Applied DNA Sciences
Annual Report 2009

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2009 oo 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 002-90539 APPLIED DNA SCIENCES, INC. (Name of small business issuer in its charter) Delaware (State or other jurisdiction of incorporation or organization) 59-2262718 (I.R.S. Employer Identification Number) 25 Health Sciences Drive, Suite 113 Stony Brook, New York (Address of principal executive office) 11790 (Postal Code) (631) 444-6862 (Issuer’s telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” "accelerated filer” and "smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock quoted on the OTC Bulletin Board as of the last business day of the Registrant’s most recently completed second fiscal quarter (March 31, 2009), was approximately $15.6 million. Shares of the Registrant’s common stock held by each executive officer and director and by each entity or person that, to the Registrant’s knowledge, owned 5% or more of the Registrant’s outstanding common stock as of March 31, 2009 have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 18, 2009, the Registrant had outstanding 275,204,070 shares of Common Stock, par value $0.001 per share. TABLE OF CONTENTS PART I ITEM 1. BUSINESS ITEM 1A. RISK FACTORS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A(T). CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES i Page 1 15 23 23 23 24 24 24 25 31 31 31 31 31 32 32 35 36 38 41 42 Forward-looking Information PART I This Annual Report on Form 10-K (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act”), including statements using terminology such as "can”, "may”, "believe”, "designated to”, "will”, "expect”, "plan”, "anticipate”, "estimate”, "potential” or "continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they: ● ● ● discuss our future expectations; contain projections of our future results of operations or of our financial condition; and state other "forward-looking” information. We believe it is important to communicate our expectations. However, forward looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in forward-looking statements as a result of certain factors, including those set forth under "Risk Factors,” "Business” and elsewhere in this report. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. ITEM 1. BUSINESS. Overview We are a provider of botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, governments and consumers from theft, counterfeiting, fraud and diversion. SigNature® DNA and BioMaterial™ Genotyping, our principal anti-counterfeiting and product authentication solutions, can be used in numerous industries, including cash-in-transit (transport and storage of banknotes), textiles and apparel, identity cards and other secure documents, pharmaceuticals, wine, and luxury consumer goods. SigNature DNA. We use the DNA of plants to manufacture highly customized and encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are virtually impossible to replicate. We have embedded SigNature DNA Markers into a range of our customers’ products, including various inks, dyes, textile treatments, thermal ribbon, thread, varnishes and adhesives. These items can then be tested for the presence of SigNature DNA Markers through an instant field detection or a forensic level authentication. Our SigNature DNA solution provides a secure, accurate and cost-effective means for users to incorporate our SigNature DNA Markers in, and then quickly and reliably authenticate and identify, a broad range of items, such as recovered banknotes, branded textiles and apparel products, pharmaceuticals and cosmetic products, identity cards and other secure documents, digital media, artwork and collectibles and fine wine. Having the ability to reliably authenticate and identify counterfeit versions of such items enables companies and governments to detect, deter, interdict and prosecute counterfeiting enterprises and individuals. BioMaterial GenoTyping. Our BioMaterial GenoTyping solution refers to the development of genetic assays to distinguish between varieties or strains of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods, that contain their own source DNA. We have developed two proprietary genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the field to finished garments. These genetic assays provide the cotton industry with what we believe to be the first authentication tools that can be applied throughout the U.S. and worldwide cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies. In 2009, we discontinued our BioActive Ingredients program, which we began in 2007. We developed BioActive Ingredients for personal care products, such as skin care products, based on the biofermentation expertise developed during the manufacturing of DNA for our SigNature DNA and BioMaterial Genotyping solutions, and we have decided to focus our business on these security and authentication solutions. Corporate History We are a Delaware corporation, which was initially formed in 1983 under the laws of the State of Florida as Datalink Systems, Inc. In 1998, we reincorporated in Nevada, and in 2002, we changed our name to our current name, Applied DNA Sciences, Inc. In December 2008, we completed our reincorporation from Nevada to the State of Delaware. 1 In November 2005, our corporate headquarters were relocated from Los Angeles, California to the Long Island High Technology Incubator at Stony Brook University in Stony Brook, New York, where we established laboratories for the manufacture of DNA markers and product prototypes, and DNA authentication. The address of our corporate headquarters is 25 Health Sciences Drive, Suite 113, Stony Brook, New York 11790, and our telephone number is (631) 444-6370. We maintain a website at www.adnas.com. To date, we have had a very limited operating history, and as a result, our operations have produced insignificant revenues. Industry Background The Company is focusing its efforts on the cash-in-transit business and the general anti-counterfeiting industry. Cash-in-transit businesses transport and store cash and ATM cassettes. In the U.K. alone, there is an estimated £500 billion being transported each year, or £1.4 billion per day. The nature of this business makes cash-in-transit an attractive target for criminals, and as a result the industry invests in excess of £100 million per year in security equipment and devices. Currently, a system of cash degradation, using a smoke or liquid dye to permanently mark and essentially destroy stolen cash, is used. The incidence of cash-in-transit based crime has increased over 170% in London since 2006, according to the Metropolitan Police. Counterfeiting, product diversion, piracy, forgery, identity theft, and unauthorized intrusion into physical locations and databases create significant and growing problems to companies in a wide range of industries as well as governments and individuals worldwide. The U.S. Chamber of Commerce reported in 2007 that counterfeiting and piracy cost the U.S. economy between $200-$250 billion per year, or an estimated 750,000 American jobs, and pose a real threat to consumer health and safety. The World Customs Organization and Interpol estimate that annual global trade in illegitimate goods was $650 billion in 2007. Product counterfeiting and diversion particularly harms manufacturers of consumer products, especially for prestige and established brands, and the consumers who purchase them. This estimated total includes: ● ● ● ● ● ● ● ● ● ● ● ● ● $34 billion of software products; $24 billion of apparel and footwear; $4 billion of cigarettes and tobacco products; $32 billion of pharmaceuticals; $18 million in wine; $500 million of sports equipment; $35 million of electronic equipment and supplies; $3 billion in cosmetics; $12 billion in automobile parts; $1 billion of food and alcohol products; $1 billion in jewelry and watches; $10 million of computer equipment and supplies; and $100 billion of other goods. Governments are increasingly vulnerable to counterfeiting, terrorism and other security threats at least in part because currencies, identity and security cards and other official documents can be counterfeited with relative ease. For instance, the DOPIP valued 2005 seizures and losses associated with counterfeit currency at around $609 billion, and counterfeit identification at $124 million. Governments must also enforce the various anti-counterfeiting and anti-piracy regimes of their respective jurisdictions which becomes increasingly difficult with the continued expansion of global trade. The pharmaceutical industry also faces major problems relative to counterfeit, diluted, or falsely labeled drugs that make their way through healthcare systems worldwide, posing a health threat to patients and a financial threat to drugmakers and distributors. In 2006 the Center for Medicine in the Public Interest predicted that counterfeit drug sales will reach $75 billion globally in 2010, an increase of more than 90% from 2005. In February 2006, the World Health Organization ("WHO”) estimated that counterfeits account for more than 10% of the global pharmaceuticals market, and 25% of pharmaceuticals consumed in developing countries and that as much as 50% in some countries, are counterfeit. According to the WHO, counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients. The challenges presented by traditional counterfeiters have recently been supplemented by the many websites, from direct retailers to auction sites, that offer counterfeit prescription drugs online. As a result, the pharmaceutical industry and regulators are examining emerging anti-counterfeit technologies, including radio-frequency identification tags and electronic product codes, known as EPCs, to help stem the wave of counterfeit drugs and better track legitimate drugs from manufacturing through the supply chain. -2- The digital and recording media industry, including the segment that records computer software on compact discs, has long been a victim of piracy, or the production of illegal copies of genuine media or software, and the counterfeiting and distribution of imitation media or software. Compact discs, DVDs, videotapes, computer software and other digital and recording media that appears identical to genuine products are sold at substantial discounts by vendors at street and night markets, via mail order catalogs and on the internet at direct retail websites or at auction sites. In 2008 the Business Software Alliance ("BSA”) reported that in 2007, the United States lost $8.0 billion as a result of software piracy. The BSA also estimated that 33 percent of software programs in the U.S. are unlicensed and that since January 1, 2000, the BSA has settled with 1,668 companies for a total of $81,821,895. In a white paper published in December 2005, the BSA and the IDC also reported that they found in a 2007 study that for every two dollars worth of software purchased legitimately, one dollar was obtained illegally. The artworks and collectibles markets are also particularly vulnerable to counterfeiting, forgery and fraud. New works are produced and then passed off as originating from a particular artistic period or source, authentic fragments are pieced together to simulate an original work, and existing works are modified in order to increase their purported value. Such phony artwork and collectibles are then often sold with fake or questionable signatures and "provenance,” or documented ownership histories that confirm authenticity. As more and more companies in each of these markets begin to address the problem of counterfeiting, we expect that different systems will compete to be the leading standards by which products can be tracked across world markets. Historically, counterfeiting, product diversion and other types of fraud have been combatted by embedding various authentication systems and rare and easily distinguishable materials into products, such as radio frequency identification ("RFID”) devices and banknote threads in packaging, integrated circuit chips and magnetic strips in automatic teller machine cards, holograms on currency, elemental taggants in explosives, and radioactivity and rare molecules in crude oil. These techniques are effective but have generally been reverse-engineered and replicated by counterfeiters, which limits their usefulness as forensic methods for authentication of the sources of products and other items. Every living organism has a unique DNA code that determines the character and composition of its cells. The core technologies of our business allow us to use the DNA of everyday plants to mark objects in a unique manner that we believe cannot be replicated, and then identify these objects by detecting the absence or presence of the DNA. Our scientific team was able to develop genetic based assays and protocols to identify DNA markers that are endogenous to a particular plant in order to differentiate between biological strains of cotton and we are now employing the same methodology in wool, wine and other natural products. In addition, in the case of Pima cotton, we have developed proprietary technologies to differentiate between Pima (G. barbadense) and Non-Pima (G. hirsutum) cotton with absolute certainty. In the process, we were also able to develop an approach to attach an exogenous DNA marker to a finished textile product. Cotton classification and the authentication of cotton geographic origin are issues of global significance, important to brand owners and to governments that must regulate the international cotton trade. The use of DNA to identify the cotton fiber content of finished textiles is a significant opportunity for license holders to control their brand and for governments to improve their ability to enforce compliance with trade agreements between nations. In addition to the global cotton trade, the markets for BioMaterial Genotyping include biotherapeutics, nutraceuticals, natural foods, wines and fermented alcohols and other natural textiles. Our Offerings SigNature DNA We believe our SigNature DNA offering is as broadly applicable, convenient and inexpensive as existing authentication systems, while highly resistant to reverse- engineering or replication, so that it can either be applied independently or supplement existing systems in order to allow for a forensic level of authentication of the sources of a broad range of items, such as artwork and collectibles, fine wine, consumer products, digital and recording media, pharmaceuticals, financial instruments, identity cards and official documents. Each SigNature DNA Marker is first designed and manufactured to be a highly customized and encrypted botanical DNA marker. The SigNature DNA Marker is then encapsulated and stabilized so that it is resistant to heat, organic solvents, chemicals and most importantly, ultraviolet, or UV radiation. Once it has been encapsulated, our SigNature DNA Embedment system can be used to embed the SigNature DNA Marker directly onto products or other items or into special inks, threads and other media, which in turn can be incorporated into packaging or products. Once it is embedded, our SigNature DNA Encryption Detector pen can instantly test for the presence or absence of any of our SigNature DNA Markers, and our SigNature polymerase chain reaction (PCR) Kits can provide rapid forensic level authentication of specific SigNature DNA Markers. -3- We believe that the key characteristics and benefits of the SigNature DNA offering are as follows: We Believe Our SigNature DNA Markers Are Virtually Impossible to Copy In creating unique SigNature DNA Markers, we use DNA segments from one or more botanical sources, rearrange them into unique encrypted sequences, and then implement one or more layers of anti-counterfeit techniques. Because the portion of DNA in a SigNature DNA Marker used to identify the marker is so minute, it cannot be detected unless it is replicated billions of times over, or amplified. This amplification can only be achieved by applying matching strands of DNA, or a primer, and polymerase chain reaction (PCR) techniques to the SigNature DNA Marker. The sequence of the relevant DNA in a SigNature DNA Marker must be known in order to manufacture the primer for that DNA. As a result, we believe the effort required to find, amplify, select and clone the relevant DNA in a SigNature DNA Marker would involve such enormous effort and expense that SigNature DNA Markers are virtually impossible to copy without our proprietary systems. Simple and Rapid Authentication We offer rapid readers capable of instantly testing for the presence or absence of any of our SigNature DNA Markers. In addition, when a forensic level of authentication is necessary, we offer in-field or in-house forensic DNA authentication with a handheld battery powered PCR-based device that will confirm authentication sequences in approximately 10 minutes. Low Cost and High Accuracy The costs associated with the DNA required to manufacture our SigNature DNA Markers are not significant since the amount of DNA required for each marker is so minute (for instance, only 3-5 parts per million when incorporated in an ink). We manufacture the identifying segment of DNA to be used in a SigNature DNA Marker by cloning them inside microorganisms such as yeast or bacteria, which are highly productive and inexpensive to grow. As a result, SigNature DNA Markers are relatively inexpensive when compared to other anti-counterfeiting devices such as RFIDs, EPCs, integrated circuit chips, and holograms. The probability of mistakenly identifying a SigNature DNA Marker is less than 1 in 1 trillion, so our authentication systems are highly accurate, and in fact, our SigNature PCR Kits can authenticate to a forensic level. Easily Integrated with Other Anti-Counterfeit Technologies Our SigNature DNA Markers can be embedded onto RFID devices, banknote threads, labels, serial numbers, holograms, and other marking systems using inks, threads and other media. We believe that combined with other traditional methods, our SigNature DNA solution provides a significant deterrent against counterfeiting, product diversion, piracy, fraud and identity theft. Broad Applicability and Ingestible Our SigNature DNA Markers can be embedded into almost any consumer product, and virtually any other item. For instance, we believe the indelible SigNature DNA Ink we produce is safe to consume and can be used in pharmaceutical drug tablets and capsules. Use of our SigNature DNA in ingestible products and drugs may require approval of the U.S. Food and Drug Administration. BioMaterial Genotyping We believe our BioMaterial Genotyping solution offers a unique means for determining the authenticity of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods. Just as a person’s DNA specifies all of their unique qualities, biomaterials typically contain genomic DNA or fragments thereof that can be utilized to authenticate originality. We have initially developed two proprietary genetic-based assays and protocols to identify DNA markers that are endogenous (internal) to a particular product in order to differentiate between biological strains. In a process we call Fibertyping™, we are able to differentiate between Pima cotton (G. barbadense) and upland cotton (G. hirsutum). Our FiberTyping offering enables our customers and potential clients to cost-effectively give assurance to manufacturers, suppliers, distributors, retailers and end- users that their products are authentic, that they are made from the fibers and textiles as labeled. In a process we call Pimatyping™, we are able to differentiate between Pima cotton grown in different regions of the world. Cotton classification and the authentication of cotton geographic origin are issues of global significance, important to brand owners and to governments that must regulate international cotton trade. Similar offerings are currently being developed for use in biomaterials other than cotton. Biomaterials can now be tracked from field to final purchase guaranteeing the authenticity of the item. As we are testing for innate genomic DNA, we believe these assays cannot be counterfeited. -4- We believe our BioMaterial Genotyping allows us to: ● ● ● Identify U.S. produced Pima cotton; Establish an authentication protocol for cotton and other biomaterials; and Deter counterfeits and protect the integrity of brands. We believe our two genetic assays accurately distinguish between: ● ● Pima cotton (G. barbadense) and upland cotton (G. hirsutum) (cultivars in mature cotton fibers and in cotton fabrics (Fibertyping); and American Pima and Extra Long Staple (ELS) Pima cotton (Pimatyping), We believe that our new DNA extraction protocol and methodologies are more effective than existing forensic systems. We believe that the combination of our SigNature DNA and BioMaterial Genotyping solutions covers the total authentication market, is applicable to multiple industry verticals, and can mark physical products on the front end and authenticate forensic DNA sequences on the back end. Discontinued BioActive Ingredients Program In 2009, we discontinued our BioActive Ingredients program, which we began in 2007. We developed BioActive Ingredients for personal care products, such as skin care products, based on the biofermentation expertise developed during the manufacturing of DNA for our SigNature DNA and BioMaterial Genotyping solutions, and we have decided to focus our business on these security and authentication solutions. Our Strategy We have begun to generate revenues principally from sales of our SigNature DNA and BioMaterial Genotyping offerings. Key aspects of our strategy include: Customize and Refine our Solutions to Meet Potential Customers’ Needs We are continuously attempting to improve our SigNature DNA solution by testing the incorporation of our SigNature DNA Markers into different media, such as newly configured labels, inks or packing elements, for use in new applications. Each prospective customer has specific needs and employs varying levels of existing security technologies with which our solution must be integrated. Our goal is to develop a secure and cost-effective system for each potential customer that can be incorporated into that potential customer’s products or items themselves or their packaging so that they can, for instance, be tracked throughout the entire supply chain and distribution system. Continue to Enhance Detection Technologies for Authentication of our SigNature DNA Markers We have also identified and are further examining opportunities to collaborate with companies and universities to develop a new line of detection technologies that will provide faster and more convenient ways to authenticate our SigNature DNA Markers. Target Potential High-Volume Markets We will continue to focus our efforts on target vertical markets that are characterized by a high level of vulnerability to counterfeiting, product diversion, piracy, fraud, identity theft, and unauthorized intrusion into physical locations and databases. Today our target markets include art and collectibles, cash-in-transit, fine wine, consumer products, digital and recording media, pharmaceuticals, textile and apparel authentication and secure documents/homeland security. If and when we have significantly penetrated these markets, we intend to expand into additional related high volume markets. Pursue Strategic Acquisitions and Alliances We intend to pursue strategic acquisitions of companies and technologies that strengthen and complement our core technologies, improve our competitive positioning, allow us to penetrate new markets, and grow our customer base. We also intend to work in collaboration with potential strategic partners in order to continue to market and sell new product lines derived from, but not limited to, DNA technology. -5- Target Markets We have begun offering our products and services in Europe and the United States and are targeting the following principal markets: Cash-in-Transit Cash-in-transit businesses transport and store bank notes and ATM cassettes. In the U.K. alone, there is an estimated £500 billion being transported each year, or £1.4 billion per day. The nature of this business makes cash-in-transit an attractive target for criminals, and as a result the industry invests in excess of £100 million per year in security equipment and devices. Currently, a system of cash degradation, using a smoke or liquid dye to permanently mark and essentially destroy stolen bank notes, is used. The incidence of cash-in-transit based crime has increased over 170% in London since 2006, according to the Metropolitan Police and the UK boasts the highest levels of cash-in-transit crime in Europe. We are able to incorporate our SigNature DNA Markers in cash degradation ink that is used in the cash-in-transit industry. This solvent-based ink marks bank notes if the cash box is compromised and has the ability to penetrate the bank notes rapidly and permanently. We believe our SigNature DNA Markers are more resilient and detectable than other competing products. Textile and Apparel Authentication Cotton classification and the authentication of cotton geographic origin are issues of global significance, important to brand owners and to governments that must regulate international cotton trade. We believe that our SigNature DNA and BioMaterial Genotyping solutions could have significant potential applications for the enforcement of cotton trade quotas in the U.S. and across the globe, and for legislated quality improvement within the industry. We believe that similar issues face the wool and other natural product industries which is the next area we plan to target. Secure Documents Governments worldwide are increasingly faced with the problems of counterfeit currencies, official documents, and identity and security cards, as well as terrorism and other security threats. Governments must also enforce the various anti-counterfeiting and anti-piracy regimes of their respective jurisdictions which becomes increasingly difficult with the continued expansion of global trade. Our SigNature DNA solution can provide secure, forensic, and cost-effective anti-counterfeiting, anti-piracy and identification solutions to local, state, and federal governments as well as the defense contractors and the other companies that do business with them. Our SigNature solution can be used for all types of identification and official documents, such as: ● ● ● ● ● ● ● ● ● passports; lawful permanent resident, or "green” cards; visas; drivers’ licenses; Social Security cards; military identification cards; national transportation cards; security cards for access to sensitive physical locations; and other important identity cards, official documents and security-related cards. Pharmaceuticals The pharmaceutical industry also faces major problems relative to counterfeit, diluted, or falsely labeled drugs that make their way through healthcare systems worldwide, posing a health threat to patients and a financial threat to drugmakers and distributors. As a result, the pharmaceutical industry and regulators are examining emerging anti- counterfeit technologies, including RFID tags and EPCs to help stem the wave of counterfeit drugs and better track legitimate drugs from manufacturing through the supply chain. Our SigNature DNA Markers can easily be embedded directly into pharmaceutical packaging or into RFID tags or EPCs attached to packaging, and since they are ingestible, may be applied as part of a unit dose. In its 2004 report "Combating Counterfeit Drugs,” the U.S. Food and Drug Administration noted that authentication technologies for pharmaceuticals (such as color-shifting inks, holograms, taggants, or chemical markers embedded in a drug or its label) have been sufficiently perfected that they can now serve as a critical component of a layered approach to control counterfeit drugs. The U.S. Food and Drug Administration’s 2004 Report acknowledged the importance of using one or more authentication technologies for drug products. -6- Consumer Products Counterfeit items are a significant and growing problem with all kinds of consumer packaged goods, especially in the retail and apparel industries. According to the World Customs Organization, up to $12 billion worth of clothing and accessories worldwide are fake, and Interpol reported $3 billion worth of fragrances and cosmetics are counterfeit each year. In the United States, $1.29 billion dollars worth of seizures and losses were incurred resulting from counterfeit of apparel and other consumer products. We have developed and are currently marketing a number of solutions aimed at brand protection and authentication for