administrative and occupancy costs of $74,600, patent costs
$32,600 and conference and travel costs of $15,400.  Miscellaneous
costs were $1,000 in the 2010 quarter. For the similar period in
2009, General and Administrative costs consisted of the following: salaries
and benefit costs of $216,800; legal fees of $59,100 and other professional
and consulting fees of $155,600; general administrative and occupancy costs of
$51,700, patent costs of $32,400 and conference and travel expenses of
$10,100.  Miscellaneous costs for the 2009 quarter were
$105,000.
  
 With
respect to our Laboratory Information Services business, in the quarter ended
March 31, 2010 in comparison to the same period in 2009, payroll and
benefit expenses increased by a net $7,300 due to a change in the staff mix as
the Chief Financial Officer (CFO) joined the staff midway through the quarter,
an increase in base salary for the CEO and an increase in stock based
compensation as a result of the options granted in March 2010 as disclosed in
Note 3.  Professional and consulting fees decreased by a $25,500
largely by hiring the CFO, who had formerly served as a
consultant.  Legal fees increased by a net $281,800 which was due to
293,800 being incurred in defending against actions brought by Mr. Brandt (see
Matters Involving our Former
Chief Executive Officer and Former Director, Leonard Brandt).These
litigation costs were slightly offset by a reduction of $12,000 in regular legal
fees.  General and administrative costs increased by a net $22,900 due
to filing fees, increased computer service costs and costs associated with
relocating the office.  Patent and conference and travel costs did not
substantially change quarter over quarter.  Miscellaneous expenses
incurred in the 2009 quarter of $105,000 were as a result of a revised IRS
assessment on 2006 payroll taxes and Delaware Franchise Tax assessments for
calendar years 2007 and 2008 did not reoccur to the same degree in the 2010
quarter.
 
 26
  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. 
Costs increased in the quarter ended March 31, 2010 by $22,700 as compared to
the prior year quarter.  This increase is largely due to clinical
services staff who worked on the clinical trial were no longer reimbursed by the
Laboratory Information Services for their time spent on the study.
 
 Interest
income (expense)
  Three
      Months Ended March 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    Percent
                                      ChangeLaboratory
      Information Services (Expense), net
                                    
                                    $
                                    (100
                                    )
                                    
                                    $
                                    (4,600
                                    )
                                    
                                    
                                    (98)%Clinical
      Services (Expense)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (100
                                    )
                                    
                                    
                                    *Total
      interest income (expense)
                                    
                                    $
                                    (100
                                    )
                                    
                                    $
                                    (4,700
                                    )
                                    
                                    
                                    (98)%*
      not
      meaningful
 
 
 With
respect to our Laboratory Information Services business, we earned interest
income of $1,800 for the quarter ended March 31, 2010 from interest bearing
accounts.  This was offset by $1,900 of interest expense on promissory
notes. For the comparable period in 2009, net interest income was $1,200 and
interest expense was $5,800 of interest expense on promissory
notes.
 
 Net
Loss
  Three
      Months Ended March 31,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeLaboratory
      Information Services net loss..
                                
                                $
                                (1,340,100
                                )
                                
                                $
                                (1,468,200
                                )
                                
                                
                                (9)%Clinical
      Services net loss..
                                
                                
                                (53,700
                                )
                                
                                
                                6,900
                                
                                
                                
                                *Total
      Net Loss..
                                
                                $
                                (1,393,800
                                )
                                
                                $
                                (1,461,300
                                )
                                
                                
                                (5)%*
      not
      meaningful
 
 The
decrease in net loss of $67,500 in the three months ended March 31, 2010
compared to the prior year period is due primarily to net decreases in
costs within our research and development and sales and marketing
departments. These decreases were substantially offset by expenses incurred in
defending the lawsuit brought by Mr. Brandt.
 