the retail and apparel industries, including the clothing, accessories, fragrances and cosmetics segments. Our SigNature DNA solution can be used by manufacturers in these industries to combat counterfeiting and piracy of primary, secondary and tertiary packaging, as well as the product itself, and to track products that have been lost in transit, whether misplaced or stolen. Fine Wine Vintners and purveyors of fine wine are also vulnerable to counterfeiting or product diversion. We believe our SigNature and BioMaterial Genotyping solutions can provide vintners, purveyors of fine wines and organizations within the wine community several benefits: ● ● ● Verifed authenticity increases potential customers’ confidence in the product and their purchase decision; For the vintner, the SigNature and BioMaterial Genotyping solutions can strengthen brand support and recognition, and offers the potential for improved marketability and sales; and SigNature DNA Markers can be embedded in bottles, labels, or both at the winery, and easily authenticated at the location of the wine distributor or auctioneer; BioMaterial Genotyping allows the identification of wine based on the varietal of grape and the region it is grown in. Art & Collectibles The fine art and collectibles markets are particularly vulnerable to counterfeiting, forgeries and fraud. Phony artwork and collectibles are often sold with fake or questionable signatures or attributions. We believe our SigNature DNA Markers can safely be embedded directly in, and so can be used to designate and then authenticate all forms of artwork and collectibles, including paintings, books, porcelain, marble, stone, bronzes, tapestries, glass and fine woodwork, including frames. We believe they can also be embedded in any original supporting documentation related to the artwork or collectible, the signature of the artist and any other relevant material that would provide provenance, such as: ● ● ● ● ● ● A signed certificate or statement of authenticity from a respected authority or expert on the artist; An exhibition or gallery sticker attached to the art or collectible; An original sales receipt; A film or recording of the artist talking about the art or collectible; An appraisal from a recognized authority or expert on the art or collectible; and Letters or papers from recognized experts or authorities discussing the art or collectible. Digital and Recording Media The digital and recording media industry, including the segment that records computer software on compact discs, faces significant threats from piracy and the counterfeiting and distribution of imitation media or software. In 2008 the Business Software Alliance ("BSA”) reported that in 2007, the United States software industry lost $8.9 billion as a result of software piracy, an increase of $1.6 billion over the previous year. An independent study conducted by IDC for the BSA reported that 33 percent of software in the United States is unlicensed. Our SigNature DNA Markers can be embedded onto digital and recording media products, such as CDs, DVDs, videotapes and computer software, as well as the packaging of these products. Our Technology Every living organism has a unique DNA code that determines the character and composition of its cells. The core technologies of our business allow us to use the DNA of everyday plants to mark objects in a unique manner that we believe can only be replicated at great expense, and then identify these objects by detecting the absence or presence of the DNA. SigNature DNA Encryption Our patent pending encryption system allows us to isolate strands of botanical DNA and then fragment and reconstitute them to form unique "DNA chimers”, or encrypted DNA segments, whose sequences are known only to us. -7- SigNature DNA Encapsulation Our patented encapsulation system allows us to apply a protective coating to encrypted DNA chimers, creating a SigNature DNA Marker that is resistant to heat, organic solvents, chemicals and UV radiation, and so can be identified for hundreds of years after being embedded directly, or into media applied or attached to the item to be marked. SigNature DNA Embedment Our patented embedment system allows us to incorporate our SigNature DNA Markers into a broad variety of media, such as petroleum and petroleum derivatives, inks, dyes, laminates, glues, threads, and textiles. SigNature DNA Authentication Our patent pending forensic level authentication methods allow us to unlock the encrypted DNA chimers by using PCR techniques and proprietary primers that were specifically designed by us to detect the DNA sequences we encrypted and embedded into the product or other item. Detection of the DNA chimers unique to a particular item or series of items allows us to authenticate its or their origin. Products and Services Our SigNature DNA solution consists of three steps: creating and encapsulating a specific encrypted DNA segment, applying it to a product or other item, and detecting the presence or absence of the specific segment. We plan for the first two steps to be controlled exclusively by Applied DNA and its certified agents to ensure the security of SigNature DNA Markers. Once applied, the presence of any of our SigNature DNA Markers can be detected by us or a customer in a simple spot test, or a sample taken from the product or other item can be analyzed forensically to obtain definitive proof of the presence or absence of a specific type of SigNature DNA Marker (e.g., one designed to mark a particular product). Creating a Customer or Product-Specific SigNature DNA Marker Our SigNature DNA Markers are botanical DNA segments custom manufactured by us to identify a particular class of or individual products or items. During this manufacturing process, we scramble and encrypt a naturally occurring botanical DNA code segment or segments, and then encapsulate the resulting DNA segment utilizing our proprietary SigNature DNA Encapsulation system. We then record and store the sequence of the DNA segment in a secure database in order that we can later detect it. Embedding the SigNature DNA Marker Our SigNature DNA Markers may be directly embedded in products or other items, or otherwise attached by embedding them into media that is incorporated in or attached to the product or item. For example, we can embed SigNature DNA Markers directly in paper, metal, plastics, stone, ceramic, and other materials. Media in which we can embed SigNature DNA Markers include: SigNature DNA Ink: Our SigNature DNA Ink can be applied directly or on a label that is then affixed to the product or item. SigNature DNA Ink is highly durable and degradation resistant. SigNature DNA Ink can be visible (colored) or invisible. This makes it possible to mark products with a visible, or overt, and/or invisible, or covert, SigNature DNA Marker on any tangible surface such as a label. The location of covert Signature DNA Markers on a product are recorded and stored in a secure database. Similar media like varnish and paints can also be used instead of ink. Sporting event tickets have been prototyped using our SigNature DNA Ink. In addition, our SigNature DNA Ink is being tested in government documents, auto parts, luxury goods and consumer products. Other examples of where our SigNature DNA Inks can be used include: ● ● ● ● ● ● artwork and collectibles (paintings, artifacts, antiques, stamps, coins, documents, collectibles and memorabilia); corporate documents (confidential, date and time dependent documents or security clearance documents); financial instruments (currency, stock certificates, checks, bonds and debentures); retail items (event tickets, VIP tickets, clothing labels, luxury products); pharmaceuticals (tablet, capsule and pill surface printing); and other miscellaneous items (lottery tickets, inspection stamps, custom seals, passports and visas, etc.). -8- We have also developed a portfolio of SigNature DNA containing thermal transfer ribbons. These products will allow retailers to protect at the point-of-sale by printing price labels, hang tags, event tickets and even credentials with customized SigNature markers. We are also able to mark cartridges of laser printers with SigNature DNA. AzSure™ Security Ink: We have developed AzSure bank note marking ink at the request of our cash-in-transit customer. This security ink is being marketed to governments and industry to protect bank notes and other financial instruments. We believe the unique visible and fluorescent blue signature of our highly substantive dye/DNA system distinguishes AzSure from all other dyes used within the cash-in-transit industry. SigNature DNA Thread: Our SigNature DNA Thread, which can consist of any fabric from cotton to wool, is embedded with SigNature DNA Markers and can be used to mark and authenticate products and other items incorporating textiles. For example, SigNature DNA Thread can be incorporated in a finished garment, bag, purse, shoe or other product or item. SigNature DNA Thread can help textile vendors, clothing and accessory manufacturers and governments authenticate thread, yarn and fabric at any stage in the supply chain. We can also embed our SigNature DNA Markers into raw cotton fiber before manufacture of a finished cotton textile product (e.g., a t-shirt) and authenticate a finished cotton product. We are currently working with the Textile Centre of Excellence consortium of companies (Leeds, UK) to demonstrate how our SigNature DNA can be used to authenticate textiles at all points of the supply chain through to the end user. In addition, we are working to demonstrate the integration of SigNature DNA with existing manufacturing processes to produce threads, labels and fabrics manufactured by Yorkshire-based companies. Other Security Devices: Our SigNature DNA Markers can also be embedded onto printed barcodes, RFID tags, optical memory strips, holograms, tamper proof labels and other security devices incorporated into products and other items for various security-related purposes. SigNature DNA Detection and Product Authentication We now offer a full range of detection options from instant rapid screening to more detailed forensic level authentication: Level 1 "Spot Test” Detection: We offer rapid readers capable of instantly testing for the presence or absence of any of our SigNature DNA Markers. Level 2 Forensic DNA Authentication: When a forensic level of authentication is necessary, we offer in-field or in-house forensic DNA authentication with a handheld battery powered PCR-based device that will confirm authentication sequences in approximately 10 minutes Sales and Marketing As of December 17, 2009, we had three employees engaged in sales and marketing. We expect to hire additional sales directors and/or consultants to assist us with sales and marketing efforts with respect to our nine target vertical markets. Research and Development Our research and development efforts are primarily focused on the development of prototypes of new versions of our products using our existing technologies for review by prospective customers, such as different types of SigNature DNA Ink and SigNature DNA Thread. We are also focused on the identification of additional genotyping markers. Nonetheless, we believe that our development of new and enhanced technologies relating to our business may be important to our future success, and we continue to examine whether investments in the research and development of such technologies is merited. Manufacturing We have the capability to manufacture SigNature DNA Markers, covert DNA Ink, and SigNature PCR Kits at our laboratories in Stony Brook. We rely upon other companies to manufacture our overt color-changing DNA Ink. We also have in-house capabilities to complete all BioMaterial Genotyping authentications. Distribution of our Products and Commercial Agreements Cash-in Transit. We can use our SigNature DNA platform to offer a forensic security solution for banks and institutions operating in the cash-in-transit industry, including automated teller machine (ATM) operations and banknote transportation and storage. We can embed our SigNature DNA Marker into cash degradation inks that are placed in cash- in-transit boxes. If a cash box is compromised or illegally accessed, the security device discharges the liquid cash degradation dye into the banknotes, which can be detected after the banknotes are recovered by police. Since January 2008, we have been engaged with Loomis Group U.K., a cash-handling company, and Spinnaker International, a cash-in-transit box manufacturer, pursuant to which we provide signature DNA for use in boxes and authentication and expert witness reports. In July 2009, we joined Banknote Watch, a national U.K.-based crime prevention initiative. -9- IIMAK Agreement. On April 18, 2007, we entered into a Joint Development and Marketing Agreement with International Imaging Materials, Inc., or IIMAK. In this agreement with IIMAK, the parties agreed to jointly develop thermal transfer ribbons incorporating our SigNature DNA Markers to help prevent counterfeiting and product diversion for an initial six (6) month period. Upon the successful development of commercially feasible ribbons incorporating SigNature DNA Markers, we will be paid royalties based on a calculation of net receipts by IIMAK from sales of such products. We will receive the exclusive right to supply DNA taggants to IIMAK and IIMAK will receive the exclusive right to manufacture and sell such products worldwide. In February 2008, we completed the joint development stage of this agreement and initiated pilot manufacturing of IIMAK thermal transfer ribbons embedded with SigNature DNA. Print Color Agreement. On September 16, 2009, we entered into a Supply and Distribution Agreement, pursuant to which Printcolor Screen Ltd. has agreed to manufacture and supply to us on an exclusive basis AzSure security ink for an initial period of five years, unless the agreement is mutually terminated by the parties or terminated for material breach. Supima Cotton Agreement. On June 27, 2007, we entered into a Feasibility Study Agreement with Supima, a non-profit organization for the promotion of U.S. pima cotton growers. In connection with the agreement we undertook a study of the feasibility of establishing a method or methods to authenticate and identify U.S. produced pima cotton fibers. We received payments from Supima upon signing of the agreement and in installments beginning on July 6, 2007 through completion of the feasibility study. The feasibility study was successfully completed in the first quarter of 2008. We plan to begin a preliminary launch of authentication services in 2010 and we may in the future offer authentication services to member companies of Supima (as well as non-member companies) to confirm the Supima cotton content of textile items such as apparel and home fashion products. We are obligated to pay Supima a percentage of any fees that we receive from such companies for authentication services we provide them. We are also obligated to pay Supima fifty percent of the aggregate amount of payments that we received from Supima for the feasibility study out of any fees we receive from providing authentication services. In addition, until the earlier of either (i) five years or (ii) the repayment to Supima of fifty percent of the aggregate amount of payments that we received from Supima for the feasibility study, we are obligated to pay Supima a fee for each authentication service that we provide. The agreement may be terminated by us or Supima after sixty (60) days upon fourteen (14) days prior written notice. Textile Centre of Excellence. On August 11, 2008, we entered into an Agreement with Huddersfield and District Textile Training Company Limited. We have agreed to undertake a study to demonstrate how our SigNature DNA can be used to authenticate textiles at all points of the supply chain through to the end user. In addition, this study will demonstrate the integration of SigNature DNA with existing manufacturing processes to produce threads, labels and fabrics manufactured by Yorkshire-based companies. The funding for Phase I of the study, which ran through December 2008, totaled £50,000. We successfully completed Phase I of the study, and we anticipate beginning Phase II, which could result in continued funding. Nissha Agreement. On December 14, 2009, we entered into a Supply Agreement with Nissha Printing Co., Ltd. ("Nissha"), an international printing company. In the agreement, we agreed to supply our authentication marks to Nissha to be incorporated into their printing ink. We will receive an initial fee, annual fee and authentication mark fee for each unique authentication mark purchased. Additional fees may be received if more than 10 authentications per year are ordered by Nissha. In addition, on December 21, 2009, we entered into a Supply Agreement with an international company. In the agreement, we agreed to supply the company with our authentication marks. We will receive an annual fee for each unique authentication mark purchased. There is the potential to receive additional fees if more than three authentications per year are ordered. In exchange for exclusive rights in a specific field, the company has agreed to minimum volume purchases for each year of the agreement. -10- Biowell Agreement. In the first half of 2005, Biowell Technology, Inc. ("Biowell”) transferred substantially all of its intellectual property to Rixflex Holdings Limited, a British Virgin Islands company, and on July 12, 2005, Rixflex Holdings Limited merged with and into our wholly-owned subsidiary APDN (B.V.L.) Inc., a British Virgin Islands company. The shareholders of Rixflex Holdings Limited received 36 million shares of our common stock in consideration of this merger. In connection with the acquisition of this Biowell intellectual property, we terminated our existing license agreement and on July 12, 2005, we entered into a license agreement with Biowell, under which we granted Biowell an exclusive license to sell, market, and sub-license certain of our products in Australia, certain countries in Asia and certain Middle Eastern countries. By letter dated November 1, 2007, we terminated Biowell’s rights as license with respect to Australia, China and certain other countries in Asia because of Biowell’s failure to pay us certain fees, payments or consideration in connection with the grant of the license. In addition, we terminated the exclusivity of the license with respect to certain Middle Eastern and other Asian countries because of Biowell’s failure to meet certain minimum annual net sales in each of the various countries covered by the license. Competition The principal markets for our offerings are intensely competitive. We compete with many existing suppliers and new competitors continue to enter the market. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical and biotechnology companies, or have strategic alliances with such companies, and many of them have substantially greater capital resources, marketing experience, research and development staff, and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may be more successful than us in producing and marketing their existing products. Some of our competitors that operate in the anti-counterfeiting and fraud prevention markets include: American Bank Noble Holographics, Inc., Applied Optical Technologies, Authentix, ChemTAG, Collectors Universe Inc., Collotype, Data Dot Technology, De La Rue Plc., Digimarc Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies, Kodak, L-1 Identity Solutions, Manakoa, Media Sec Technologies, November AG, opSec Security Group plc, SmartWater Technology, Inc., Sun Chemical Corp, Tracetag, Prooflag SAS and Warnex. Some examples of competing security products include: ● ● ● ● ● ● ● ● fingerprint scanner (a system that scans fingerprints before granting access to secure information or facilities); voice recognition software (software that authenticates users based on individual vocal patterns); cornea scanner (a scanner that scans the iris of a user’s eye to compare with data in a computer database); face scanner (a scanning system that uses complex algorithms to distinguish one face from another); integrated circuit chip & magnetic strips (integrated circuit chips that receive and, if authentic, send a correct electric signal back to the reader, and magnetic strips that contain information, both of which are common components of debit and credit cards); optically variable microstructures (these include holograms, which display images in three dimensions and are generally difficult to reproduce using advanced color photocopiers and printing techniques, along with other devices with similar features); elemental taggants and fluorescence (elemental taggants are various unique substances that can be used to mark products and other items, are revealed by techniques such as x-ray fluorescence); and radioactivity & rare molecules (radioactive substances or rare molecules which are uncommon and readily detected). We expect competition with our products and services to continue and intensify in the future. We believe competition in our principal markets is primarily driven by: ● ● ● ● ● ● product performance, features and liability; price; timing of product introductions; ability to develop, maintain and protect proprietary products and technologies; sales and distribution capabilities; technical support and service; -11- ● ● ● brand loyalty; applications support; and breadth of product line. If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be significantly harmed. Proprietary Rights We believe that our 12 patents, 15 provisional patents, 11 patents pending, 5 registered trademarks, and 5 registered trademarks pending, which are described in the table below, and our trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. Patents Issued: Patent Name Nucleic Acid as Marker for Product Anticounterfeiting and Identification Method of using ribonucleic acid as marker for product anti-counterfeit labeling EppenLocker (A Leakage Prevention Apparatus of Microcentrifuge) Multiple Tube Structure for Multiple PCR in a Closed Container A Device for Multiple Polymerase Chain Reactions In a Closed Container and a Method of Using Thereof Method for Mixing Nucleic Acid in Water Insoluble Media and Application Thereof A Method of marking solid or liquid substances with nucleic acid for anti- counterfeiting and authentication A novel nucleic acid based steganography system and applications thereof Method for Mixing Ribonucleic Acid in Water Insoluble Media and Application Thereof Method for Mixing Ribonucleic Acid in Water Insoluble Media and Application Thereof Method of dissolving nucleic acid in water insoluble medium and its application A Nucleic Acid Based Steganography System and Application thereof Patent No 89108443 00107580.2 203050 205554 231311 Assignee of Record APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. Date Issued 3/17/2000 Taiwan Jurisdiction 2/2/2005 China 3/10/2000 Taiwan 6/20/2000 Taiwan APDN (B.V.I.) Inc. 6/12/2000 Taiwan 921221973 APDN (B.V.I.) Inc. 8/11/2003 Taiwan APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. Rixflex 10/3/2006 United States 7/31/2008 Malaysia 8/3/2005 Korea India 8/4/2004 APDN (B.V.I.) Inc. 8/31/2002 Japan APDN (B.V.I.) Inc. 4/2/2009 EU APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. 8/27/2003 China 8/3/2004 EU 7115301 MY 135976-A 679484 234658 3930794 1394544 03155949.2 EP1568783 -12- Application No. Filed in Name of Date Filed Jurisdiction Patents Pending Patent Name Method for Mixing Nucleic Acid in Water Insoluble Media and Application Thereof Novel nucleic acid based steganography system and application thereof Cryptic method of secret information carried in DNA molecule and it deencryption method A novel nucleic acid based steganography system and application thereof 10/645,602 10/909,431 921221490 03127517.6 61387/2004 1-2004-00742 A novel nucleic acid based steganography system and applications thereof 092819 Method for classifying group ID of shoppers and transferring the shopping discount to group development funds development Method for transferring feedback foundation capable of identifying multiple objects Method of Classifying Group ID of Shoppers and Transferring the Shopping Discount to Group Development Fund 2004-225987 P-00200400374 92119302 03150071.4 PI20042889 092217 2004-200730 Rixflex Holdings Limited Rixflex Holdings Limited APDN (B.V.I.) Inc. Biowell Rixflex Holdings Limited APDN (B.V.I.) Inc. Rixflex Holdings Limited Rixflex Holdings Limited Rixflex Holdings Limited 8/22/2003 United States 8/3/2004 United States 8/6/2003 Taiwan 8/6/2003 China 8/4/2004 Korea 8/4/2004 Vietnam 8/4/2004 Thailand 8/2/2004 Japan 8/4/2004 Indonesia APDN (B.V.I.) Inc. 7/15/2003 Taiwan APDN (B.V.I.) Inc. Rixflex Holdings Limited Rixflex Holdings Limited Biowell 7/31/2003 China 8/4/2004 Malaysia 7/12/2004 Thailand 7/7/2004 Japan System and Method for authenticating multiple components associated with a particular product 11/437,265 11/890,533 PCT/US2006/019660 APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. 5/19/2005 US 5/19/2006 US PCT 5/19/2006 System and Method for Marking Textiles with Nucleic Acid 10/825,968 APDN (B.V.I.) Inc. 4/15/2004 US Method for Transferring Feedback Foundation capable of identifying multiple objects 92119302 03150071.4 APDN (B.V.I.) Inc. Rixflex Holdings Limited 7/15/2003 Taiwan 7/31/2003 China -13- Provisional Patents Patent Name System and Method for Marking Textiles with Nucleic Acids System and Method for Authenticating Multiple Components Associated with a Particular Good System and Method for Secure Document Printing and Detection System and Method for Authenticating Tablets System and Method for Authenticating Sports Identification Goods Optical Reporter Compositions Methods for Covalent Linking of Optical Reporters Method for Authenticating Articles with Optical Reporters Method for Secure Document Printing and Detection Method for Authenticating Sports Identification Goods Method for Authenticating Tablets Methods for Genetic Analysis of Textiles made of Gossypium Barbadense and Gossypium Hirsutum Cotton Methods for Genotyping Mature Cotton Fibers and Textiles Patent No publication # 20050112610 Assignee of Record Priority Date Jurisdiction APDN (B.V.I.) Inc. 4/16/2003 US 11/437,265 APDN (B.V.I.) Inc. 5/19/2006 US Application # 60/874,425 11/954,055 11/954,051 11/954,030 11/954,009 11/954,038 11/954,044 11/954,051 11/954,055 12/269,737 12/269,757 APDN (B.V.I.) Inc. 12/12/2006 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/29/2006 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 12/11/2007 US APDN (B.V.I.) Inc. 11/12/2008 US APDN (B.V.I.) Inc. 11/12/2008 US Incorporating Water Soluble Security Markers into Cyanoacrylate Solutions 12/465,450 APDN (B.V.I.) Inc. 5/13/2009 US System and Method for Marking Textiles with Nucleic Acid 10/825,968 APDN (B.V.I.) Inc. 4/15/2004 US TRADEMARKS Registered APPLIED DNA SIGNATURE SIGNATURE SIGNATURE AZSURE Pending FIBERTYPING PIMATYPING BIOMATERIAL GENOTYPING AZSURE Assignee of Record APDN APDN apdn APDN APDN Assignee of Record APDN APDN APDN APDN TM Reg # 3489209 3482366 005419031 1143760 3698729 TM # 77/488531 77/488647 77/771522 AOO17737 -14- Registered Jurisdiction 8/19/2008 US 8/5/2008 US 10/26/2006 EU 10/27/2006 Australia 10/20/2009 US Filed Jurisdiction 6/2/2008 US 6/2/2008 US 6/30/2009 US 11/10/2009 EU However, there are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. There is always the possibility that the scope of the protection gained from one of our issued patents will be insufficient or deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. This secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from these trade secrets. Additionally, litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. In the event of an intellectual property dispute, we may be forced to litigate. This litigation could involve proceedings instituted by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business. If a third party claims an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees or cease our affected business activities. Although we might under these circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all. Employees Presently, we currently have 13 full-time employees and two part-time employees, including two in management, nine in operations, three in sales and marketing and one in investor relations. None of our employees are covered by collective bargaining agreements, and we believe our relations with our employees are favorable. Available Information We are subject to the informational requirements of the Exchange Act, which requires us to file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to such reports and other information with the Securities and Exchange Commission ("SEC”). This information is available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC- 0330. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s website at www.sec.gov. Our web site is located at www.adnas.com. ITEM 1A. RISK FACTORS. Because of the following factors, as well as other variables affecting our operating results and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Risks Relating to Our Business: We have a short operating history, a relatively new business model, and have not produced significant revenues. This makes it difficult to evaluate our future prospects and increases the risk that we will not be successful. We have a short operating history with our current business model, which involves the marketing, sale and distribution of anti-counterfeiting and product authentication solutions. Our operations since inception have produced insignificant revenues, and may not produce significant revenues in the near term, or at all, which may harm our ability to obtain additional financing and may require us to reduce or discontinue our operations. If we create significant revenues in the future, we will derive most of such revenues from the sale of anti-counterfeiting and product authentication solutions, which are immature industries. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving industry. We may not be able to successfully address these risks and difficulties, which could significantly harm our business, operating results, and financial condition. -15- We have a history of losses from operations which may continue, and which may harm our ability to obtain financing and continue our operations. We incurred net operating losses of $6.9 million for the year ended September 30, 2009 and $4.2 million for the year ended September 30, 2008. These net losses have principally been the result of the various costs associated with our selling, general and administrative expenses as we commenced operations, acquired, developed and validated technologies, began marketing activities, and incurred interest expense on notes and warrants we issued to obtain financing. Our operations are subject to the risks and competition inherent in a company that moved from the development stage to an operating company. We may not generate sufficient revenues from operations to achieve or sustain profitability on a quarterly, annual or any other basis in the future. Our revenues and profits, if any, will depend upon various factors, including whether our existing products and services or any new products and services we develop will achieve any level of market acceptance. If we continue to incur losses, our accumulated deficit will continue to increase, which might significantly impair our ability to obtain additional financing. As a result, our business, results of operations and financial condition would be significantly harmed, and we may be required to reduce or terminate our operations. We will require additional financing which may require the issuance of additional shares which would dilute the ownership held by our stockholders; we may not have enough additional shares to issue. We will need to raise funds through either debt or the sale of our shares in order to achieve our business goals. Although there are no present plans, agreements, commitments or undertakings with respect to the sale of additional shares or securities convertible into any such shares by us, any shares issued would further dilute the percentage ownership held by the stockholders. Furthermore, if we raise funds in equity transactions through the issuance of convertible securities which are convertible at the time of conversion at a discount to the prevailing market price, substantial dilution is likely to occur resulting in a material decline in the price of your shares. In addition, we may not have sufficient authorized shares of common stock under our certificate of incorporation to raise additional funds through the issuance of equity or covertible debt securities. If we are unable to obtain additional financing our business operations will be harmed or discontinued, and if we do obtain additional financing our stockholders may suffer substantial dilution. We believe that our existing capital resources will enable us to fund our operations until approximately February 2010. We believe we will be required to seek additional capital to sustain or expand our prototype and sample manufacturing, and sales and marketing activities, and to otherwise continue our business operations beyond that date. We have no commitments for any future funding, and may not be able to obtain additional financing or grants on terms acceptable to us, if at all, in the future. If we are unable to obtain additional capital this would restrict our ability to grow and may require us to curtail or discontinue our business operations. Additionally, while a reduction in our business operations may prolong our ability to operate, that reduction would harm our ability to implement our business strategy. If we can obtain any equity financing, it may involve substantial dilution to our then existing stockholders. Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing. In their report dated December 23, 2009, our independent auditors stated that our financial statements for the year ended September 30, 2009 were prepared assuming that we would continue as a going concern, and that they have substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our negative working capital of $2.9 million, recurring net loss from operations of $6.9 million, and capital deficiency of $1.7 million for the year ended September 30, 2009. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including the sale of our securities, obtaining loans from financial institutions, or obtaining grants from various organizations or governments, where possible. Our continued net operating losses and our auditors’ doubts increase the difficulty of our meeting such goals and our efforts to continue as a going concern may not prove successful. General economic conditions and the current global financial crisis may adversely affect our business, operating results and financial condition. The current global economy and economic slowdown may have serious negative consequences for our business and operating results. Since our customers incorporate our products into a variety of consumer goods, the demand for our products is subject to worldwide economic conditions and their impact on levels of consumer spending. Some of the factors affecting consumer spending include general economic conditions, unemployment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, energy prices, interest rates, consumer confidence and other macroeconomic factors. During a period of economic weakness or uncertainty, demand for consumer goods incorporating our products may weaken, and current or potential customers may defer purchases of our products. -16- The recent distress in the credit and financial markets has also resulted in extreme volatility in security prices and diminished liquidity, and there can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy. Moreover, the current crisis has had a significant material adverse impact on a number of financial institutions and has limited access to capital and credit for many companies. This could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all. If our existing products and services are not accepted by potential customers or we fail to introduce new products and services, our business, results of operations and financial condition will be harmed. There has been limited market acceptance of our botanical DNA encryption, encapsulation, embedment and authentication products and services to date. Some of the factors that will affect whether we achieve market acceptance of our solutions include: ● availability, quality and price relative to competitive solutions; ● customers’ opinions of the solutions’ utility; ● ease of use; ● consistency with prior practices; ● scientists’ opinions of the solutions’ usefulness; ● citation of the solutions in published research; and ● general trends in anti-counterfeit and security solutions’ research. The expenses or losses associated with the continued lack of market acceptance of our solutions will harm our business, operating results and financial condition. Rapid technological changes and frequent new product introductions are typical for the markets we serve. Our future success may depend in part on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions may provide a significant competitive advantage because customers invest their time in selecting and learning to use new products, and are often reluctant to switch products. To the extent we fail to introduce new and innovative products, we may lose any market share we then have to our competitors, which will be difficult or impossible to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or damage our business. We may experience delays in the development and introduction of products. We may not keep pace with the rapid rate of change in anti-counterfeiting and security products’ research, and any new products acquired or developed by us may not meet the requirements of the marketplace or achieve market acceptance. If we are unable to retain the services of Drs. Hayward or Liang we may not be able to continue our operations. Our success depends to a significant extent upon the continued service of Dr. James A. Hayward, one of our directors, our President and Chief Executive Officer; and Dr. Benjamin Liang, our Secretary and Strategic Technology Development Officer. We do not have employment agreements with Drs. Hayward or Liang. Loss of the services of Drs. Hayward or Liang could significantly harm our business, results of operations and financial condition. We do not maintain key-man insurance on the lives of Drs. Hayward or Liang. During fiscal 2009, Dr. Hayward provided $1.5 million in loans to the Company. In the absence of any other financing, curtailment of cash investments by Dr. Hayward could harm our cash availability and our ability to fund our operations. The markets for our anti-counterfeiting and product authentication solutions are very competitive, and we may be unable to continue to compete effectively in these industries in the future. The principal markets for our anti-counterfeiting and product authentication solutions are intensely competitive. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical and biotechnology companies, or have strategic alliances with such companies, and many of them have substantially greater capital resources, marketing experience, research and development staff, and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may be more successful than us in producing and marketing their existing products. Some of our competitors that operate in the anti-counterfeiting and fraud prevention markets include: Authentix, Collectors Universe Inc., Data Dot Technology, Digimarc Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies, Kodak, L-1 Identity Solutions, Manakoa, OpSec Security Group, SmartWater Technology, Inc., Sun Chemical Corp, and Tracetag. -17- We expect this competition to continue and intensify in the future. Competition in our markets is primarily driven by: ● product performance, features and liability; ● price; ● timing of product introductions; ● ability to develop, maintain and protect proprietary products and technologies; ● sales and distribution capabilities; ● technical support and service; ● brand loyalty; ● applications support; and ● breadth of product line. If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be significantly harmed. We need to expand our sales, marketing and support organizations and our distribution arrangements to increase market acceptance of our products and services. We currently have few sales, marketing, customer service and support personnel and will need to increase our staff to generate a greater volume of sales and to support any new customers or the expanding needs of existing customers. The employment market for sales, marketing, customer service and support personnel in our industry is very competitive, and we may not be able to hire the kind and number of sales, marketing, customer service and support personnel we are targeting. Our inability to hire qualified sales, marketing, customer service and support personnel may harm our business, operating results and financial condition. We do not currently have any arrangements with any distributors and we may not be able to enter into arrangements with qualified distributors on acceptable terms or at all. If we are not able to develop greater distribution capacity, we may not be able to generate sufficient revenue to support our operations. A manufacturer’s inability or willingness to produce our goods on time and to our specifications could result in lost revenue and net losses. Though we manufacture prototypes, samples and some of our own products, we currently do not own or operate any significant manufacturing facilities and depend upon independent third parties for the manufacture of some of our products to our specifications. The inability of a manufacturer to ship orders of such products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could harm our business by resulting in decreased revenues or net losses upon sales of products, if any sales could be made. If we need to replace manufacturers, our expenses could increase, resulting in smaller profit margins. We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have, and thus may have an advantage in the competition for production and import quota capacity. If we experience a significant increase in demand, or if our existing manufacturers must be replaced, we will need to establish new relationships with another or multiple manufacturers. We cannot assure you that this additional third party manufacturing capacity will be available when required on terms that are acceptable to us or terms similar to those we have with our existing manufacturers, either from a production standpoint or a financial standpoint. We do not have long-term contracts with our manufacturers, and our manufacturers do not produce our products exclusively. Should we be forced to replace our manufacturers, we may experience an adverse financial impact, or an adverse operational impact, such as being forced to pay increased costs for such replacement manufacturing or delays upon distribution and delivery of our products to our customers, which could cause us to lose customers or lose revenues because of late shipments. -18- If a manufacturer fails to use acceptable labor practices, we might have delays in shipments or face joint liability for violations, resulting in decreased revenue and increased expenses. While we require our independent manufacturers to operate in compliance with applicable laws and regulations, we have no control over their ultimate actions. While our internal and vendor operating guidelines promote ethical business practices and our staff and buying agents periodically visit and monitor the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by our independent manufacturers, or by one of our licensing partners, or the divergence of an independent manufacturer’s or licensing partner’s labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations, such as the loss of potential revenue and incurring additional expenses. Failure to license new technologies could impair sales of our existing products or any new product development we undertake in the future. To generate broad product lines, it is advantageous to sometimes license technologies from third parties rather than depend exclusively on the development efforts of our own employees. As a result, we believe our ability to license new technologies from third parties is and will continue to be important to our ability to offer new products. In addition, from time to time we are notified or become aware of patents held by third parties that are related to technologies we are selling or may sell in the future. After a review of these patents, we may decide to seek a license for these technologies from these third parties. There can be no assurance that we will be able to successfully identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all. If we lose the rights to patented technology, we may need to discontinue selling certain products or redesign our products, and we may lose a competitive advantage. Potential competitors could license technologies that we fail to license and potentially erode our market share for certain products. Intellectual property licenses would typically subject us to various commercialization, sublicensing, minimum payment, and other obligations. If we fail to comply with these requirements, we could lose important rights under a license. In addition, certain rights granted under the license could be lost for reasons beyond our control, and we may not receive significant indemnification from a licensor against third party claims of intellectual property infringement. Our failure to manage our growth in operations and acquisitions of new product lines and new businesses could harm our business. Any growth in our operations, if any, will place a significant strain on our current management resources. To manage such growth, we would need to improve our: ● operations and financial systems; ● procedures and controls; and ● training and management of our employees. Our future growth, if any, may be attributable to acquisitions of new product lines and new businesses. Future acquisitions, if successfully consummated, would likely create increased working capital requirements, which would likely precede by several months any material contribution of an acquisition to our net income. Our failure to manage growth or future acquisitions successfully could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the acquisitions by incurring convertible debt or issuing securities. Although we currently only have operations within the United States, if we were to acquire an international operation; we would face additional risks, including: ● difficulties in staffing, managing and integrating international operations due to language, cultural or other differences; ● different or conflicting regulatory or legal requirements; ● foreign currency fluctuations; and ● diversion of significant time and attention of our management. Failure to attract and retain qualified scientific, production and managerial personnel could harm our business. Recruiting and retaining qualified scientific and production personnel to perform and manage prototype, sample, and product manufacturing and business development personnel to conduct business development are critical to our success. In addition, our desired growth and expansion into areas and activities requiring additional expertise, such as clinical testing, government approvals, production, and marketing will require the addition of new management personnel and the development of additional expertise by existing management personnel. Because the industry in which we compete is very competitive, we face significant challenges attracting and retaining a qualified personnel base. Although we believe we have been and will be able to attract and retain these personnel, we may not be able to continue to successfully attract qualified personnel. The failure to attract and retain these personnel or, alternatively, to develop this expertise internally would harm our business since our ability to conduct business development and manufacturing will be reduced or eliminated, resulting in lower revenues. We generally do not enter into employment agreements requiring our employees to continue in our employment for any period of time. -19- Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand. Our patents, trademarks, trade secrets, copyrights and all of our other intellectual property rights are important assets for us. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. There is always the possibility that the scope of the protection gained from one of our issued patents will be insufficient or deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from these trade secrets. Intellectual property litigation could harm our business. Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. In the event of an intellectual property dispute, we may be forced to litigate. This litigation could involve proceedings instituted by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business. If a third party claims an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees or cease our affected business activities. Although we might under these circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all. Furthermore, a third party may claim that we are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. A court may decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, a court may order us to pay the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our or our licensor’s issued patents or pending applications or that we or our licensors were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our or our licensors’ patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions. -20- Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Accidents related to hazardous materials could adversely affect our business. Some of our operations require the controlled use of hazardous materials. Although we believe our safety procedures comply with the standards prescribed by federal, state, local and foreign regulations, the risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of an accident, we could be liable for any damages that result, which could seriously damage our business and results of operations. Potential product liability claims could affect our earnings and financial condition. We face a potential risk of liability claims based on our products and services, and we have faced such claims in the past. Though we have product liability insurance coverage which we believe is adequate, we may not be able to maintain this insurance at reasonable cost and on reasonable terms. We also cannot assure that this insurance, if obtained, will be adequate to protect us against a product liability claim, should one arise. In the event that a product liability claim is successfully brought against us, it could result in a significant decrease in our liquidity or assets, which could result in the reduction or termination of our business. Litigation generally could affect our financial condition and results of operations. We generally may be subject to claims made by and required to respond to litigation brought by customers, former employees, former officers and directors, former distributors and sales representatives, and vendors and service providers. We have faced such claims and litigation in the past and we cannot assure that we will not be subject to claims in the future. In the event that a claim is successfully brought against us, considering our lack of material revenue and the losses our business has incurred for the period from our inception to September 30, 2009, this could result in a significant decrease in our liquidity or assets, which could result in the reduction or termination of our business. We were obligated to pay liquidated damages as a result of our failure to have our registration statement declared effective prior to June 15, 2005, and any payment of liquidated damages will either result in depletion of our limited working capital or issuance of shares of common stock which would cause dilution to our existing stockholders. Pursuant to the terms of a registration rights agreement with respect to common stock underlying convertible notes and warrants we issued in private placements in November and December, 2003, December, 2004, and January and February, 2005, for each month after June 15, 2005 that we did not have a registration statement registering the shares underlying these convertible notes and warrants declared effective, we were obligated to pay liquidated damages in the amount of 3.5% per month of the face amount of the notes, an amount equal to $367,885. On July 24, 2008, the SEC declared effective our registration statement with respect to common stock underlying convertible notes and warrants we issued in private placements in November and December, 2003, December, 2004, and January and February, 2005. At our option, these liquidated damages can be paid in cash or unregistered shares of our common stock. To date we have decided to pay certain of these liquidated damages in common stock, although any future payments of liquidated damages may, at our option, be made in cash. If we decide to pay such liquidated damages in cash, we would be required to use our limited working capital and potentially raise additional funds. If we decide to pay the liquidated damages in shares of common stock, the number of shares issued would depend on our stock price at the time that payment is due. Based on the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our common stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively, we issued a total of 3,807,375 shares of common stock in liquidated damages from August, 2005 to January, 2006 to persons who invested in the January and February, 2005 private placements . The issuance of shares upon any payment by us of further liquidated damages will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering. -21- We paid liquidated damages in the form of common stock only for the period from June 15, 2005 to December 15, 2005, and only to persons who invested in the January and February, 2005 private placements. We believe that we have no enforceable obligation to pay liquidated damages to holders of any shares we agreed to register under the registration rights agreement for periods after the first anniversary of the date of issuance of such shares, since they were eligible for resale under Rule 144 of the Securities Act during such periods, and such liquidated damages are grossly inconsistent with actual damages to such persons. Nonetheless, as of September 30, 2009 we have accrued approximately $12.0 million in penalties representing further liquidated damages associated with our failure to have the registration statement declared effective by the deadline, and have included this amount in accounts payable and accrued expenses. As of September 30, 2009, we concluded that the payment of liquidated damages under these commitments were not probable. Accordingly, we reversed the accrued expenses for the potential liquidated damages of $12.0 million as other income in the statement of operations during the year ended September 30, 2009. Matter voluntarily reported to the Securities and Exchange Commission During the months of March, May, July and August 2005, we issued a total of 8,550,000 shares of our common stock to certain employees and consultants pursuant to the 2005 Incentive Stock Plan. We engaged our outside counsel to conduct an investigation of the circumstances surrounding the issuance of these shares. On April 26, 2006, we voluntarily reported the findings from this investigation to the SEC, and agreed to provide the SEC with further information arising from the investigation. We believe that the issuance of 8,000,000 shares to employees in July 2005 was effectuated by both our former President and our former Chief Financial Officer/Chief Operating Officer without approval of our board of directors. These former officers received a total of 3,000,000 of these shares. In addition, it appears that the 8,000,000 shares issued in July 2005, as well as an additional 550,000 shares issued to employees and consultants in March, May and August 2005, were improperly issued without a restrictive legend stating that the shares could not be resold legally except in compliance with the Securities Act of 1933, as amended. The members of the Company’s management who effectuated the stock issuances no longer work for the Company. These shares were not registered under the Securities Act of 1933, or the securities laws of any state, and we believe that certain of these shares may have been sold on the open market, though we have been unable to determine the magnitude of such sales. Since our voluntary report of the findings of our internal investigation to the SEC on April 26, 2006, we have received no communication from the SEC or any third party with respect to this matter. If violations of securities laws occurred in connection with the resale of