 Results
of Operations for the six months ended March 31, 2010 and 2009
 
 The
following table presents consolidated statement of operations data for each of
the periods indicated as a percentage of revenues.
  Six
      Months Ended March 31,2010
                                
                                
                                2009Revenues
                                
                                
                                100
                                %
                                
                                
                                100
                                %Cost
      of revenues
                                
                                
                                21
                                
                                
                                
                                19Gross
      profit
                                
                                
                                79
                                
                                
                                
                                81Research
      and development
                                
                                
                                168
                                
                                
                                
                                323Sales
      and marketing
                                
                                
                                125
                                
                                
                                
                                154General
      and administrative expenses
                                
                                
                                795
                                
                                
                                
                                416Operating
      loss
                                
                                
                                (1,010
                                )
                                
                                
                                (812
                                )Other
      income (expense), net
                                
                                
                                (1
                                )
                                
                                
                                (2
                                )Net
      income (loss)
                                
                                
                                (1,011
                                )%
                                
                                
                                (814
                                )%
  27
  Revenues
  Six
      Months Ended March 31,2010
                                
                                
                                2009
                                
                                
                                Percent
                                  ChangeLaboratory
      Information Service Revenues
                                
                                $
                                56,800
                                
                                
                                $
                                59,700
                                
                                
                                
                                (5
                                %)Clinical
      Services
      Revenues
                                
                                
                                265,000
                                
                                
                                
                                295,800
                                
                                
                                
                                (10
                                %)Total
      Revenues
                                
                                $
                                321,800
                                
                                
                                $
                                355,500
                                
                                
                                
                                (9
                                %)
 
 With
respect to our Laboratory Information Services business, the number of
non-clinical study related paid rEEG Reports delivered for the period decreased
from 153 in 2009 to 147 in 2010, while the average price per report decreased
from approximately $390 in 2009 to $386 in 2010 (clinical study, training,
database-enhancing and compassionate-use rEEG reports are provided free of
charge).  We do not expect to drive broader adoption of reports based
on our rEEG technology until the Company obtains FDA 510(k) clearance and the
results of our multi-site clinical study to validate the efficacy of our
products is published.  Accordingly, we anticipate that Laboratory
Services Revenues will not increase substantially in the current fiscal
year.
 
 Our
Clinical Services revenue is as a result of patient billings for psychiatric
services rendered.   Revenues declined by $30,800 in the first
half of 2010 versus the same period in 2009 because of a reduction in the volume
of patients treated as a result of a reduction in the number of psychiatrists on
staff. We have recruited a new psychiatrist who will start working with our
Clinical Services in the fourth quarter of the current fiscal year, at which
time patient volume should start increasing.  Currently, we do not plan to
materially expand our Clinical Services business, 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
  Six
      Months Ended March 31,2010
                            
                            
                            2009
                            
                            
                            Percent
                              ChangeCost
      of Laboratory Information Services revenues
                            
                            $
                            69,100
                            
                            
                            $
                            69,100
                            
                            
                            
                            -
                            %
  28
 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 six
months ended March 31, 2010, cost of revenues were $69,100 consisting primarily
of direct labor and benefit costs (including stock-based compensation costs) of
$50,900 and consulting fees of $16,400.  For the six months ended
March 31, 2009, cost of revenues were also $69,100, which includes direct labor
and benefit costs (including stock based compensation costs) of $50,400, and
consulting fees of $17,500.  There has been no material change in Cost
of Laboratory Information Services revenues for the two six-month periods ending
March 31, 2010 and 2009.
 
 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
 Six
      Months Ended March 31,2010
                            
                            
                            2009
                            
                            
                            Percent
                              ChangeLaboratory
      Information Services research and development
                            
                            $
                            541,300
                            
                            
                            $
                            1,147,800
                            
                            
                            
                            (53)
                            %
 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 six months ended March 31, 2010, primarily
consisted of the following: payroll and benefit costs (including stock
based compensation) of $396,900, consultant costs of $115,200 and other
miscellaneous costs of $29,000.  There were no clinical study costs or
patient marketing and recruitment costs.  For the comparable period
for 2009, research and development costs included: payroll and benefit costs
(including stock based compensation) of $396,200, consultant costs of
$12,300 and other miscellaneous costs of $41,900. Additionally, as the clinical
study was in progress during the 2009 period, research and development costs
included clinical study costs of $573,200 and patient marketing and recruitment
costs of $124,200.
 
 Comparing
the six-month period ended March 31, 2010 with the similar period in 2009,
clinical study 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 the preparation of scientific papers
for publications, and the generation of grant applications for research
funding.  Additionally the focus moved to the enhancing the rEEG
production system and the application for 510(k) clearance with the
FDA.  As a result of this shift in focus, consulting fees increased by
$102,900, of which $64,100 was spent on consultants hired to assist the Company
with its FDA 510(k) application which was filed with the FDA on April 1, 2010.
Additionally, $11,200 was spent on the services of a biostatistician to analyze
the results of the clinical trial.  A further $28,000 was spent on
programming consultants to enhance and document the production
system.  Payroll and benefits remained constant for the two periods
despite a change in the staff mix.
   Sales
and marketing
  Six
      Months Ended March 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    Percent
                                      ChangeSales
      and MarketingLaboratory
      Information Services
                                    
                                    $
                                    400,250
                                    
                                    
                                    $
                                    542,900
                                    
                                    
                                    
                                    (26)
                                    %Clinical
      Services
                                    
                                    
                                    2,500
                                    
                                    
                                    
                                    4,100
                                    
                                    
                                    
                                    (39)
                                    %Total
      Sales and Marketing
                                    
                                    $
                                    402,750
                                    
                                    
                                    $
                                    547,000
                                    
                                    
                                    
                                    (26)
                                    %
 
 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 six-month
period ended March 31, 2010 primarily consisted of the following expenses:
payroll and benefits $237,100, advertising and marketing $66,200, consulting
$50,400 and conferences and travel $35,500. For the comparable period in 2009
expenses were as follows: payroll and benefits $320,900, advertising and
marketing $124,300, consulting $67,600 and conferences and conferences and
travel $17,100.
 
 Comparing
the six months ended March 31, 2010, with the same period in 2009; payroll
and benefits decreased by $83,800 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 $58,100
as advertising was curtailed while the Company awaits its 501(k) clearance and
marketing efforts were largely limited to program development, whereas for the
2009 period the Company was actively executing its advertising and marketing
plans.  Conference and travel expenses increased by $18,400 in the
2010 quarter as the Company conducted its first user-group meeting in
January.
 
 The
Clinical Services sales and marketing expenses consists of advertising to
attract patients to the clinic.  We anticipate a moderate increase in
marketing expenditure to expand our Clinical Services business in the future,
which expenditures will be tailored based on the knowledge we have acquired in
attracting patients to our clinical trials and additional market
analysis.
 
 
 General
and administrative
  Six
      Months Ended March 31,2010
                                      
                                      
                                      2009
                                      
                                      
                                      Percent
                                        ChangeGeneral
      and administrativeLaboratory
      Information Services
                                      
                                      $
                                      2,218,000
                                      
                                      
                                      $
                                      1,161,400
                                      
                                      
                                      
                                      91
                                      %Clinical
      Services
                                      
                                      $
                                      339,500
                                      
                                      
                                      
                                      317,100
                                      
                                      
                                      
                                      7
                                      %Total
      General and administrative
                                      
                                      $
                                      2,557,500
                                      
                                      
                                      $
                                      1,478,500
                                      
                                      
                                      
                                      84
                                      %
  29
  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 six-months ended March 31, 2010,
General and Administrative costs consisted of salaries and benefit costs of
$364,700; legal fees of $1,218,350 and other professional and consulting fees of
$290,200, general administrative and occupancy costs of $233,600, patent costs
$43,200 and conference and travel costs of $64,200.  Miscellaneous
costs were $3,600 in the 2010 quarter. For the similar period in
2009, General and Administrative costs consisted of the following: salaries
and benefit costs of $455,600; legal fees of $131,400 and other
professional and consulting fees of $228,300; general administrative and
occupancy costs of $133,500, patent costs of $89,100 and conference and travel
expenses of $25,300.  Miscellaneous costs for the 2009 period were
$99,700.
  
 With
respect to our Laboratory Information Services business, in the six months ended
March 31, 2010 in comparison to the same period in 2009, payroll and
benefit expenses decreased by a net $90,900 largely due to a change in 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) joined the staff in mid February,
2010.  Furthermore, stock based compensation was reduced by 20,400 to
$202,600 in the 2010 period.  Professional and consulting fees
increased by $62,000 partly due to an increase in audit fees due to the timing,
complexity and increased frequency of SEC filings.  Additionally,
consultants were hired in connection with the Brandt litigation and private
placement financing.  Legal fees increased by a net $1,218,400 which
was due to $1,065,300 being incurred in defending against actions brought by Mr.
Brandt (see page 23 Matters
Involving our Former Chief Executive Officer and Former Director, Leonard
Brandt).Additionally non-litigation legal fees increased by $21,600 due
to increased activity related to SEC filings, fund-raising and FDA-related
work.  General and administrative costs increased by a $100,100 due to
an increase in investor relations and corporate promotional expenses, increased
computer service costs and costs associated with relocating the
office.  Patent costs declined by $44,100 as costs were largely
associated with patent maintenance.  Conference and travel costs
increased by $38,900 as a result of increased travel associated with raising
capital and litigation activities.  Miscellaneous expenses incurred in
the 2009 six-month period of $99,700 were largely the result of a revised IRS
assessment on 2006 payroll taxes and Delaware Franchise Tax assessments for
calendar years 2007 and 2008 did not reoccur to the same degree in the 2010
period.
  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 $22,400 to $339,500 in the six months
ending March 31, 2010 from $317,100 for the comparable period in
2009.  This increase is largely due to the fact that clinical services
staff who had worked on the clinical trial were no longer reimbursed by the
Laboratory Information Services for their time spent on the study.
 