certain of these shares, the employees and consultants or persons who purchased shares from them may have rights to have their purchase rescinded or other claims against us for violation of securities laws, which could harm our business, results of operations, and financial condition. Risks Relating to Our Common Stock: There are a large number of shares underlying our options and warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock and will cause immediate and substantial dilution to our existing stockholders. As of December 18, 2009, we had 275,204,070 shares of common stock issued and outstanding and outstanding options and warrants to purchase 100,917,000 shares of common stock, except for shares issuable upon exercise of options held by our "affiliates" as defined in Rule 144 under The Securities Act of 1933. All of the shares issuable upon exercise of our options and warrants may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock. The issuance of shares upon exercise of options and warrants will cause immediate and substantial dilution to the interests of other stockholders since the selling stockholder may convert and sell the full amount issuable on exercise. If we fail to remain current on our reporting requirements, we could be removed from the OTC bulletin board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Companies trading on The Over The Counter Bulletin Board (the "OTC Bulletin Board”), such as us, must be reporting issuers under Section 12 or Section 15(d) of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. Prior to May 2001, we were delinquent in our reporting requirements, having failed to file our quarterly and annual reports for the years ended 1998 – 2000 (except the quarterly reports for the first two quarters of 1999). We have been current in our reporting requirements for the last six years, however, there can be no assurance that in the future we will always be current in our reporting requirements. -22- Our common stock is subject to the "penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock. The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: ● ● that a broker or dealer approve a person’s account for transactions in penny stocks; and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: obtain financial information and investment experience objectives of the person; and ● ● make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: ● ● sets forth the basis on which the broker or dealer made the suitability determination; and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. ITEM 1B. UNRESOLVED STAFF COMMENTS. We are a smaller reporting company as defined by Rule 12-b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 2. PROPERTIES. We maintain our principal office at 25 Health Sciences Drive, Suite 113, Stony Brook, New York 11790. We moved our principal office to the Long Island High Technology Incubator, which is located on the campus of Stony Brook University, in November 2005. We believe that our current office space and facilities are sufficient to meet our present needs and do not anticipate any difficulty securing alternative or additional space, as needed, on terms acceptable to us. ITEM 3. LEGAL PROCEEDINGS. From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as described below, we are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. Intervex, Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York Index No.08-601219): Intervex, Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008 related to a claim for breach of contract. In March 2005, we entered into a consulting agreement with Intervex, which provided for, among other things, a payment of $6,000 per month for a period of 24 months, or an aggregate of $144,000. In addition, the consulting agreement provided for the issuance by us to Intervex of a five-year warrant to purchase 250,000 shares of our common stock with an exercise price of $.75. Intervex asserts that we owe it 17 payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon, and a warrant to purchase 250,000 shares of our common stock. We have counterclaimed for compensatory and punitive damages, restitution, attorneys’ fees and costs, interest and other relief the court deems proper. We filed a motion for summary judgment and Intervex filed a cross-motion for summary judgment. Oral arguments are scheduled for January 7, 2010 on both motions. We intend to vigorously defend against the claims asserted against us. -23- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information Our Common Stock is traded over-the-counter on The Over The Counter Bulletin Board (the "OTC Bulletin Board”) maintained by the National Association of Securities Dealers under the symbol "APDN.” There is no certainty that the Common Stock will continue to be quoted or that any liquidity exists for our stockholders. The following table sets forth the quarterly quotes of high and low prices for our Common Stock on the OTC Bulletin Board during the fiscal years ended September 30, 2008 and September 30, 2009. Fiscal 2008 Fiscal 2009 High Low High Low First Quarter Second Quarter Third Quarter Fourth Quarter $0.17 $0.22 $0.14 $0.10 $0.09 $0.09 $0.09 $0.03 $0.06 $0.10 $0.19 $0.16 $0.03 $0.04 $0.06 $0.07 Holders As of December 17, 2009, we had approximately 1,033 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219. Dividends We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant. Recent Sales of Unregistered Securities Other than as previously described in our Quarterly Reports on Form 10-Q or in our Current Reports on Form 8-K, there were no sales of unregistered securities during fiscal 2009. ITEM 6. SELECTED FINANCIAL DATA. We are a smaller reporting company as defined by Rule 12-b-2 of the Exchange Act and are not required to provide the information required under this item. -24- ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto, included elsewhere within this report. The Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including statements using terminology such as "can”, "may”, "believe”, "designated to”, "will”, "expect”, "plan”, "anticipate”, "estimate”, "potential” or "continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they: ● ● ● discuss our future expectations; contain projections of our future results of operations or of our financial condition; and state other "forward-looking” information. We believe it is important to communicate our expectations. However, forward looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in forward-looking statements as a result of certain factors, including those set forth under "Risk Factors,” "Business” and elsewhere in this report. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. Introduction We are a provider of botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, governments and consumers from theft, counterfeiting, fraud and diversion. SigNature® DNA and BioMaterial™ Genotyping, our principal anti-counterfeiting and product authentication solutions, can be used in numerous industries, including cash-in-transit (transport and storage of banknotes), textiles and apparel, identity cards and other secure documents, pharmaceuticals, wine, and luxury consumer goods. SigNature DNA. We use the DNA of plants to manufacture highly customized and encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are virtually impossible to replicate. We have embedded SigNature DNA Markers into a range of our customers’ products, including various inks, dyes, textile treatments, thermal ribbon, thread, varnishes and adhesives. These items can then be tested for the presence of SigNature DNA Markers through an instant field detection or a forensic level authentication. Our SigNature DNA solution provides a secure, accurate and cost-effective means for users to incorporate our SigNature DNA Markers in, and then quickly and reliably authenticate and identify, a broad range of items, such as recovered banknotes, branded textiles and apparel products, pharmaceuticals and cosmetic products, identity cards and other secure documents, digital media, artwork and collectibles and fine wine. Having the ability to reliably authenticate and identify counterfeit versions of such items enables companies and governments to detect, deter, interdict and prosecute counterfeiting enterprises and individuals. BioMaterial GenoTyping. Our BioMaterial GenoTyping solution refers to the development of genetic assays to distinguish between varieties or strains of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods, that contain their own source DNA. We have developed two proprietary genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the field to finished garments. These genetic assays provide the cotton industry with what we believe to be the first authentication tools that can be applied throughout the U.S. and worldwide cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies. In 2009, we discontinued our BioActive Ingredients program, which we began in 2007. We developed BioActive Ingredients for personal care products, such as skin care products, based on the biofermentation expertise developed during the manufacturing of DNA for our SigNature DNA and BioMaterial Genotyping solutions, and we have decided to focus our business on these security and authentication solutions. General To date, our operations have produced insignificant revenues. We have continued to incur expenses and have limited sources of liquidity. We expect to generate revenues principally from sales of our SigNature Program, and BioMaterial Genotyping. We are currently attempting to develop business in the following target markets: cash-in-transit, textile and apparel authentication, secure documents, pharmaceuticals, consumer products, fine wine, art and collectibles, and digital and recording media. We intend to pursue both domestic and international sales opportunities in each of these vertical markets. Critical Accounting Policies Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. -25- We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report. The accounting policies identified as critical are as follows: ● ● ● ● Equity issued with registration rights; Revenue recognition; Allowance for Doubtful Accounts; and Fair value of intangible assets. Equity Issued with Registration Rights In connection with placement of our convertible notes and warrants to certain investors during the fiscal quarters ended December 31, 2003, December 31, 2004, March 31, 2005, March 31, 2006 and June 30, 2006, we granted certain registration rights that provide for liquidated damages in the event of failure to timely perform under the agreements. Although these notes and warrants do not provide for net-cash settlement, the existence of liquidated damages provides for a defacto net-cash settlement option. Therefore, the common stock underlying the notes and warrants subject to such liquidated damages does not meet the tests required for shareholders’ equity classification in the past, and accordingly has been reflected between liabilities and equity in our previous consolidated balance sheet. In September 2007, we exchanged our common stock for the remaining Secured Convertible Promissory Note that contained embedded derivatives such as certain conversion features, variable interest features, call options and default provisions. We had an accumulative accrual of $12,023,888 in liquidating damages in relationship to the previously outstanding convertible promissory notes and related warrants. As of September 30, 2009, we determined that it was not probable that we would be obligated to pay these damages and accordingly adjusted the accrual to other income. Revenue Recognition Revenues are derived from research, development, qualification and production testing for certain commercial products. Revenue from fixed price testing contracts is generally recorded upon completion of the contracts, which are generally short-term, or upon completion of identifiable contractual tasks. At the time we enter into a contract that includes multiple tasks, we estimate the amount of actual labor and other costs that will be required to complete each task based on historical experience. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and materials based is recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and we are unable to negotiate additional billings with a customer for cost over-runs, we may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred. For revenue from product sales, we recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition ("ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and the customer jointly determine that the product has been delivered or no refund will be required. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments ("ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC 605-25 on our financial position and results of operations was not significant. -26- Allowance for Uncollectible Receivables We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We use a combination of write-off history, aging analysis and any specific known troubled accounts in determining the allowance. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. Fair Value of Intangible Assets We have adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10”). The Statement requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. Comparison of the Year Ended September 30, 2009 to the Year Ended September 30, 2008 Revenues For the years ended September 30, 2009 and 2008, we generated $ 295,162 and $873,010 in revenues from operations, respectively. Our cost of sales for the year ended September 30, 2009 was $61,238, netting us a gross profit of $233,924. Our cost of sales for the year ended September 30, 2008 was $171,332, netting us a gross profit of $701,678. Revenues attributable to our BioActive Ingredients decreased for the twelve months ended September 30, 2009 compared to the same period in 2008 as we de-emphasized and discontinued our BioActive Ingredients program. Costs and Expenses Selling, General and Administrative Selling, general and administrative expenses for the twelve months ended September 30, 2009 increased 54% to $6,576,434 from $4,277,013 in the same period in 2008. Included within the selling, general and administrative expenses for the year ended September 30, 2009 was a noncash charge to operations of $2,748,521 for the fair value of vested options issued to officers and employees compared to $-0- in 2008. Research and Development Research and development expenses decreased by $10,427 for the twelve months ended September 30, 2009 compared to the same period in 2008 from $145,832 to $135,405, primarily due to a decrease in research and development activities as a result of our change in focus to marketing activities. Depreciation and Amortization In the twelve months ended September 30, 2009, depreciation and amortization decreased by $16,288 compared to the same period in 2008 from $434,416 to $418,128. The decrease is attributable to the aging of fixed assets previously acquired. Total Operating Expenses Total operating expenses increased to $7,129,967 from $4,857,261, or an increase of $2,272,706, primarily due to noncash charge to operations of $2,748,521 for the fair value of vested options issued to officers and employees compared to $-0- in 2008. -27- Other Income/Loss Other income for the twelve months ended September 30, 2009 increased from of $-0- to $12,023,888. During the year ended September 30, 2009, we determined that future payments of liquidated damages on previously issued notes were not probable, therefore we reversed our accrual of $12,023,888 to other income. Interest Expenses Interest expenses for the twelve months ended September 30, 2009, decreased to $1,182,695 from $2,647,315 in the same period of 2008, a decrease of $1,464,620. The decrease in interest expense was due to the conversion into common stock in 2009 of the convertible notes issued in connection with financings completed in 2008. Net Income (Loss) Net income for the twelve months ended September 30, 2009 increased from a loss of $6,802,898 to an income of $3,944,578 as a result of the combination of factors described above. Liquidity and Capital Resources Our liquidity needs consist of our working capital requirements, indebtedness payments and research and development expenditure funding. Historically, we have financed our operations through the sale of equity and convertible debt as well as borrowings from various credit sources. In fiscal 2009, and in prior fiscal years, we have been relying in part on cash infusions from our President, Chairman and Chief Executive Officer, James A. Hayward, in order to fund our operations. During fiscal 2009, Dr. Hayward provided $1.5 million in new loans. Curtailment of cash investments by Dr. Hayward could harm our cash availability and our ability to fund our operations, including our ability to meet our payroll and accounts payable obligations. As of September 30, 2009, we had a working capital deficit of $2.9 million. For the year ended September 30, 2009, we generated a net cash flow deficit from operating activities of $2.5 million consisting primarily of year to date income of $3.9 million, net with a non cash accrual reduction (see other income above) of $12,023,888. Non cash adjustments included $1.6 million in depreciation and amortization charges and $3.6 million for equity based compensation. Additionally, we had a net decrease in assets of $0.03 million and a net increase in current liabilities of $0.4 million. Cash provided by financing activities for the year ended September 30, 2009 totaled $2.5 million consisting of proceeds from the issuance of convertible debt, net of the capitalized financing costs. We expect capital expenditures to be less than $150,000 in fiscal 2010. Our primary investments will be in laboratory equipment to support prototyping and our authentication services. Exploitation of potential revenue sources will be financed primarily through the sale of securities and convertible debt, exercise of outstanding warrants, issuance of notes payable and other debt or a combination thereof, depending upon the transaction size, market conditions and other factors. While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next three months in order to meet our current and projected cash flow deficits from operations and development. We have sufficient funds to conduct our operations until approximately February 2010. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition. Our registered independent certified public accountants have stated in their report dated December 23, 2009, that we have incurred operating losses in the last two years, and that we are dependent upon management’s ability to develop profitable operations and raise additional capital. These factors among others may raise substantial doubt about our ability to continue as a going concern. Recent Debt and Equity Financing Transactions Fiscal 2008 During the year ended September 30, 2008, we sold an aggregate of thirty-six units at a price of $100,000 per unit for sale to "accredited investors,” as defined in regulations promulgated under the Securities Act, for aggregate gross proceeds of $3,600,000. Each unit consists of (i) a $100,000 Principal Amount 10% Secured Convertible Promissory Note and (ii) a warrant to purchase 200,000 shares of our common stock. The promissory notes and accrued but unpaid interest thereon automatically convert one year after issuance at a conversion price equal to a discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the holder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the automatic conversion price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the notes on three days notice. The promissory notes bear interest at the rate of 10% per annum and are due and payable in full on the one year anniversary of their issuance. The warrants are exercisable for cash or on a cashless basis for a period of four years commencing one year after issuance at a price of $0.50 per share. Each warrant may be redeemed at our option at a redemption price of $0.01 upon the earlier of (i) three years after the issuance, and (ii) the date our common stock has traded on The Over the Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading days. -28- Fiscal 2009 During the year ended September 30, 2009, we issued and sold an aggregate principal amount of $1,500,000 in secured convertible promissory notes bearing interest at 10% per annum and warrants to purchase an aggregate of 1,300,000 shares of our common stock to James A. Hayward, our President, Chairman, Chief Executive Officer and a director. Form more information related to the secured convertible promissory notes and notes issued and sold to Dr. Hayward, please see "Item 13—Certain Relationships and Related Transactions, and Director Independence.” In addition, during the year ended September 30, 2009, we sold an aggregate principal amount of $1,230,000 in secured convertible promissory notes bearing interest at 10% per annum to "accredited investors,” as defined in regulations promulgated under the Securities Act. The promissory notes and accrued but unpaid interest thereon automatically convert one year after issuance at a conversion price equal to a discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the holder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the automatic conversion price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the notes on three days notice. The promissory notes bear interest at the rate of 10% per annum and are due and payable in full on the one year anniversary of their issuance. The warrants are exercisable for cash or on a cashless basis for a period of four years commencing one year after issuance at a price of $0.50 per share. Each warrant may be redeemed at our option at a redemption price of $0.01 upon the earlier of (i) three years after the issuance, and (ii) the date our common stock has traded on The Over the Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading days. Fiscal 2010 (through December 23, 2009) Since October 1, 2009, we issued and sold an aggregate principal amount of $270,000 in secured convertible promissory notes bearing interest at 10% per annum to "accredited investors,” as defined in regulations promulgated under the Securities Act. The promissory notes and accrued but unpaid interest thereon automatically convert one year after issuance at a conversion price equal to a discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the holder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the automatic conversion price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the notes on three days notice. The promissory notes bear interest at the rate of 10% per annum and are due and payable in full on the one year anniversary of their issuance. The warrants are exercisable for cash or on a cashless basis for a period of four years commencing one year after issuance at a price of $0.50 per share. Each warrant may be redeemed at our option at a redemption price of $0.01 upon the earlier of (i) three years after the issuance, and (ii) the date our common stock has traded on The Over the Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading days. We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a material source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. We intend to pursue the building of a re- seller network outside the United States, and if successful, the re-seller agreements would constitute a source of liquidity and capital over time. In order to obtain capital, we may need to sell additional shares of our common stock for which we may not have enough authorized shares or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding and execution of re-seller agreements outside the Unites States. -29- We need to seek additional capital to sustain or expand our prototype and sample manufacturing, and sales and marketing activities, and to otherwise continue our business operations beyond February 2010. We have no commitments for any future funding, and may not be able to obtain additional financing or grants on terms acceptable to us, if at all, in the future. If we are unable to obtain additional capital this would restrict our ability to grow and may require us to curtail or discontinue our business operations. Additionally, while a reduction in our business operations may prolong our ability to operate, that reduction would harm our ability to implement our business strategy. If we can obtain any equity financing, it may involve substantial dilution to our then existing stockholders. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets have made it more difficult to obtain financing through the issuance of equity or debt securities. In addition, we may not have sufficient authorized shares of Common Stock under our certificate of incorporation to raise additional funds through the issuance of equity or convertible debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations. Substantially all of the real property used in our business is leased under operating lease agreements. Product Research and Development We anticipate spending approximately $150,000 for product research and development activities during the next twelve months. Acquisition of Plant and Equipment and Other Assets We do not anticipate the sale of any material property, plant or equipment during the next 12 months. We do anticipate spending approximately $30,000 on the acquisition of leasehold improvements during the next 12 months. We believe our current leased space is adequate to manage our growth, if any, over the next 2 to 3 years. Number of Employees We currently have 13 full-time employees and two part-time employees, including two in management, nine in operations, three in sales and marketing and one in investor relations. We expect to increase its staffing dedicated to sales, product prototyping, manufacturing of DNA markers and forensic authentication services. Expenses related to travel, marketing, salaries, and general overhead will be increased as necessary to support our growth in revenue. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. We anticipate that it may become desirable to add additional full and or part time employees to discharge certain critical functions during the next 12 months. This projected increase in personnel is dependent upon our ability to generate revenues and obtain sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. As we continue to expand, we will incur additional costs for personnel. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Inflation The effect of inflation on our revenue and operating results was not significant. Going Concern The accompanying audited condensed consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. Our auditors, in their report dated December 23, 2009, have expressed substantial doubt about our ability to continue as going concern. Our cash position may be inadequate to pay all of the costs associated with the testing, production and marketing of our products. Management intends to use borrowings and the sale of equity or convertible debt to mitigate the effects of its cash position, however no assurance can be given that debt or equity financing, if and when required will be available. The accompanying audited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue existence. -30- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information required under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See pages F-1 through F-33 following the Exhibits List. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. Not applicable. ITEM 9A(T). CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective. Management Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2009 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of September 30, 2009, we determined that control deficiencies existed that constituted material weaknesses, as described below: ● ● ● ● ● lack of documented policies and procedures; we have no audit committee; there is a risk of management override given that our officers have a high degree of involvement in our day to day operations. there is no policy on fraud and no code of ethics at this time, though we plan to implement such policies in fiscal 2010; and there is no effective separation of duties, which includes monitoring controls, between the members of management. Management is currently evaluating what steps can be taken in order to address these material weaknesses. Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. -31- As a result of the material weaknesses described above, management has concluded that we did not maintain effective internal control over financial reporting as of September 30, 2009 based on criteria established in Internal Control—Integrated Framework issued by COSO. RBSM LLP, an independent registered public accounting firm, was not required to and has not issued a report concerning the effectiveness of our internal control over financial reporting as of September 30, 2009. Changes in Internal Controls During the fiscal year ended September 30, 2009, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. Not applicable. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The following is a list of our directors, executive officers and significant employees. PART III Name James A. Hayward Sanford R. Simon Yacov Shamash Kurt Jensen Ming-Hwa Benjamin Liang Age 56 66 59 52 46 Title Chief Executive Officer, President, and Chairman of the Board Chief Financial Officer Secretary and Strategic Technology Development Officer Board of Directors Director Director Director Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Currently there are three seats on our board of directors. Currently, the members of our board of directors do not receive any fees for being a director or attending meetings. Our directors are reimbursed for out-of-pocket expenses relating to attendance at meetings. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below. Chief Executive Officer – James A. Hayward Dr. James A. Hayward has been our Chief Executive Officer since March 17, 2006 and our President and the Chairman of the Board of Directors since June 12, 2007. He was previously our acting Chief Executive Officer since October 5, 2005. Dr. Hayward received his Ph.D. in Molecular Biology from the State University of New York at Stony Brook in 1983 and an honorary Doctor of Science from the same institution in 2000. His experience with public companies began with the co-founding of one of England’s first biotechnology companies–Biocompatibles. Following this, Dr. Hayward was Head of Product Development for the Estee Lauder companies for five years. In 1990 he founded The Collaborative Group, a provider of products and services to the biotechnology, pharmaceutical and consumer-product industries based in Stony Brook, where he served as Chairman, President and Chief Executive Officer for 14 years. During this period, The Collaborative Group created several businesses, including The Collaborative BioAlliance, a contract developer and manufacturer of human gene products, that was sold to Dow Chemical in 2002, and Collaborative Labs, a service provider and manufacturer of ingredients for skincare and dermatology that was sold to Engelhard (now BASF) in 2004. Since 2000, Dr. Hayward has been a General Partner of Double D Venture Fund, a venture capital firm based in New York, New York. -32- Director – Yacov Shamash Dr. Yacov Shamash has been a member of the Board of Directors since March 17, 2006. Dr. Shamash is Vice President of Economic Development at the State University of New York at Stony Brook. Since 1992, he has been the Dean of Engineering and Applied Sciences and the Harriman School for Management and Policy at the University, and Founder of the New York State Center for Excellence in Wireless Technologies at the University. Dr. Shamash developed and directed the NSF Industry/University Cooperative Research Center for the Design of Analog/Digital Integrated Circuits from 1989 to 1992 and also served as Chairman of the Electrical and Computer Engineering Department at Washington State University from 1985 until 1992. Dr. Shamash also serves on the Board of Directors of Keytronic Corp., Netsmart Technologies, Inc., American Medical Alert Corp., and Softheon Corp. Director – Sanford R. Simon Dr. Sanford R. Simon has been a member of the Board of Directors since March 17, 2006. Dr. Simon has been a Professor of Biochemistry, Cell Biology and Pathology at Stony Brook since 1997. He joined the faculty at Stony Brook as an Assistant Professor in 1969 and was promoted to Associate Professor with tenure in 1975. Dr. Simon was a member of the Board of Directors of The Collaborative Group from 1995 to 2004. From 1967 to 1969 Dr. Simon was a Guest Investigator at Rockefeller University. Dr. Simon received a B.A. in Zoology and Chemistry from Columbia University in 1963, a Ph.D. in Biochemistry from Rockefeller University in 1967, and studied as a postdoctoral fellow with Nobel Prize winner Max Perutz in Cambridge, England. Chief Financial Officer – Kurt Jensen Kurt H. Jensen, M.Sc.(Cand. Merc.) has been our Chief Financial Officer since December 21, 2007, taking over the position from Dr. Hayward. Mr. Jensen has been our Controller since February 2006. Prior to that date, for a period of more than 23 years, he was employed by Point of Woods Homes, Inc. Mr. Jensen was awarded a M.Sc. in Economics and Business Administration from the Copenhagen Business School in 1983. Secretary and Strategic Technology Development Officer – Ming-Hwa Benjamin Liang Ming-Hwa Benjamin Liang has been our Secretary and Strategic Technology Development Officer since October 2005. Between May 1999 and September 2005, Mr. Liang had been the director of research and development at Biowell Technology Inc. Mr. Liang received a B.S. in Bio-Agriculture from Colorado State University in 1989, a M.S. in Horticulture from the University of Missouri at Columbia in 1991, his Ph.D. in Plant Science from the University of Missouri at Columbia in 1997 and his LL.M. in Intellectual Property Law from Shih Hsin University, Taiwan in 2004. Information Regarding Committees of the Board of Directors Compensation Committee In June 2008, our Board of Directors created a standing compensation committee. Our compensation committee is composed of our independent directors, Dr. Sanford R. Simon and Dr. Yacov Shamash. The compensation committee reviews and approves salaries and bonuses for all officers, administers options outstanding under our stock incentive plan, provides advice and recommendations to the Board regarding directors’ compensation and carries out the responsibilities required by SEC rules. The compensation committee believes that its processes and oversight should be directed toward attracting, retaining and motivating employees and non-employee directors to promote and advance the interests and strategic goals of the Company. As requested by the compensation committee, the Chief Executive Officer will provide information and may participate in discussion regarding compensation for other executive officers. The compensation committee does not utilize outside compensation consultants but considers other general industry information and trends if available. The Board of Directors has not adopted a written charter for the compensation committee. Nominating and Audit Committees We do not have a standing nominating or audit committee. As a small public company, we believe that all of our directors acting together, as opposed to a subset of them acting by means of a committee, is the most efficient and effective framework for us to perform the functions otherwise associated with nominating and audit committees. Nominating Committee Functions — Since we do not have a nominating committee, all of the members of the Board of Directors participate in the consideration of director nominees. We do not currently have a written nominating committee charter or similar document. Audit Committee Functions — Since we do not have an audit committee, the entire Board of Directors acts as the audit committee. The Board has determined that we do not have an audit committee financial expert, as that term is defined in Item 407(d)(5)(ii) of Regulation S-K, serving on the Board of Directors. We have not been able to identify a suitable candidate for our Board of Directors that would qualify as an audit committee financial expert. Dr. Hayward does not meet the definition of an "independent” director set forth in Rule 4200(a)(15) of the Market Place Rules of the Nasdaq Stock Market, which is the independence standard that we have chosen to report under. We do not currently have a written audit committee charter or similar document. -33- Process for Identifying and Evaluating Nominees for the Board of Directors Our Board of Directors may employ a variety of methods for identifying and evaluating director nominees. If vacancies are anticipated or arise, our Board of Directors will consider various potential candidates which may come to our attention through current board members, professional search firms, stockholders or other persons. These candidates may be evaluated by our Board of Directors at any time during the year. Our Board of Directors considers candidates recommended by stockholders when the nominations are properly submitted as described in "Consideration of Stockholder Recommendations” below. Following verification of the stockholder status of persons proposing candidates, our Board of Directors will make an initial analysis of the qualifications of any candidate recommended by stockholders or others pursuant to the criteria summarized herein to determine whether the candidate is qualified for service on the board, before deciding to undertake a complete evaluation of the candidate. If our Board of Directors determines that additional consideration is warranted, it may use a third-party search firm to gather additional information about the prospective nominee’s background and experience. Other than the verification of compliance with procedures and stockholder status, and the initial analysis performed before undertaking a complete evaluation, our Board of Directors will treat a potential candidate nominated by a stockholder like any other potential candidate. In evaluating a director candidate, our Board of Directors will review his or her qualifications including capability, availability to serve, conflicts of interest, general understanding of business, understanding of our business and technology, educational and professional background, personal accomplishment and other relevant factors. Our Board of Directors has not established any specific qualification standards for director nominees, although from time to time the Board of Directors may identify certain skills or attributes as being particularly desirable to help meet specific needs that have arisen. Our Board of Directors may also interview prospective nominees in person or by telephone. After completing this evaluation, the Board of Directors will determine the nominees. Consideration of Stockholder Recommendations Our Board of Directors considers director candidates recommended by stockholders. Candidates recommended by stockholders are evaluated on the same basis as are candidates recommended by our Board of Directors. Any stockholder wishing to recommend a candidate for nomination by the Board of Directors should provide the following information in a letter addressed to the Board in care of our Secretary: (i) the name and address of the stockholder recommending the person to be nominated; (ii) a representation that the stockholder is a holder of record of our stock, including the number of shares held and the period of holding; (iii) a description of all arrangements or understandings between the stockholder and the recommended nominee; (iv) information as to any plans or proposals of the type required to be disclosed in Schedule 13D and any proposals that the nominee proposes to bring to the Board of Directors if elected; (v) any other information regarding the recommended nominee that would be required to be included in a proxy statement filed pursuant to Regulation 14A pursuant to the Securities Exchange Act of 1934 and (vi) the consent of the recommended nominee to serve as a director if elected. Additional information may be requested to assist our Board of Directors in determining the eligibility of a proposed candidate to serve as a director. In addition, the notice must meet any other requirements contained in our bylaws. Stockholders may nominate candidates directly by complying with our bylaws and applicable law. Code of Ethics We have not yet adopted a Code of Ethics. Our Board of Directors periodically reviews whether it should adopt a Code of Ethics given the scale and character of its operations at this time. Compliance with Section 16(A) of the Exchange Act Since our common stock is registered under Section 15(d) of the Exchange Act, we are not required to file reports of executive officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities pursuant to Section 16(a) of the Exchange Act. -34- ITEM 11. EXECUTIVE COMPENSATION. Summary Compensation Table The following table sets forth the compensation of our principal executive officer and our two other executive officers for the fiscal years ended September 30, 2009 and 2008. We refer to these executive officers as our "named executive officers.” Name and Principal Position (a)(1) James A. Hayward Chairman, President and Chief Executive Officer Kurt H. Jensen Chief Financial Officer Ming-Hwa Liang Chief Technology Officer and Secretary Year (b) Salary ($)(2) (c) Bonus ($) (d) Stock Awards ($) (e) Option Awards ($)(3) (f) Non-Equity Incentive Plan Compensation ($) (g) Non-qualified Deferred Compensation Earnings ($) (h) All Other Compensation ($) (i) Total ($) (j) 2009 2008 — — 2009 2008 135,871 135,871 2009 2008 123,964 123,382 — — — — — — — — — — — 1,666,000 — 490,000 — — — 686,000 — — — — — — — — — — — — — — — 1,666,000 — — — — 135,871 625,871 123,964 809,382 (1) We have no employment agreements with our named executive officers. (2) Dr. Hayward has elected not to receive cash compensation until there is an improvement in our financial and operating performance and prospects. (3) The amounts in column (f) represent the grant date fair value under ASC 718-10 based on the average of the bid and asked prices of our common stock on the grant date. The grant date for the stock options was June 17, 2008, and the average of the bid and asked prices of our common stock was $0.11. The grant date fair value for the stock options was $0.098. The options granted to the named executive officers vested with respect to 25% of the underlying shares on the date of grant, and the remaining vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant. Outstanding Equity Awards at Fiscal Year-End The following table shows information concerning outstanding equity awards as of September 30, 2009 held by the Named Executive Officers. Option Awards Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) Number of Securities Underlying Unexercised Options (#) Exercisable (1) (b) 8,500,000 500,000 2,500,000 3,500,000 Number of Securities Underlying Unexercised Options (#) Unexercisable (1) (c) 8,500,000 0 2,500,000 3,500,000 Option Exercise Price ($) (1) (e) 0.11 0.09 0.11 0.11 $ Option Expiration Date (1) (f) 6/17/2013 9/01/2011 6/17/2013 6/17/2013 Name (a) James A. Hayward Kurt H. Jensen Ming-Hwa Liang (1) On June 17, 2008, our Board of Directors granted nonstatutory stock options under the 2005 Incentive Stock Plan to certain key employees, including our named executive officers. The options granted to the named executive officers vested with respect to 25% of the underlying shares on the date of grant, and the remaining vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant. -35- Pension Benefits None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us. Nonqualified Contribution Plans None of our named executive officers participate in or have account balances in non-qualified defined contribution plans maintained by us. Deferred Compensation None of our named executive officers participates in or has account balances in deferred compensation plans or arrangements maintained by us. Employment Agreements We have no employment agreements with our named executive officers. Payment of Post-Termination Compensation We do not have change-in-control agreements with any of our executive officers, and we are not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment. Director Compensation Fiscal 2009 We currently have no policy in effect for providing compensation to our directors for their services on our Board of Directors. During the fiscal year ended September 30, 2009, we did not provide any compensation to our directors for their service on our Board of Directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth certain information regarding the shares of our common stock beneficially owned as of December 18, 2009, (i) by each person who is known to us to beneficially own more than 5% of the outstanding common stock, (ii) by each of the executive officers named in the table under "Executive Compensation” and by each of our directors, and (iii) by all officers and directors as a group. NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES OWNED (1)(2) PERCENTAGE OF CLASS (3) James A. Hayward 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 Yacov Shamash 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 Kurt Jensen 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 Ben Liang 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 Sanford R. Simon 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 All directors and officers as a group (5 persons) Common Stock 30,239,840 (4) 10.28% Common Stock 500,000 (5) * Common Stock 3,080,000 (6) 1.11% Common Stock 3,903,359 (7) 1.40% Common Stock Common Stock 500,000 (5) * 38,223,199 (8) 12.67% -36- * indicates less than one percent (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the shares shown. Except as indicated by footnote and subject to community property laws where applicable, to our knowledge, the stockholders named in the table have sole voting and investment power with respect to all common stock shares shown as beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options, warrants or convertible securities (in any case, the "Currently Exercisable Options”). Each beneficial owner’s percentage ownership is determined by assuming that the Currently Exercisable Options that are held by such person (but not those held by any other person) have been exercised and converted. Does not include unvested shares subject to options granted on June 17, 2008 pursuant to the 2005 Incentive Stock Plan, which vested with respect to 25% of the underlying shares on the date of grant and vest with respect to the remaining shares ratably on each anniversary thereafter until fully vested on the third anniversary of the date of grant, including 8,500,000 to James A. Hayward, 250,000 to Yacov Shamash, 2,500,000 to Kurt H. Jensen, 3,500,000 to Ben Liang and 250,000 to Sanford R. Simon. Based upon 275,204,070 shares of common stock outstanding as of December 18, 2009. Includes 19,000,000 shares underlying currently exercisable options and warrants. Includes 500,000 shares underlying a currently exercisable warrant. Includes 40,000 shares held by a spouse and 3,000,000 immediately exercisable options. Includes 275,392 shares held by spouse and 3,500,000 immediately exercisable options. Includes 26,500,000 shares underlying currently exercisable options and warrants. (2) (3) (4) (5) (6) (7) (8) Equity Compensation Plan Information 2002 Professional/Employee/Consultant Compensation Plan. In November of 2002, we created a special compensation plan to pay the founders, consultants and professionals that had been contributing valuable services to us during the previous nine months. This plan, under which 2,000,000 shares of our common stock were reserved for issuance, is called the Professional/Employee/Consultant Compensation Plan (the "Compensation Plan”). Share and option issuances from the Compensation Plan were to be staggered over the following six to eight months, and consultants that were to continue providing services thereafter either became employees or received renewed contracts from us in July of 2003, which contracts contained a more traditional cash compensation component. Each qualified and eligible recipient of shares and/or options under the Compensation Plan received securities in lieu of cash payment for services. Each recipient agreed, in his or her respective consulting contract with us, to sell a limited number of shares monthly. In December of 2004, we adjusted the exercise price of options under the Compensation Plan to $0.60 per share. As of September 30, 2009, a total of 1,440,000 shares have been issued from, and options to purchase 560,000 shares have been issued under the Compensation Plan, and options to purchase 264,000 shares have been exercised as of that date. 2005 Incentive Stock Plan. On January 26, 2005, the Board of Directors, and on February 15, 2005, the holders of a majority of the outstanding common stock of the Company approved the 2005 Incentive Stock Plan and authorized the issuance of 16,000,000 shares of common stock as stock awards and stock options thereunder. On May 16, 2007, at the annual meeting of stockholders, the holders of a majority of the outstanding common stock of the Company approved an increase in the number of shares subject to the 2005 Incentive Stock Plan to 20,000,000 shares of common stock. On June 17, 2008, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of common stock issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, which was approved by our stockholders at the 2008 annual meeting of stockholders held on December 16, 2008. In connection with the share increase amendment, the Board of Directors granted and we issued options to purchase a total of 37,670,000 shares to certain key employees and non-employee directors under the 2005 Incentive Stock Plan, including 17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and Ming-Hwa Liang, respectively. The options granted to our key employees and non-employee directors vested with respect to 25% of the underlying shares on the date of grant and the remaining vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant. The 2005 Incentive Stock Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions to our success with an award of options to purchase shares of our common stock. As of September 30, 2009, a total of 8,550,000 shares have been issued and options to purchase 38,920,000 shares have been granted under the 2005 Incentive Stock Plan. -37- The Board of Directors, in their discretion, may award stock and stock options to executive officers and key employees as part of their compensation for employment or for retention purposes. The following table sets forth certain information regarding our compensation plans as of September 30, 2009: Plan Category Professional/Consultant/ Employee Stock and Stock Option Compensation Plan approved in November 2002 2005 Incentive Stock Plan approved on January 26, 2005 Total Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) 296,000 38,920,000 39,216,000 $ $ $ 0.60 0.11 0.11 0 51,405,000 51,405,000 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. During the fiscal years ended September 30, 2008 and 2009, we issued and sold an aggregate principal amount of $1,500,000 in secured convertible promissory notes bearing interest at 10% per annum and warrants to purchase an aggregate of 1,300,000 shares of our common stock to James A. Hayward, our President, Chairman, Chief Executive Officer and a director, as follows: ● ● ● ● ● ● On October 21, 2008, we issued and sold to James A. Hayward a $500,000 principal amount secured promissory note ("October Note”) bearing interest at a rate of 10% per annum and a warrant ("October Warrant”) to purchase 1,000,000 shares of our common stock. On January 29, 2009, we issued and sold to James A. Hayward a $150,000 principal amount secured promissory note ("January Note”) bearing interest at a rate of 10% per annum and a warrant ("January Warrant”) to purchase 300,000 shares of our common stock. On February 27, 2009, we issued and sold to James A. Hayward a $200,000 principal amount secured promissory note ("February Note”) bearing interest at a rate of 10% per annum. On March 30, 2009, we issued and sold to James A. Hayward a $250,000 principal amount secured promissory note ("March Note”) bearing interest at a rate of 10% per annum. On June 30, 2009, we issued and sold to James A. Hayward a $150,000 principal amount secured promissory note ("June Note”) bearing interest at a rate of 10% per annum. On September 30, 2009, we issued and sold to James A. Hayward a $250,000 principal amount secured promissory note ("September Note”) bearing interest at a rate of 10% per annum. The terms of the October Note were amended pursuant to mutual agreement so that it did not convert into shares of our common stock on October 21, 2009. The October Note and accrued but unpaid interest thereon will convert into shares of our common stock at a date to be determined by our board of directors at a conversion price of $0.026171520 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. The October Warrant is exercisable for a four-year period commencing on October 21, 2009, and expiring on October 20, 2013, at a price of $0.50 per share. The October Warrant may be redeemed at our option at a redemption price of $0.01 upon the earlier of (i) October 20, 2011, and (ii) the date our common stock has traded on The Over the Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading days. -38- The January Note and accrued but unpaid interest thereon shall automatically convert into shares of our common stock on January 29, 2010 at a conversion price of $0.033337264 per share ("Automatic Conversion Price”), which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the noteholder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the Automatic Conversion Price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the January Note on three days written notice (during which period the holder can elect to convert the January Note). The January Note bears interest at the rate of 10% per annum and is due and payable in full on January 29, 2010. Until the principal and accrued but unpaid interest under the January Note are paid in full, or converted into shares of our common stock, the January Note will be secured by a security interest in all of our assets. The January Warrant is exercisable for a four-year period commencing on January 29, 2010, and expiring on January 28, 2014, at a price of $0.50 per share. The January Warrant may be redeemed at our option at a redemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) the date our common stock has traded on The Over the Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading days. The February Note and accrued but unpaid interest thereon shall automatically convert into shares of our common stock on February 27, 2010 at a conversion price of $0.046892438 per share ("Automatic Conversion Price”), which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the noteholder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the Automatic Conversion Price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the February Note on three days written notice (during which period the holder can elect to convert the February Note). The February Note bears interest at the rate of 10% per annum and is due and payable in full on February 27, 2010. Until the principal and accrued but unpaid interest under the February Note are paid in full, or converted into shares of our common stock, the February Note will be secured by a security interest in all of our assets. The March Note and accrued but unpaid interest thereon shall automatically convert into shares of our common stock on March 30, 2010 at a conversion price of $0.043239467 per share ("Automatic Conversion Price”), which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the noteholder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the Automatic Conversion Price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the March Note on three days written notice (during which period the holder can elect to convert the March Note). The March Note bears interest at the rate of 10% per annum and is due and payable in full on March 30, 2010. Until the principal and accrued but unpaid interest under the March Note are paid in full, or converted into shares of our common stock, the March Note will be secured by a security interest in all of our assets. The June Note and accrued but unpaid interest thereon shall automatically convert into shares of our common stock on June 30, 2010 at a conversion price of $0.103059299 per share ("Automatic Conversion Price”), which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the noteholder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the Automatic Conversion Price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the June Note on three days written notice (during which