 Interest
income (expense)
  Six
      Months Ended March 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    Percent
                                      ChangeLaboratory
      Information Services (Expense), net
                                    
                                    $
                                    (1,500
                                    )
                                    
                                    $
                                    (3,400
                                    )
                                    
                                    
                                    (56)
                                    %Clinical
      Services (Expense)
                                    
                                    
                                    (200
                                    )
                                    
                                    
                                    (100
                                    )
                                    
                                    
                                    100
                                    %Total
      interest income (expense)
                                    
                                    $
                                    (1,700
                                    )
                                    
                                    $
                                    (3,500
                                    )
                                    
                                    
                                    (51)
                                    %*
      not
      meaningful
  With
respect to our Laboratory Information Services business, we earned interest
income of $2,800 for the six months ended March 31, 2010 from interest bearing
accounts.  This was offset by $4,300 of interest expense on promissory
notes. For the comparable period in 2009, we earned interest income of $8,300
for the six months ended March 31, 2009 from interest bearing
accounts.  This was offset by $11,700 of interest expense on
promissory notes.
 
 Net
Loss
  30
  Six
      Months Ended March 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    Percent
                                      ChangeLaboratory
      Information Services net loss
                                    
                                    $
                                    (3,199,100
                                    )
                                    
                                    $
                                    (2,892,500
                                    )
                                    
                                    
                                    11
                                    %Clinical
      Services net loss
                                    
                                    
                                    (53,900
                                    )
                                    
                                    
                                    (700
                                    )
                                    
                                    
                                    7,700
                                    %Total
      Net Loss
                                    
                                    $
                                    (3,253,000
                                    )
                                    
                                    $
                                    (2,893,200
                                    )
                                    
                                    
                                    12
                                    %
 The
increase in net loss of $359,800 in the six months ended March 31, 2010
compared to the prior year period is primarily due to net decreases in
costs within our research and development and sales and marketing
departments. These decreases were more than offset by expenses incurred in
defending against the lawsuit brought by Mr. Brandt.
   Liquidity
and Capital Resources
 
 As of
March 31, 2010 we had approximately $0.68 million in cash and cash equivalents
and a working capital deficit balance of approximately $0.98 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. We expect that
our existing cash will be used to fund working capital and for other general
corporate purposes.
  Since our
inception, we have incurred significant losses and, as of March 31, 2010, we had
an accumulated deficit of approximately $28.4 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 and sales
and marketing expenses will continue to grow and consequently we will need to
generate significant product revenues to achieve profitability. There can be no
assurance of achieving profitability.
 
 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 will need to raise substantial
additional funds in the next 12 months in order to continue to conduct our
business.  Our liquidity and capital requirements depend on several
factors, including the rate of market acceptance of our services, the ability to
expand and retain our customer base, our ability to execute our current business
plan and other factors.  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. 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.
 
 Sources
of Liquidity
 
 To date,
substantially all of our operations have been financed primarily from equity and
debt financings.  Through March 31, 2010, we had received proceeds of
$13.7 million from the sale of stock, $4.8 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.
 
 Cash
Flows
 
 Net cash
used in operating activities was $3.24 million for the six months ended March
31, 2010 compared to $1.89 million for six months ended March 31,
2009.  The increase in cash used of $1.35 million was primarily
attributable to increased legal fees associated with the Brandt litigation of
$1.06 million and other increases in general and administrative
costs.
 
 Investing
activities during the six months ended March 31, 2010 were $8,900 spent on
office furniture at our new Laboratory Information Services
location.  In the comparable period in 2009, there were no investing
activities.
 