period the holder can elect to convert the June Note). The June Note bears interest at the rate of 10% per annum and is due and payable in full on June 30, 2010. Until the principal and accrued but unpaid interest under the June Note are paid in full, or converted into shares of our common stock, the June Note will be secured by a security interest in all of our assets. -39- The September Note and accrued but unpaid interest thereon shall automatically convert into shares of our common stock on September 30, 2010 at a conversion price of $0.121732857 per share ("Automatic Conversion Price”), which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance, and are convertible into shares of our common stock at the option of the noteholder at any time prior to such automatic conversion at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion and (ii) the Automatic Conversion Price. In addition, any time prior to conversion, we have the irrevocable right to repay the unpaid principal and accrued but unpaid interest under the September Note on three days written notice (during which period the holder can elect to convert the September Note). The September Note bears interest at the rate of 10% per annum and is due and payable in full on September 30, 2010. Until the principal and accrued but unpaid interest under the September Note are paid in full, or converted into shares of our common stock, the September Note will be secured by a security interest in all of our assets. We currently have no formal, written policy regarding entering into transactions with affiliated parties. However, all transactions with affiliated parties, including the foregoing, are reviewed and approved by a disinterested majority of our board of directors. The foregoing transactions with affiliated parties were made on substantially similar terms as transactions with third party investors in our securities during the fiscal years ended September 30, 2008 and 2009. Director Independence Our Board of Directors currently consists of three members: James A. Hayward, Yacov Shamash and Sanford R. Simon. Although our securities are not currently listed on a national securities exchange or in an inter-dealer quotation system which has requirements that a majority of the board of directors be independent, the Board of Directors has determined that currently and at all times during the fiscal year ended September 30, 2009, Drs. Shamash and Simon, representing two of our three directors, are "independent” as defined by the listing standards of the Nasdaq Stock Market, constituting a majority of independent directors of our Board of Directors as required by the rules of the Nasdaq Stock Market. The Board of Directors considers in its evaluation of independence whether any director has a relationship with us that would interfere with the exercise of independent judgment in carrying out his responsibilities of a director. -40- ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The following table sets forth fees billed to us by our auditors during fiscal years ended September 30, 2009 and 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered. (i) Audit Fees (ii) Audit Related Fees (iii) Tax Fees (iv) All Other Fees Total Fees Fiscal year ended September 30, 2009 Fiscal year ended September 30, 2008 $ $ 73,000 10,000 — — 83,000 $ $ 157,516 — — — 157,516 Audit Fees — Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by RBSM LLP in connection with statutory and regulatory filings or engagements. Audit Related Fees — Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit Fees.” These services consist of responding to SEC comments in connection with our filings with the SEC and the review of and consent to registration statements. Tax Fees — Consists of fees billed for professional services for tax compliance, tax advice and tax planning. There were no tax fees billed in fiscal 2009 or 2008. All Other Fees — Consists of fees for products and services other than the services reported above. There were no management consulting services provided in fiscal 2009 or 2008. The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors We currently do not have a designated Audit Committee, and accordingly, our Board of Directors’ policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis. -41- ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) We have filed the following documents as part of this Form 10-K: 1. Consolidated Financial Statements PART IV Our consolidated financial statements at September 30, 2009 and 2008, and for the years ended September 30, 2009 and 2008, and the notes thereto, together with the report of our independent registered public accounting firm on those consolidated financial statements, are hereby filed as part of this report beginning on page F-1. 2. Financial Statement Schedule All financial statement schedules have been omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 3. Exhibits. The information required by this item is set forth on the exhibit index that follows the signature page of this report. -42- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES. Date: December 23, 2009 APPLIED DNA SCIENCES, INC. /s/JAMES A. HAYWARD James A. Hayward Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name /s/ JAMES A. HAYWARD James A. Hayward /s/ KURT H. JENSEN Kurt H. Jensen /s/ YACOV SHAMASH Yacov Shamash /s/ SANFORD R. SIMON Sanford R. Simon Position Chief Executive Officer (Principal Executive Officer), President, Chairman of the Board of Directors and Director Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Director Director -43- Date December 23, 2009 December 23, 2009 December 23, 2009 December 23, 2009 EXHIBIT INDEX The following exhibits are included as part of this Form S-1. References to "the Company” in this Exhibit List mean Applied DNA Sciences, Inc., a Nevada corporation. Exhibit 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 10.1† 10.2# 10.3# 10.4# 10.5*# 10.6 23.1* 31.1* 31.2* 32.1* 32.2* Description Certificate of Incorporation of Applied DNA Sciences, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on January 16, 2009 and incorporated herein by reference. By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on January 16, 2009 and incorporated herein by reference. Form of Subscription Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. Form of 10% Secured Convertible Promissory Note, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. Form of Warrant Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. Registration Rights Agreement, dated January 28, 2005, between the Company and Vertical Capital Partners, Inc., on behalf of the investors, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. Security Agreement, dated January 28, 2005, between the Company and Vertical Capital Partners, Inc., on behalf of the investors, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. Form of Subscription Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. Form of 10% Secured Convertible Promissory Note, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. Form of Warrant Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. Form of Subscription Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on April 20, 2009 and incorporated herein by reference. Form of 10% Secured Convertible Promissory Note, filed as an exhibit to the current report on Form 8-K filed with the Commission on April 20, 2009 and incorporated herein by reference. Applied DNA Sciences, Inc. 2005 Stock Incentive Plan and form of employee stock option agreement thereunder, filed as an exhibit to the registration statement on Form S-8 filed with the Commission on December 4, 2009 and incorporated herein by reference. Joint Development and Marketing Agreement, dated April 18, 2007 by and between Applied DNA Sciences and International Imaging Materials, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on April 24, 2007 and incorporated herein by reference. Technology Reseller Agreement, dated May 30, 2007 by and between Applied DNA Sciences, Inc. and Printcolor Screen Ltd., filed as an exhibit to the current report on Form 8-K filed with the Commission on June 1, 2007 and incorporated herein by reference. Feasibility Study Agreement, dated June 27, 2007 by and between Applied DNA Sciences, Inc. and Supima, filed as an exhibit to the current report on Form 8-K filed with the Commission on July 3, 2007 and incorporated herein by reference. Supply and Distribution Agreement, dated September 16, 2009 by and between Applied DNA Sciences, Inc. and Printcolor Screen Ltd. Applied DNA Sciences, Inc. 2005 Incentive Stock Plan, filed as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-163478) filed with the Commission on December 4, 2009 and incorporated herein by reference. Consent of RBSM LLP. Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certifications of Chief Financial Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Filed herewith. † Indicates a management contract or any compensatory plan, contract or arrangement. # A request for confidentiality has been filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission as required by Rule 24b-2 promulgated under the Securities Exchange Act of 1934. -44- APPLIED DNA SCIENCES, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of September 30, 2009 and 2008 Consolidated Statements of Operations for the Years Ended September 30, 2009 and 2008 Consolidated Statements of Deficiency in Stockholders’ Equity for the Two Years Ended September 30, 2009 Consolidated Statements of Cash Flows for the Years Ended September 30, 2009 and 2008 Notes to Consolidated Financial Statements F-1 Page F-2 F-3 F-4 F-5 F-6 F-7 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Applied DNA Sciences, Inc. Stony Brook, New York We have audited the accompanying consolidated balance sheets of Applied DNA Sciences, Inc. (the "Company") as of September 30, 2009 and 2008 and the related consolidated statements of operations, deficiency in stockholders' equity, and cash flows for each of the two years in the period ended September 30, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied DNA Sciences, Inc. as of September 30, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2009, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Note L to the accompanying consolidated financial statements, the Company has suffered recurring losses and does not have significant cash or other material assets, nor does it have an established source of revenues sufficient to cover its operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are described in Note L. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. New York, New York December 23, 2009 /s/ RBSM LLP F-2 APPLIED DNA SCIENCES, INC. CONSOLIDATED BALANCE SHEETS ASSETS Current assets: Cash and cash equivalents Accounts Receivable Prepaid expenses Total current assets Property, plant and equipment-net of accumulated depreciation of $199,119 and $147,132, respectively Other assets: Deposits Capitalized finance costs-net of accumulated amortization of $615,611 and $464,274, respectively Intangible assets: Patents, net of accumulated amortization of $34,112 and $31,762, respectively (Note B) Intellectual property, net of accumulated amortization and write off of $8,430,474 and $8,066,682, respectively (Note B) Total Assets LIABILITIES AND DEFICIENCY IN STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities Convertible notes payable, net of unamortized discount of $319,589 and $486,726, (Note D) Total current liabilities Commitments and contingencies (Note H) Deficiency in Stockholders’ Equity- (Note F) Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of September 30, 2009 and 2008 Common stock, par value $0.001 per share; 410,000,000 shares authorized; 275,204,070 and 205,359,605 issued and outstanding as of September 30, 2009 and 2008, respectively Additional paid in capital Accumulated deficit Total deficiency in stockholders’ equity Total Liabilities and Deficiency in Stockholders’ Equity See the accompanying notes to the consolidated financial statements F-3 September 30, 2009 2008 $ $ 213,307 47,302 79,436 340,045 11,743 8,322 146,389 136,405 75,150 83,333 294,888 63,730 8,322 113,226 145 1,000,426 2,494 1,364,217 $ 1,507,070 $ 1,846,877 $ $ 843,491 2,410,411 3,253,902 12,821,171 3,063,274 15,884,445 - - - - 275,204 141,409,667 (143,431,703) (1,746,832) 205,359 133,133,354 (147,376,281) (14,037,568) $ 1,507,070 $ 1,846,877 Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Research and development Depreciation and amortization Total operating expenses NET LOSS FROM OPERATIONS Other income (Note C) Interest expense Net income (loss) before provision for income taxes Income taxes (benefit) NET INCOME (LOSS) Net income (loss) per share-basic Net income (loss) per share-diluted Weighted average shares outstanding- Basic Diluted APPLIED DNA SCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2009 AND 2008 See the accompanying notes to the consolidated financial statements F-4 2009 2008 $ 295,162 $ 873,010 (61,238) 233,924 6,576,434 135,405 418,128 (171,332) 701,678 4,277,013 145,832 434,416 7,129,967 4,857,261 (6,896,043) (4,155,583) 12,023,888 - (1,182,695) (2,647,315) 3,945,150 (6,802,898) 572 3,944,578 0.02 0.01 $ $ $ - (6,802,898) (0.04) (0.04) 251,520,538 308,912,411 191,488,042 191,488,042 $ $ $ Preferred Shares Preferred Stock Amount Balance, September 30, 2007 60,000 $ Common stock issued in settlement of convertible debentures Common stock issued in exchange for services rendered Common stock issued in February 2008 in exchange for warrant exercise on a cashless basis Beneficial conversion feature relating to convertible debentures Cancellation of previously issued preferred stock Net Loss Balance, September 30, 2008 Common stock issued in settlement of convertible debentures Common stock issued in exchange for consulting services Common stock issued in February 2009 in settlement of services at $0.06 per share Fair value of warrants issued in connection with services rendered Common stock issued for exercise of options on a cashless basis Beneficial conversion feature relating to convertible debentures Fair value of vested options issued directors, officers and employees Net income Balance, September 30, 2009 APPLIED DNA SCIENCES, INC. CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS’ EQUITY TWO YEARS ENDED SEPTEMBER 30, 2009 6 - - - - - - - - (60,000) (6) - - - - - - - - - - - $ - - - - - - - - - - - Common Shares 180,281,661 Common Stock Amount $ 180,281 $ Additional Paid in Capital 128,448,584 Accumulated Deficit (140,573,383) $ Total (11,944,512) $ 13,702,944 13,703 1,246,571 10,000,000 10,000 1,030,000 1,375,000 1,375 (1,375) - - - - - - 2,409,568 6 - - - - - - 1,260,274 1,040,000 - 2,409,568 - (6,802,898) (6,802,898) 205,359,605 205,359 133,133,354 (147,376,281) (14,037,568) 46,430,397 46,432 3,858,568 20,000,000 20,000 437,534 3,101,568 3,101 182,993 - - 217,865 312,500 312 (312) - - - - 831,144 2,748,521 - - - - - - - 3,905,000 457,534 186,094 217,865 - 831,144 2,748,521 - 275,204,070 $ - 275,204 - 141,409,667 3,944,578 (143,431,703) $ $ $ 3,944,578 (1,746,832) See the accompanying notes to the consolidated financial statements F-5 APPLIED DNA SCIENCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2009 AND 2008 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Reversal of accrued penalty charges Fair value of vested options issued to officers, directors and employees Fair value of warrants issued in exchange for services rendered Amortization of capitalized financing costs Amortization of debt discount attributable to convertible debentures Equity based compensation Change in assets and liabilities: Decrease (increase) in accounts receivable Decrease in prepaid expenses and deposits Decrease in other assets Increase (decrease) in accounts payable and accrued liabilities Net cash used in operating activities Cash flows from investing activities: (Increase) decrease in restricted cash held in escrow Acquisition (disposal) of property and equipment, net Net cash provided by (used in) investing activities Cash flows from financing activities: Net proceeds from issuance of convertible notes Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosures of Cash Flow Information: Cash paid during period for interest Cash paid during period for taxes Non-cash financing and investing activities: Common stock issued in exchange for previously incurred debt See the accompanying notes to the consolidated financial statements F-6 September 30, 2009 2008 $ 3,944,578 $ (6,802,898) 418,128 (12,023,888) 2,748,521 217,865 151,337 998,280 643,628 27,848 3,897 - 401,208 (2,468,598) - - - 2,545,500 2,545,500 76,902 136,405 213,307 - - $ $ $ 434,416 - - - 456,277 2,282,437 1,040,000 (75,150) 17,667 5,500 (284,529) (2,926,280) 399,920 (22,500) 377,420 2,660,080 2,660,080 111,220 25,185 136,405 - - 3,905,000 $ 1,260,274 $ $ $ $ APPLIED DNA SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. Business and Basis of Presentation On September 16, 2002, Applied DNA Sciences, Inc. (the "Company”) was incorporated under the laws of the State of Nevada. During the year ended September 30, 2007, the Company transitioned from a development stage enterprise to an operating company. The Company is principally devoted to developing DNA embedded biotechnology security solutions in the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Applied DNA Operations Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Revenue Recognition Revenues are derived from research, development, qualification and production testing for certain commercial products. Revenue from fixed price testing contracts is generally recorded upon completion of the contracts, which are generally short-term, or upon completion of identifiable contractual tasks. At the time the Company enters into a contract that includes multiple tasks, the Company estimates the amount of actual labor and other costs that will be required to complete each task based on historical experience. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and materials based is recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and the Company is unable to negotiate additional billings with a customer for cost over-runs, the Company may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred. For revenue from product sales, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition ("ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for allowances and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. At September 30, 2009 and 2008 the Company‘s deferred revenue was $-0-. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments ("ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC 605-25 on the Company’s financial position and results of operations was not significant. F-7 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued) Cash Equivalents For the purpose of the accompanying consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. Accounts Receivable The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. At September 30, 2009 and 2008, the Company has deemed that no allowance for doubtful accounts was necessary. Income Taxes The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes ("ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives of 3 to 5 years using the straight line method. At September 30, 2009 and 2008 property and equipment consist of: Computer equipment Lab equipment Furniture Accumulated Depreciation Net Impairment of Long-Lived Assets September 30, 2009 September 30, 2008 $ $ 27,404 77,473 105,985 210,862 (199,119) 11,743 $ $ 27,404 77,473 105,985 210,862 (147,132) 63,730 The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Comprehensive Income The Company does not have any items of comprehensive income in any of the years presented. F-8 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued) Segment Information The Company adopted Accounting Standards Codification subtopic Segment Reporting 280-10 ("ASC 280-10”). ASC 280-10 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision- making group, in making decisions how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company’s single principal operating segment. Net Loss Per Share The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share ("ASC 260-10”) which specifies the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding. For the year ended September 30, 2009, common equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive. Fully diluted shares outstanding were 308,912,411 for the year ended September 30, 2009. Stock Based Compensation Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation ("ASC 718-10”) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The Company implemented ASC 718-10 on January 1, 2006 using the modified prospective method. Stock-based compensation expense recognized under ASC 718-10 for the years ended September 30, 2009 and 2008 was $2,748,521 and $-0-, respectively. Concentrations Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company’s revenues earned from sale of products and services for the years ended September 30, 2009 and 2008 included an aggregate of 83% from four customers of the Company’s total revenues. One and two customers accounted for the Company’s total accounts receivable at September 30, 2009 and 2008, respectively. F-9 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued) Research and Development The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development ("ASC 730- 10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenses of $135,405 and $145,832 for the years ended September 30, 2009 and 2008, respectively. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $50,922 and $36,364 as advertising costs for the years ended September 30, 2009 and 2008, respectively. Intangible Assets The Company amortized its intangible assets using the straight-line method over their estimated period of benefit. The estimated useful life for patents is five years while intellectual property uses a seven year useful life. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. Fair Value of Financial Instruments In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10”). ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations. Refer to Footnote K for further discussion regarding fair valuation. Effective October 1, 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments ("ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s consolidated financial position, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts payable and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments Recently Adopted Accounting Principles In April 2008, the FASB issued ASC 350-10, "Determination of the Useful Life of Intangible Assets”. ASC 350-10 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350-10, "Goodwill and Other Intangible Assets.” ASC No. 350-10 is effective for fiscal years beginning after December 15, 2008. The adoption of this ASC did not have a material impact on the Company’s consolidated financial statements. F-10 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued) In March 2008, the FASB issued ASC 815-10, "Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”. ASC 815-10 requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under Accounting Standards Codification 815-10, "Accounting for Derivative Instruments and Hedging Activities”; and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. As ASC 815-10 relates specifically to disclosures, it currently has no impact on the Company’s consolidated financial statements. In June 2008, the FASB ratified ASC 815-40-15, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”. ASC 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-40-15 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition. In April 2009, the FASB issued ASC 805-10, "Accounting for Assets Acquired and Liabilities assumed in a Business Combination That Arise from Contingencies —an amendment of FASB Statement No. 141 (Revised December 2007), Business Combinations”. ASC 805-10 addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805-10 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805-10 will have an impact on the Company’s accounting for any future acquisitions and its consolidated financial statements. In May 2009, the FASB issued SFAS No. 165, "Subsequent Events”, which is included in ASC Topic 855, Subsequent Events. ASC Topic 855 established principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. ASC Topic 855 also required disclosure of the date through which subsequent events are evaluated by management. ASC Topic 855 was effective for interim periods ending after June 15, 2009 and applies prospectively. Because ASC Topic 855 impacted the disclosure requirements, and not the accounting treatment for subsequent events, the adoption of ASC Topic 855 did not impact our results of operations or financial condition. See Note M for disclosures regarding our subsequent events. Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board ("FASB”) Accounting Standards Codification ("ASC”) 105-10, Generally Accepted Accounting Principles – Overall ("ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the "Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification. F-11 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued) In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, an entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition. In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force , that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. ASU No. 2009-13 is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition. F-12 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE B - ACQUISITION OF INTANGIBLE ASSETS The identifiable intangible assets acquired and their carrying values at September 30, 2009 and 2008 are as follows: Trade secrets and developed technologies (Weighted average life of 7 years) Patents (Weighted average life of 5 years) Total Amortized identifiable intangible assets- Gross carrying value: Less: Accumulated Amortization Impairment (See below) Net: Residual value: 2009 2008 9,430,900 34,257 $ 9,430,900 34,257 9,465,157 9,465,157 (2,809,575) (5,655,011) 1,000,571 0 (2,443,435) (5,655,011) 1,366,711 0 $ $ $ $ During the year ended September 30, 2006 the Company management performed an evaluation of its intangible assets (intellectual property) for purposes of determining the implied fair value of the assets at September 30, 2006. The test indicated that the recorded remaining book value of its intellectual property exceeded its fair value for the year ended September 30, 2006, as determined by discounted future cash flows. As a result, upon completion of the assessment, management recorded a non-cash impairment charge of $5,655,011, net of tax, or $0.05 per share during the year ended September 30, 2006 to reduce the carrying value of the patents to $2,091,800. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates. Total amortization expense charged to operations for the years ended September 30, 2009 and 2008 were $366,141 and $370,110, respectively. NOTE C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at September 30, 2009 and 2008 are as follows: Accounts payable Accrued consulting fees Accrued interest payable Accrued penalties relating to registration rights liquidating damages Accrued salaries payable Total F-13 2009 593,025 102,500 110,767 - 37,199 843,491 $ $ 2008 413,454 102,500 281,329 12,023,888 - 12,821,171 $ $ APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Registration Rights Liquidated Damages In private placements in November and December, 2003, December, 2004, and January and February, 2005, the Company issued secured convertible promissory notes and warrants to purchase the Company’s common stock. Pursuant to the terms of a registration rights agreement, the Company agreed to file a registration statement to be declared effective by the SEC for the common stock underlying the notes and warrants in order to permit public resale thereof. The registration rights agreement provided for the payment of liquidated damages if the stipulated registration deadlines were not met. The liquidated damages are equal to 3.5% per month of the face amount of the notes, which equals $367,885, with no limitations. During the year ended September 30, 2008, the SEC declared effective the Company’s registration statement with respect to the common stock underlying the notes and warrants. As of September 30, 2009, the Company concluded that the payment of liquidated damages under these commitments were not probable. Accordingly, the Company reversed the accrued expenses for the potential liquidated damages of $12,023,888 as other income in the statement of operations during the year ended September 30, 2009. NOTE D – PRIVATE PLACEMENT OF CONVERTIBLE NOTES Convertible notes payable as of September 30, 2009 and 2008 are as follows: 10% Secured Convertible Notes payable, dated October 4, 2007, net of unamortized debt discount of $2,847 (see below) 10% Secured Convertible Notes payable, dated October 30, 2007, net of unamortized debt discount of $35,373 (see below) 10% Secured Convertible Notes payable, dated November 29, 2007, net of unamortized debt discount of $104,801 (see below) 10% Secured Convertible Notes payable dated December 20, 2007, net of unamortized debt discount of $52,868 (see below) 10% Secured Convertible Notes payable dated January 17, 2008, net of unamortized debt discount of $73,759 (see below) 10% Secured Convertible Notes payable dated March 4, 2008, net of unamortized debt discount of $85,829 (see below) 10% Secured Convertible Note payable dated May 7, 2008, net of unamortized debt discount of $35,532 (see below) 10% Secured Convertible Note payable dated July 31, 2008, net of unamortized debt discount of $95,717 (see below) Secured Convertible Note Payable dated October 21, 2008, net of unamortized debt discount of $14,591 (see below) Secured Convertible Note Payable dated January 29, 2009, net of unamortized debt discount of $23,693 (see below) Secured Convertible Note Payable dated February 27, 2009, net of unamortized debt discount of $22,975 (see below) Secured Convertible Note Payable dated March 30, 2009, net of unamortized debt discount of $48,054 (see below) Secured Convertible Note Payable dated April 14, 2009, net of unamortized debt discount of $66,581 (see below) Secured Convertible Note Payable dated June 22, 2009, net of unamortized debt discount of $32,457 (see below) Secured Convertible Note Payable dated June 30, 2009, net of unamortized debt discount of $18,374 (see below) Secured Convertible Note Payable dated August 21, 2009, net of unamortized debt discount of $59,000 (see below) Secured Convertible Note Payable dated September 30, 2009, net of unamortized debt discount of $16,932 (see below) Secured Convertible Note Payable dated September 30, 2009, net of unamortized debt discount of $16,932 (see below) Less: current portion F-14 $ 2009 2008 $ - - - - - - - - 485,409 126,307 177,025 201,946 233,419 217,543 131,626 371,000 233,068 233,068 547,153 564,627 895,199 397,132 376,241 164,171 64,468- 54,283 - - - - - - - - - 2,410,411 (2,410,411) - $ 3,063,274 (3,063,274) - $ APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) 10% Secured Convertible Promissory Notes dated October 4, 2007 On October 4, 2007, the Company issued $500,000 principal amount convertible promissory notes due October 4, 2008 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.069328632 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.069328632 per share. In addition, on October 4, 2007, the Company issued a $50,000 principal amount convertible promissory note due October 4, 2008 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.079232722 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is convertible at $0.079232722 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with Accounting Standards Codification subtopic 470-20, Debt With Conversion and Other Options ("ASC 470-20”), the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $292,416 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. In connection with the issuance of the notes, the Company issued non-detachable warrants granting the holders the right to acquire 1,100,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $53,968 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 4.22%, a dividend yield of 0%, and volatility of 103.81%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($292,416) and warrants ($53,968) to debt discount, aggregating $346,384, and is amortizing it to interest expense over the term of the notes. Amortization of $2,847 and $343,537 was recorded for the years ended September 30, 2009 and 2008, respectively. F-15 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) On October 4, 2008, the notes and accrued interest of $55,000 converted into 8,627,388 shares of the Company’s common stock. 10% Secured Convertible Promissory Notes dated October 30, 2007 On October 30, 2007, the Company issued $550,000 principal amount convertible promissory notes due October 30, 2008 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.104750019 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.104750019 per share. In addition, on October 30, 2007, the Company issued two $50,000 principal amount convertible promissory notes due October 30, 2008 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the option of the holder, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.119714308 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.119714308 per share. The Company has granted the noteholders a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $368,499 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. In connection with the issuance of the notes, the Company issued non-detachable warrants granting the holders the right to acquire 1,300,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $105,611 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 3.85%, a dividend yield of 0%, and volatility of 108.66%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. On November 19, 2007, a noteholder elected to convert a $50,000 principal amount promissory note and accrued interest of $274 into 479,942 shares of the Company’s common stock. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($368,499) and warrants ($105,611) to debt discount, aggregating $474,110, and is amortizing it to interest expense over the term of the notes. Amortization of $35,373 and $438,737 for the years ended September 30, 2009 and 2008, respectively, inclusive of the write off of the unamortized debt discount relating to the converted note described above. On October 30, 2008, the notes and accrued interest of $55,000 converted into 6,235,084 shares of the Company’s common stock. F-16 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) 10% Secured Convertible Promissory Notes dated November 29, 2007 On November 29, 2007, the Company issued $1,000,000 principal amount convertible promissory notes due November 29, 2008 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.094431519, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance per share. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.094431519 per share. The Company has granted the noteholders a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $512,504 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. In connection with the issuance of the notes the Company issued non-detachable warrants granting the holders the right to acquire 2,000,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $135,845 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 3.42%, a dividend yield of 0%, and volatility of 106.15%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($512,504) and warrants ($135,845) to debt discount, aggregating $648,349, and is amortizing it to interest expense over the term of the notes. Amortization of $104,801 and $543,548 was recorded for the years ended September 30, 2009 and 2008, respectively. On November 29, 2008, the notes and accrued interest of $100,000 converted into 11,648,654 shares of the Company’s common stock. 10% Secured Convertible Promissory Notes dated December 20, 2007 On December 20, 2007, the Company issued $450,000 principal amount convertible promissory notes due December 20, 2008 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.074766323 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.074766323 per share. The Company has granted the noteholders a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $196,543 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. F-17 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) In connection with the issuance of the notes, the Company issued non-detachable warrants granting the holders the right to acquire 900,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $44,668 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 3.45%, a dividend yield of 0%, and volatility of 104.51%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($196,543) and warrants ($44,668) to debt discount, aggregating $241,211, and is amortizing it to interest expense over the term of the notes. Amortization of $52,868 and $188,343 was recorded for the years ended September 30, 2009 and 2008. On December 20, 2008, the notes and accrued interest of $45,000 converted into 6,620,628 shares of the Company’s common stock. 10% Secured Convertible Promissory Notes dated January 17, 2008 On January 17, 2008, the Company issued $450,000 principal amount convertible promissory notes due January 17, 2009 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.073512803 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is convertible at $0.073512803 per share. The Company has granted the noteholders a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $205,708 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. In connection with the placement of the notes the Company issued non-detachable warrants granting the holders the right to acquire 900,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $43,569 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 2.90%, a dividend yield of 0%, and volatility of 102.72%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($205,708) and warrants ($43,569) to debt discount, aggregating $249,277, and is amortizing it to interest expense over the term of the notes. Amortization of $73,759 and $175,518 was recorded for the years ended September 30, 2009 and 2008, respectively. On January 17, 2009, the notes and accrued interest of $45,000 converted into 6,733,521 shares of the Company’s common stock. F-18 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) 10% Secured Convertible Promissory Notes dated March 4, 2008 On March 4, 2008, the Company issued $250,000 principal amount convertible promissory notes due March 4, 2009 with interest at 10% per annum due upon maturity. The notes are convertible at any time prior to maturity, at the holder option of the holders, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.125875423 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the notes, including any accrued and unpaid interest, are convertible at $0.125875423 per share. The Company has granted the noteholders a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $154,805 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense. In connection with the placement of the notes the Company issued non-detachable warrants granting the holders the right to acquire 500,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $47,308 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 2.53%, a dividend yield of 0%, and volatility of 106.37%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($154,805) and warrants ($47,308) to debt discount, aggregating $202,113, and is amortizing it to interest expense over the term of the notes. Amortization of $85,829 and $116,284 was recorded for the years ended September 30, 2009 and 2008, respectively. On March 4, 2009, the notes and accrued interest of $25,000 converted into 2,184,700 shares of the Company’s common stock. 10% Secured Convertible Promissory Note dated May 7, 2008 On May 7, 2008, the Company issued a $100,000 convertible promissory note due May 7, 2009 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.079849085 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is convertible at $0.079849085 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $48,490 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. In connection with the placement of the note the Company issued non-detachable warrants granting the holders the right to acquire 200,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $10,730 to additional paid in capital and a discount against the note. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 3.09%, a dividend yield of 0%, and volatility of 101.74%. The debt discount attributed to the value of the warrants issued is amortized over the note’s maturity period (one year) as interest expense. F-19 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) The Company recorded the intrinsic value of the embedded beneficial conversion feature ($48,490) and warrants ($10,730) to debt discount, aggregating $59,220, and is amortizing it to interest expense over the term of the Notes. Amortization of $35,532 and $23,688 was recorded for the years ended September 30, 2009 and 2008, respectively. On May 4, 2009, the notes and accrued interest of $10,000 converted into 1,377,599 shares of the Company’s common stock. 10% Secured Convertible Promissory Note dated July 31, 2008 On May 7, 2008, the Company issued a $150,000 convertible promissory note due July 31, 2009 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.0549483 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is convertible at $0.0549483 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $91,655 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. In connection with the placement of the note the Company issued non-detachable warrants granting the holders the right to acquire 300,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $23,268 to additional paid in capital and a discount against the note. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 3.259%, a dividend yield of 0%, and volatility of 152.00%. The debt discount attributed to the value of the warrants issued is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($91,655) and warrants ($23,268) to debt discount, aggregating $114,923, and is amortizing it to interest expense over the term of the Notes. Amortization of $95,717 and $19,206 was recorded for the years ended September 30, 2009 and 2008, respectively. On July 31, 2009, the notes and accrued interest of $15,000 converted into 3,002,823 shares of the Company’s common stock. 10% Secured Convertible Promissory Note dated October 21, 2008 On October 21, 2008, the Company issued a $500,000 related party convertible promissory note to a related party due October 21, 2009 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.02617152 per share, which is equal to a 30% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.02617152 per share. The Company has granted the noteholder a security interest in all the Company’s assets. F-20 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) In accordance ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $279,188 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. In connection with the placement of the note the Company issued non-detachable warrants granting the holder the right to acquire 1,000,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $34,104 to additional paid in capital and a discount against the note. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 2.63%, a dividend yield of 0%, and volatility of 207.46%. The debt discount attributed to the value of the warrants issued is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($279,188) and warrants ($34,104) to debt discount, aggregating $313,292, and is amortizing it to interest expense over the term of the Notes. Amortization of $298,701 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Note dated January 29, 2009 On January 29, 2009, the Company issued a $150,000 related party convertible promissory note to a related party due January 29, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.033337264 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.033337264 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $61,974 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. In connection with the placement of the note the Company issued non-detachable warrants granting the holder the right to acquire 300,000 shares of the Company’s common stock at $0.50 per share. The warrants expire five years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $9,498 to additional paid in capital and a discount against the note. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 1.87%, a dividend yield of 0%, and volatility of 150.55%. The debt discount attributed to the value of the warrants issued is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($61,974) and warrants ($9,498) to debt discount, aggregating $71,472, and is amortizing it to interest expense over the term of the Notes. Amortization of $47,779 was recorded for the year ended September 30, 2009. F-21 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) 10% Secured Convertible Promissory Note dated February 27, 2009 On February 27, 2009, the Company issued a $200,000 related party convertible promissory note to a related party due February 27, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.046892438 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.046892438 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $55,905 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($55,905) and is amortizing it to interest expense over the term of the Notes. Amortization of $32,930 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Note dated March 30, 2009 On March 30, 2009, the Company issued a $250,000 related party convertible promissory note to a related party due March 30, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.043239467 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.043239467 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $96,905 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($96,905) and is amortizing it to interest expense over the term of the Notes. Amortization of $48,851 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Note dated April 14, 2009 On April 14, 2009, the Company issued a $300,000 convertible promissory note due April 14, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.070756456 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.070756456 per share. The Company has granted the noteholder a security interest in all the Company’s assets. F-22 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $123,990 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($123,990) and is amortizing it to interest expense over the term of the Notes. Amortization of $57,409 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Note dated June 22, 2009 On June 22, 2009, the Company issued a $250,000 convertible promissory note due June 22, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.110279774, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.110279774 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $44,705 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($44,705) and is amortizing it to interest expense over the term of the Notes. Amortization of $12,248 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Note dated June 30, 2009 On June 30, 2009, the Company issued a $150,000 related party convertible promissory note to a related party due June 30, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.103059299 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.103059299 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $24,657 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. F-23 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) The Company recorded the intrinsic value of the embedded beneficial conversion feature ($24,657) and is amortizing it to interest expense over the term of the Notes. Amortization of $6,283 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Notes dated August 21, 2009 On August 21, 2009, the Company issued an aggregate of $430,000 convertible promissory notes due August 21, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.095312615 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.095312615 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $66,262 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($66,262) and is amortizing it to interest expense over the term of the Notes. Amortization of $7,262 was recorded for the year ended September 30, 2009. 10% Secured Convertible Promissory Notes dated September 30, 2009 On September 30, 2009, the Company issued an aggregate of $250,000 convertible promissory notes due September 30, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.121732857 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.121732857 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $16,978 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($16,978) and is amortizing it to interest expense over the term of the Notes. Amortization of $46 was recorded for the year ended September 30, 2009. F-24 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE D — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued) 10% Secured Convertible Promissory Note dated September 30, 2009 On September 30, 2009, the Company issued a $250,000 related party convertible promissory note due September 30, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.121732857 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.121732857 per share. The Company has granted the noteholder a security interest in all the Company’s assets. In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $16,978 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense. The Company recorded the intrinsic value of the embedded beneficial conversion feature ($16,978) and is amortizing it to interest expense over the term of the Notes. Amortization of $46 was recorded for the year ended September 30, 2009. NOTE E - RELATED PARTY TRANSACTIONS During the years ended September 30, 2009 and 2008, the Company’s Chief Executive Officer, or entities controlled by the Company’s Chief Executive Officer, had advanced funds to the Company in the form of convertible promissory notes for working capital purposes (see Note D). Interest expense related to these notes amounted to $85,315 and $85,000 for the years ended September 30, 2009 and 2008, respectively. During the years ended September 30, 2009 and 2008, the Company had total sales of $-0- and $405,061 (or -0-% and 46.4% of total sales), respectively, to Dr. Suwelack Skin & Health Care AG, ("Dr. Suwelack”) and BioCogent of which the Company’s Chief Executive Officer is the President and sole stockholder, respectively. NOTE F - CAPITAL STOCK The Company is authorized to issue 410,000,000 shares of common stock, with a $0.001 par value per share as the result of a shareholder meeting conducted on May 16, 2007. In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value per share. In November 2007, the Company issued 1,000,000 shares of common stock in exchange for consulting services. The Company valued the shares at $0.14 per share for a total of $140,000, which represents the fair value of the services, received which did not differ materially from the value of the stock issued. F-25 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE F - CAPITAL STOCK (continued) In December 2007, the Company issued 9,000,000 shares of common stock in exchange for consulting services. The Company valued the shares at $0.10 per share for a total of $900,000, which represents the fair value of the services, received which did not differ materially from the value of the stock issued. In February 2008, the Company issued 1,375,000 shares of common stock in conjunction with the exercise of warrants. During the year ended September 30, 2008, the Company issued an aggregate of 13,702,944 shares of its common stock in settlement of secured convertible promissory notes and related accrued interest. Common Stock Transactions During the Year Ended September 30, 2009: In January 2009, the Company issued 10,000,000 shares of common stock for consulting services. The Company valued the shares issued at approximately $0.04 per share or $400,000, which represents the fair value of the shares at the date of issuance. In February 2009, the Company issued 101,568 shares of common stock in pursuant to a settlement agreement. The Company valued the shares issued at approximately $0.06 per share or $6,094, which represents the fair value of the shares at the date of issuance. In March 2009, the Company issued 3,000,000 shares of common stock in settlement of litigation. The Company valued the shares issued at approximately $0.06 per share or $180,000, which represents the fair value of the shares at the date of issuance. In July 2009, the Company issued 10,000,000 shares of common stock for consulting services. The Company valued the shares issued at approximately $0.10 per share or $1,000,000, which represents the fair value of the shares at the date of issuance. During the year ended September 30, 2009, the Company issued an aggregate of 46,430,397 shares of common stock in exchange for convertible notes and accrued interest. NOTE G - STOCK OPTIONS AND WARRANTS Warrants The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of the Company’s common stock. Exercise Prices $0.06 $0.07 $0.09 $0.10 $0.50 $0.60 $0.75 Number Outstanding 2,000,000 200,000 16,400,000 1,500,000 27,150,000 2,773,500 14,797,000 64,820,500 Warrants Outstanding Remaining Contractual Life (Years) Weighted Average Exercise Price Weighted Average Exercisable Exercisable Weighted Average Exercise Price 4.39 0.45 1.92 3.49 2.11 0.08 0.35 $ $ $ $ $ $ $ F-26 0.06 0.07 0.09 0.10 0.50 0.60 0.75 2,000,000 200,000 16,400,000 1,500,000 24,850,000 2,773,500 14,797,000 62,520,500 $ $ $ $ $ $ $ 0.06 0.07 0.09 0.10 0.50 0.60 0.75 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE G — STOCK OPTIONS AND WARRANTS (continued) Transactions involving warrants are summarized as follows: Balance, September 30, 2007 Granted Exercised Canceled or expired Outstanding at September 30, 2008 Granted Exercised Canceled or expired Balance, September 30, 2009 Number of Shares 82,434,464 7,200,000 (2,500,000) (23,153,500) 63,980,964 5,000,000 — (4,160,464) 64,820,500 $ $ $ Weighted Average Price Per Share 0.43 0.50 (0.09) (0.41) 0.46 0.20 — (0.69) 0.43 During the year ended September 30, 2009, the Company issued an aggregate of 1,300,000 warrants in conjunction with convertible debt (see Note D). On February 20, 2009, the Company issued warrants to purchase 2,000,000 shares of its common stock at $0.06 per share for four years in consideration for services. The fair value of $121,303 was charged to current period operations. The fair value of the warrants were determined using the Black-Scholes Option Pricing method based on the following assumptions: Dividend yield: -0-%; volatility: 203.14%; risk free rate: 1.81%, expected term: 4 years. On March 16, 2009, the Company issued warrants to purchase 200,000 shares of its common stock at $0.07 per share for three years in consideration for services. The fair value of $6,464 was charged to current period operations. The fair value of the warrants were determined using the Black-Scholes Option Pricing method based on the following assumptions: Dividend yield: -0-%; volatility: 170.72%; risk free rate: 0.69%, expected term: 3 years. On March 27, 2009, the Company issued a warrant to purchase 1,500,000 shares of its common stock at $0.10 per share for four years in settlement of litigation. The fair value of $90,098 was charged to current period operations. The fair value of the warrants were determined using the Black-Scholes Option Pricing method based on the following assumptions: Dividend yield: -0-%; volatility: 207.01%; risk free rate: 1.79%, expected term: 4 years. F-27 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE G — STOCK OPTIONS AND WARRANTS (continued) Aggregate intrinsic value of warrants outstanding and exercisable at September 30, 2009 was $853,000. Aggregate intrinsic value represents the difference between the Company's closing price on the last trading day of the fiscal period, which was $0.13 as of September 30, 2009, and the exercise price multiplied by the number of warrants outstanding. Employee Stock Options On January 26, 2005, the Board of Directors, and on February 15, 2005, the holders of a majority of the outstanding common stock of the Company approved the 2005 Incentive Stock Plan and authorized the issuance of 16,000,000 shares of common stock as stock awards and stock options thereunder. The 2005 Incentive Stock Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions to our success with an award of options to purchase shares of our common stock. The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan: Options Outstanding Options Exercisable Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price $ 0.07 0.09 0.11 1,000,000 1,500,000 36,420,000 38,920,000 