 Net cash
proceeds from financing activities for the six months ended March 31, 2010 were
$2.99 million, net of placement agent fees, legal fees and other offering costs,
raised on December 24 and 31, 2009 and January 4, 2010 in connection with the
second, third and fourth closings of our private placement
transaction.  These proceeds were partly offset by the repayment of
$46,100 on a promissory note issued to Daniel Hoffman M.D. in connection with
our acquisition of NTC.  Net cash used by financing activities in the
period ended March 31, 2009 primarily related to the payment of $43,400 on the
promissory note issued in connection with our NTC acquisition.
 
 31
 
 Contractual Obligations and Commercial
Commitments
  As of March 31, 2010, we have a contractual
obligation to pay the remaining balance on a promissory note to Daniel Hoffman
M.D. of $72,600 issued in connection with our acquisition of NTC, which bears
interest at a rate of 8% per annum.  Additionally, 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 $127,000.  In March 2010, we signed an amendment extending 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 $ 188,500. As of March 31, 2009, the
balance outstanding on the aforementioned promissory note was $162,700 and our
obligations for leased space were $73,500.  Please see Notes 5 and 8
to our unaudited condensed consolidated financial statements in this report for
further details.
  Operating Capital and Capital Expenditure
Requirements
  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.  We expect that our
existing cash will be used to fund working capital and for capital expenditures
and other general corporate purposes, including the repayment of debt incurred
as a result of our litigation with Brandt.Although we recently received net
proceeds of $2.93 million on December 24 and 31, 2009 and January 4,
2010, upon the second, third and fourth closings of our private placement, we
anticipate that our cash on hand and cash generated through our operations will
not be sufficient to fund our operations for at least the next 12
months.  We therefore anticipate raising additional funds in the
future.
  The
amount of capital we will need to conduct our operations and the time at which
we will require such capital may vary significantly depending upon a number of
factors, such as:
  
 ·
              
              the
      amount and timing of costs we incur in connection with our research and
      product development activities, including enhancements to our CNS Database
      and costs we incur to further validate the efficacy of our rEEG
      technology;
 
 ·
              
              the
      amount and timing of costs we incur in connection with the expansion of
      our commercial operations, including our selling and marketing
      efforts;
 
 ·
              
              the
      extent to which we incur additional legal fees in our litigation with
      Brandt in relation to his appeals pending before the Delaware Supreme
      Court and his pending counterclaims in the United States District Court;
      and
 
 ·
              
              if
      we expand our business by acquiring or investing in complimentary
      businesses.
  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.  The issuance
of equity securities may result in dilution to stockholders.  We do
not know whether additional funding will be available on acceptable terms, or at
all, especially given the economic conditions that currently prevail. If we are
not able to secure additional funding when needed, we may have to delay, reduce
the scope of or eliminate one or more research and development programs or
selling and marketing initiatives, and implement other cost saving
measures.
  Income
Taxes
 
 Since our
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 $12.4 million. If not utilized, the federal net operating loss
carryforwards will expire beginning in 2021. 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.
 
 32
  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.
 
 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 March 31, 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 reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’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, the following 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  occurred during the quarter ended March 31, 2010.
 
 ·
              As
      of February 18, 2010, we hired a Chief Financial
  Officer.
 
 ·
              We
      have improved our segregation of duties by having the accounting for our
      subsidiary Neuro Therapy Clinic, Inc done at our Aliso Viejo location,
      which enables greater opportunities for segregation of
      duties.
 
 33
 PART
II
  OTHER INFORMATION
  Item
1.  Legal
Proceedings
  The
disclosure pertaining to litigation included in Note 8 of the Notes to Unaudited
Condensed Consolidated Financial Statements as well as the litigation summary
under the heading “Matters Involving our Former Chief Executive Officer and
Former Director, Leonard Brandt” in Part I, Item 2 of this quarterly report on
Form 10-Q are incorporated herein by reference.
 
 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 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.
  Cautionary
Statement Regarding Forward-Looking Statements
  This
Quarterly Report on Form 10-Q contains 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 “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”
  herein.
 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.
  Item
6.   Exhibits
  The
following exhibits are filed as part of this report:
  Exhibit
      Number
                Exhibit Title10.1
                Consulting
      Agreement, by and between CNS Response, Inc. and Henry T. Harbin,
      effective January 1, 2010.10.2
                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).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.
  34
   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:
      May 14, 2010
                
                /s/
      George CarpenterBy:
                George
      CarpenterIts:
                Chief
      Executive Officer(Principal
      Executive Officer)
   /s/
      Paul BuckBy:
                  Paul
      BuckIts:
                  Chief
      Financial Officer(Principal
      Financial and Accounting Officer)
    35