4.65 2.17 3.97 $ $ 0.07 0.09 0.11 0.11 Transactions involving stock options issued to employees are summarized as follows: Number Exercisable — 1,500,000 18,210,000 19,710,000 $ $ Weighted Average Exercise Price 0.07 0.09 0.11 0.11 Outstanding at October 1, 2007 Granted Exercised Cancelled or expired Outstanding at September 30, 2008 Granted Exercised Canceled or expired Outstanding at September 30, 2009 Weighted Average Exercise Price Per Share 0.47 — — — 0.47 0.11 0.10 0.60 0.11 Number of Shares 5,660,000 — — — 5,660,000 38,670,000 (1,125,000) (4,285,000) 38,920,000 $ $ $ Amendment to the 2005 Incentive Stock Plan and Recent Equity Award Grants On June 17, 2008, the Board of Directors adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of common stock issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, subsequently approved by the stockholders at the 2008 annual meeting of stockholders in December 2008. In connection with the share increase amendment, the Board of Directors granted options to purchase a total of 37,670,000 shares to certain key employees and non- employee directors under the 2005 Incentive Stock Plan, including 17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and Ming-Hwa Liang, respectively, and 500,000 to each of Yacov Shamash and Sanford R. Simon. The options granted to our key employees and non-employee directors vested with respect to 25% of the underlying shares on the date of grant and the remaining will vest ratably each anniversary thereafter until fully vested on the third anniversary of the date of grant. The fair value was determined using the Black Scholes Option Pricing Model, with the following assumptions utilized: Dividend yield: -0-%, volatility: 208.48%; risk free rate: 3.66%; expected life: 5 years. F-28 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE G — STOCK OPTIONS AND WARRANTS (continued) On February 27, 2009, the Company granted 1,000,000 options to purchase its common stock at $0.07 over five years with vesting at 25% per year beginning at the first anniversary. The fair value, determined using the Black Scholes Option Pricing Model with the following assumptions utilized: Dividend yield: -0-%, volatility: 205.19%; risk free rate: 1.84%; expected life: 5 years. Aggregate intrinsic value of options outstanding and exercisable at September 30, 2009 was $848,400. Aggregate intrinsic value represents the difference between the Company's closing price on the last trading day of the fiscal period, which was $0.13 as of September 30, 2009, and the exercise price multiplied by the number of options outstanding. The Company recorded $2,748,521 as stock compensation expense for the year ended September 30, 2009 for the vesting portion of all employee options outstanding. NOTE H – INCOME TAXES The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes ("ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. At September 30, 2009, the Company has available for federal income tax purposes significant net operating loss carryforwards expiring in the year 2028, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Due to significant changes in the Company’s ownership, as well as non compliance with filing requirements of corporate tax returns for past several years, the future use of its existing net operating losses may be limited. F-29 APPLIED DNA SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE I-LOSS PER SHARE The following table presents the computation of basic and diluted income (loss) per share: Income (loss) available for common shareholders Basic income( loss) per share Weighted average common shares outstanding-basic Fully diluted income per share Weighted average common shares outstanding-fully diluted For the Year Ended September 30, 2009 For the Year Ended September 30, 2008 $ $ $ 3,944,578 0.02 251,520,538 0.01 308,912,411 $ $ (6,802,898) (0.04) 191,488,042 NA NA During the year ended September 30, 2009, common stock equivalents are not considered in the calculation of the weighted average number of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per common share. NOTE J- COMMITMENTS AND CONTINGENCIES The Company leases office space under operating lease in Stony Brook, New York for its corporate use from an entity controlled by significant former shareholder, expiring in October 2009. In November 2005, the Company vacated the Los Angeles facility to relocated to the new Stony Brook New York address Total lease rental expenses for the years ended on September 30, 2009 and 2008, was $80,554 and $76,445, respectively. Commitments for minimum rentals under non-cancelable lease at September 30, 2009 are as follows: Year ended September 30, 2010 2011 2012 2013 2014 and thereafter Employment and Consulting Agreements $ $ 81,100 6,758 - - - 87,858 The Company has consulting agreement with an outside contractor, who is also a Company stockholder. The agreement is generally month to month. The Company recorded $25,000 of consulting expenses for the year ended September 30, 2009 related to this agreement. Litigation From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as described below, we are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. F-30 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE J — COMMITMENTS AND CONTINGENCIES (continued) Intervex, Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York Index No.08-601219): Intervex, Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008 related to a claim for breach of contract. In March 2005, The Company entered into a consulting agreement with Intervex, which provided for, among other things, a payment of $6,000 per month for a period of 24 months, or an aggregate of $144,000. In addition, the consulting agreement provided for the issuance by The Company to Intervex of a five-year warrant to purchase 250,000 shares of The Company's common stock with an exercise price of $.75. Intervex asserts that The Company owes them 17 payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon, and a warrant to purchase 250,000 shares of The Company's common stock. The Company has counterclaimed for compensatory and punitive damages, restitution, attorneys’ fees and costs, interest and other relief the court deems proper. The Company filed a motion for summary judgment and Intervex filed a cross-motion for summary judgment. Oral arguments are scheduled for January 7, 2010 on both motions. This matter is in the early stages of discovery. We intend to vigorously defend against the claims asserted against us. Matters Voluntarily Reported to the SEC and Securities Act Violations The Company previously disclosed that we investigated the circumstances surrounding certain issuances of 8,550,000 shares to employees and consultants in July 2005, and engaged outside counsel to conduct this investigation. The Company has voluntarily reported its current findings from the investigation to the SEC, and it has agreed to provide the SEC with further information arising from the investigation. The Company believes that the issuance of 8,000,000 shares to employees in July 2005 was effectuated by both its former President and its former Chief Financial Officer/Chief Operating Officer without approval of the Board of Directors. These former officers received a total of 3,000,000 of these shares. In addition, it appears that the 8,000,000 shares issued in July 2005, as well as an additional 550,000 shares issued to employees and consultants in March, May and August 2005, were improperly issued without a restrictive legend stating that the shares could not be resold legally except in compliance with the Securities Act of 1933, as amended. The members of The Company's management who effectuated the stock issuances that are being examined in the investigation no longer work for The Company. In the event that any of the exemptions from registration with respect to the issuance of the Company’s common stock under federal and applicable state securities laws were not available, the Company may be subject to claims by federal and state regulators for any such violations. In addition, if any purchaser of the Company’s common stock were to prevail in a suit resulting from a violation of federal or applicable state securities laws, the Company could be liable to return the amount paid for such securities with interest thereon, less the amount of any income received thereon, upon tender of such securities, or for damages if the purchaser no longer owns the securities. As of the date of these financial statements, the Company is not aware of any alleged specific violation or the likelihood of any claim. There can be no assurance that litigation asserting such claims will not be initiated, or that the Company would prevail in any such litigation. The Company is unable to predict the extent of its ultimate liability with respect to any and all future securities matters. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company’s financial condition and operating results. NOTE K - FAIR VALUE MEASUREMENT The Company adopted the provisions of ASC 825-10 on October 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities. F-31 APPLIED DNA SCIENCES, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE K —FAIR VALUE MEASUREMENT (continued) Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement. Upon adoption of ASC 825-10, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the consolidated financial statements. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. The following table sets forth the Company’s short and long-term investments as of September 30, 2009 which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 825-10, these are classified based on the lowest level of input that is significant to the fair value measurement: Assets: Cash Liabilities: Convertible notes payable Quoted Prices in Active Markets for Identical Instruments Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Assets and liabilities at fair Value 213,307 $ - - $ 2,410,411 $ $ - - $ $ 213,307 2,410,411 $ $ F-32 APPLIED DNA SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE L - GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during the years ended September 30, 2009 and 2008, the Company has a negative working capital of $2.9 million and $15.6 million, incurred a net loss from operations of $6.9 million and $4.1 million and has a capital deficiency of $1.7 million and $14 million, respectively. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company’s existence is dependent upon management’s ability to develop profitable operations. Management is devoting substantially all of its efforts to developing DNA embedded biotechnology security solutions in the United States and Europe and there can be no assurance that the Company’s efforts will be successful and no assurance can be given that management’s actions will result in profitable operations or the resolution of its liquidity problems. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. In order to improve the Company’s liquidity, the Company’s management is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing. NOTE M – SUBSEQUENT EVENTS In accordance with FASB ASC 855, "Subsequent Events,” the Company has evaluated subsequent events through the date of filing, December 23, 2009. 10% Secured Convertible Promissory Notes dated October 14, 2009 On October 14, 2009, the Company issued an aggregate of $270,000 convertible promissory notes due October 14, 2010 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of our common stock at a price equal to the greater of (i) 50% of the average price of our common stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.092674218 per share, which is equal to a 20% discount to the average volume, weighted average price of our common stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.092674218 per share. The Company has granted the noteholder a security interest in all the Company’s assets. F-33 EXHIBIT 10.5 Confidential Treatment This SUPPLY AND DISTRIBUTION AGREEMENT (this " Agreement”), is made as of September 16, 2009 ("Effective Date”) by and between Printcolor Screen Ltd., a Swiss company with its principal place of business at Welschloh 299 CH-8965 Berikon, Switzerland (" SUPPLIER”), and Applied DNA Sciences, Inc., a Delaware corporation its principal place of business at 25 Health Sciences Drive Suite 113, Stony Brook, New York 11790 ("BUYER”, and together with SUPPLIER, the "Parties”). SUPPLY AND DISTRIBUTION AGREEMENT RECITALS WHEREAS, the Parties desire to enter into this Supply and Distribution Agreement whereby SUPPLIER will manufacture and supply certain products for BUYER under the terms and conditions set forth in this Agreement, and BUYER will purchase and sell such products to its customers. NOW, THEREFORE, and in consideration of the mutual promises, covenants, representations and good and valuable consideration set forth herein, the adequacy of which is hereby acknowledged, the Parties hereto agree as follows: ARTICLE 1. PRODUCTS, ORDERS AND PRICING. 1.1 Manufacturing Services. During the term of this Agreement, SUPPLIER shall manufacture and supply to BUYER on an exclusive basis (except as set forth in Section 8.1 of this Agreement) and BUYER shall purchase and acquire from SUPPLIER, those quantities of the AzSure formulation or any derivatives thereof (the " Products”) as are ordered by BUYER from time to time under, and subject to the terms and conditions of, this Agreement. Notwithstanding anything herein to the contrary, BUYER shall not be obligated to utilize SUPPLIER’s manufacturing or supply services with respect to any minimum amount of the Products or at all. 1.2 Purchase Price. Prices for the Products sold under, and for the term of, this Agreement shall be as set forth on the price list that appears as Schedule A to this Agreement (the " Purchase Price”), except for permitted adjustments made from time to time by written agreement of the Parties (in which case an amended Schedule A shall replace the old Schedule A and shall be attached to this Agreement). 1.3 Payment; Payment Terms; Payment Currency. BUYER shall pay the amounts invoiced by SUPPLIER for the Products ordered by BUYER. In case of any dispute or question, SUPPLIER shall first contact BUYER and attempt in good faith to resolve the dispute/question. Payments by BUYER shall be made directly to SUPPLIER on or before the date which is sixty (60) days after the date of receipt of such invoice. All payments required to be made by BUYER hereunder shall be made in Euros. 1.4 Compliance with Law. All of the Products to be manufactured or supplied hereunder shall be made in accordance with all applicable laws and regulations and shall be shipped with an MSDS. In addition, SUPPLIER represents and warrants that: (i) the Products, when received, shall meet specifications and shall be of merchantable quality, fit and safe and free from defects in material, design and workmanship; (ii) it possesses all licenses and permits required by any governmental jurisdiction in which it or its employees operate pursuant to this Agreement that may be required to manufacture and sell the Products; (iii) the Products are manufactured and labeled in compliance with all applicable environmental, health and safety laws and regulations; (iv) the Products are fit for a particular purpose intended; and (v) SUPPLIER and its customers shall have good title to all Products sold to BUYER free and clear of all liens, claims and encumbrances. 1.5 Placing of Orders. During the Term or any Renewal Term of this Agreement, BUYER shall submit written purchase orders to SUPPLIER clearly setting forth the amounts of Product to be purchased by BUYER and requested shipping dates for the ordered Products. All purchase orders shall be in accordance with the terms and conditions of this Agreement. In the event of any conflict between the terms of this Agreement and the terms of any purchase order issued by BUYER, the terms of this Agreement will govern. ARTICLE 2. TERM AND TERMINATION. 2.1 Term. The term of this Agreement shall continue from the Effective Date until the earlier of (i) five (5) years after the Effective Date and (ii) the date this Agreement is otherwise terminated in accordance with its terms (the "Initial Term”). 2.2 Termination. This Agreement may be immediately terminated by either party upon (i) failure of the other party to comply with laws and regulations which materially affect such party’s contracting rights or reputation and where such failure is not cured within thirty (30) days of receipt of written notice thereof; (ii) any material breach of this Agreement by the other party which is not cured within thirty (30) days of receipt of written notice thereof or (iii) the mutual agreement of the Parties. 2.3 Renewal Term. This Agreement will automatically renew for consecutive one (1) year terms under the same terms and conditions set forth herein (each a "Renewal Term”) unless terminated by either party upon delivering written notice to the other party at least ninety (90) days but not more than one hundred twenty (120) days prior to the end of the then existing term. The Renewal Term(s), if any, and the Initial Term are collectively referred to herein as the "Term.” 2.4 Rights on Termination or Expiration. In the event of the termination or expiration of this Agreement, in addition to all other remedies available at law or in equity, the Parties shall have the following rights and obligations: (a) (b) (c) (d) Within ten (10) days after the termination or expiration of this Agreement, each party shall return to the other any and all proprietary and Confidential Information of such party then in its possession or under its control. Termination or expiration of this Agreement shall not release any party from the obligation to make payment to the other party of all amounts then and thereafter due and payable under this Agreement within thirty (30) days of termination or expiration, as the case may be. Unless BUYER otherwise instructs SUPPLIER in writing, SUPPLIER shall fulfill all outstanding purchase orders submitted by BUYER in accordance with Section 1.5 of this Agreement. BUYER will have the option of requiring SUPPLIER to continue to supply the Products for a period up to six (6) months under the same terms applicable to this Agreement in order to maintain a continuity of supply in the transition. -2- ARTICLE 3. Delivery. BUYER shall provide SUPPLIER with reasonable lead time for the fulfillment and delivery of purchase orders and SUPPLIER shall timely fulfill orders for purchases received from BUYER and shall deliver the products wherever so instructed by BUYER as follows: 3.1. Ex works (incoterms) Berikon, Switzerland. SUPPLIER shall supply shipping documents and the safety label. 3.2. SUPPLIER shall supply a batch identification number/barcode and MSDS with each shipment, the content of the MSDS in accordance with applicable laws and regulations, containing the AzSure product name. 3.3. by SUPPLIER. BUYER shall supply product labels printed at its own expense to SUPPLIER. The product labels will conform to the AzSure style and contain a product code issued ARTICLE 4. Time of essence. Time is of the essence as to the obligations of SUPPLIER under each purchase order issued by BUYER in accordance with Section 1.5 of this Agreement. The agreed upon lead times for the product will be indicated on each such purchase order. SUPPLIER agrees to operate within the lead times agreed to by the parties as indicated on each such purchase order. ARTICLE 5. Quality Control. The quality of the products, including, among other things, the specifications in manufacturing the products, shall meet the quality requirements of BUYER’s customers that are provided to SUPPLIER or otherwise reasonably understood by SUPPLIER prior to acceptance of any purchase order solely to the extent the foregoing relate to the products. ARTICLE 6. Risk of Loss. BUYER shall bear the risk of loss of, or damage to, any of the products after the products have been placed on trucks at the loading dock at SUPPLIER’s plant located at Berikon, Switzerland (the "Plant”) for transport to BUYER’s customers or other place designated by BUYER. SUPPLIER shall bear the risk of loss for the products prior to such time (fob SUPPLIER’s Plant). ARTICLE 7. Inspection of the products. BUYER and its representatives may, upon reasonable notice and during regular business hours, inspect the manufacture of products and conduct related quality control; provided, that such right of inspection shall be limited to one inspection per quarter of each year. In connection therewith, SUPPLIER shall provide reasonable assistance and access to SUPPLIER’s facilities, personnel and materials. SUPPLIER shall comply with BUYER’s reasonable quality and inspection procedures. ARTICLE 8. MUTUAL REPRESENTATIONS AND WARRANTIES. 8.1 Each party represents and warrants to the other that it has the right and authority to enter into this Agreement and to perform all of its respective obligations and undertakings herein. Each party further represents and warrants to the other that (i) the rights and privileges granted or to be granted hereunder are and will at all times be free and clear of any liens, claims, charges or encumbrances; and (ii) neither party has done or omitted to do, nor will do or omit to do, any act or thing that would or might impair, encumber, or diminish the other party’s full enjoyment of the rights and privileges granted and to be granted under this Agreement. 8.2 Each party represents and warrants that it is duly organized and existing in good standing under the laws of the jurisdiction in which it is organized, is duly qualified and in good standing as a foreign corporation in every state in which the character of its business requires such qualifications, and has the power to own its property and to carry on its business as now being conducted. -3- ARTICLE 9. COVENANTS. 9.1 BUYER recognizes that SUPPLIER is currently manufacturing and/or supplying and may manufacture and/or supply the AzSure formulation (without marking the product or literature as "AzSure”) to Villiger in Switzerland. SUPPLIER will not sell to Villiger the "AzSure” formulation in the azure color. SUPPLIER agrees that it will not enter into any agreement for the manufacture of Products that would impair its ability to perform its obligations hereunder on a timely basis. 9.2 BUYER agrees to source AzSure or similar formulations only from SUPPLIER during the term of this Agreement. 9.3 The Parties agree that BUYER owns the rights to the pending trademark for "AzSure” and its associated art except for the chemical composition of the ink, which is SUPPLIER’s intellectual property. 9.4 BUYER agrees to make commercially reasonable efforts to sell AzSure to the cash in transit (CViT) industry globally. After an initial business development phase of no more than 12 months, BUYER will make commercially reasonable efforts to target an annual sales volume of approximately 10 tons of the Product. BUYER will develop marketing collaterals at its own expense. SUPPLIER will be mentioned as the "development partner” for AzSure in BUYER’s sales and marketing literature. 9.5 BUYER reserves the right to appoint sales agents and to offer exclusive supply within specific markets. 9.6 SUPPLIER agrees to supply BUYER with the methods of quality assurance required for testing each batch of the Product. SUPPLIER agrees to provide BUYER with a quality control report for each batch of the Product. SUPPLIER will not alter the yet to be agreed upon formulation for the Product without the approval of BUYER. ARTICLE 10. CONFIDENTIAL INFORMATION. 10.1 Each party acknowledges and agrees that it may have access to information, including, but not limited to, intellectual property, trade secrets, business information, ideas and expressions, which are proprietary to and/or embody the substantial creative efforts of the other party ("Confidential Information”). The Parties agree that Confidential Information will remain the sole and exclusive property of the disclosing party ("Disclosing Party”), and the receiving party ("Receiving Party”) agrees to maintain and preserve the confidentiality of such information, including, but without limitation, taking such steps to protect and preserve the confidentiality of the Confidential Information as it takes to preserve and protect the confidentiality of its own confidential information. All materials and information disclosed by either party to the other will be presumed to be Confidential Information and will be so regarded by the Receiving Party unless, the Receiving Party can prove that the materials or information are not Confidential Information. For the purposes of this Section: 10.2 The Parties agree that the Confidential Information will be disclosed for use by the Receiving Party only for the limited and sole purpose of carrying out the terms of this Agreement. 10.3 The Receiving Party agrees not to disclose or permit any other person or entity access to the Confidential Information, except that such disclosure will be permitted to an employee, agent, representative or independent contractor of the Receiving Party requiring access to the same. -4- 10.4 The Receiving Party agrees: (i) not to alter or remove any identification of any copyright, trademark or other proprietary rights notice which indicates the ownership of any part of the Confidential Information, and (ii) to notify the Disclosing Party of the circumstances surrounding any possession, use or knowledge of the Confidential Information by any person or entity other than those authorized by this Agreement. 10.5 Confidential Information will exclude any information that (i) has been or is obtained by the Receiving Party from a source independent of the Disclosing Party and not receiving such information from the Disclosing Party, (ii) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Disclosing Party or its personnel, or (iii) is independently developed by the Receiving Party without reliance in any way on the Confidential Information provided by the Disclosing Party; or (iv) the Receiving Party is required to disclose under judicial order, regulatory requirement, or statutory requirement, provided that the Receiving Party provides written notice and an opportunity for the Disclosing Party to take any available protective action prior to such disclosure. ARTICLE 11. INDEMNIFICATION; LIMITATION ON DAMAGES. 11.1 SUPPLIER’s Indemnification. SUPPLIER hereby agrees to indemnify, defend, and hold BUYER harmless from any and all third party claims, losses, liabilities, causes of action and costs (including reasonable attorneys’ fees) arising from, or on account of, or related to any breach by SUPPLIER of its obligations, representations and warranties hereunder. 11.2 BUYER’s Indemnification. BUYER hereby agrees to indemnify, defend, and hold SUPPLIER harmless from any and all third party claims, losses, liabilities, causes of action and costs (including reasonable attorneys’ fees) arising from, or on account of, or related to any breach by BUYER of its obligations, representations and warranties hereunder. 11.3 Limitation on Damages. NEITHER PARTY NOR ANY OF ITS RESPECTIVE AFFILIATES, SHALL BE LIABLE TO THE OTHER PARTY OR TO ANY OTHER INDIVIDUAL OR ENTITY FOR ANY INDIRECT, SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, OR INCIDENTAL LOSS OR DAMAGE OF ANY KIND OR NATURE, RELATING TO OR ARISING OUT OF THIS AGREEMENT INCLUDING BUT NOT LIMITED TO ANY LOSS OF REVENUES, ANTICIPATED PROFITS OR SAVINGS, OR LOSS BY REASON OF SHUTDOWN IN OPERATION OR FOR INCREASED EXPENSES OF OPERATION. ARTICLE 12. GENERAL. 12.1 Governing Law. This Agreement shall be interpreted in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof. The Parties agree that jurisdiction over and venue in any legal proceeding arising out of or relating to this Agreement will exclusively be in the state or federal courts located in New York County, New York. 12.2 Entire Agreement. This Agreement, including the Exhibit(s) attached hereto, constitutes the entire agreement and understanding between the Parties and integrates all prior discussions between them related to its subject matter. No modification of any of the terms of the agreement will be valid unless in writing and signed by an authorized representative of each party. 12.3 Assignment. This Agreement may not be assigned by any party hereto to any other person, firm, or entity without the express written approval of the other party hereto and any attempt at assignment in violation of this Section will be null and void; provided, that, notwithstanding the foregoing, BUYER may assign this Agreement, and grant a security interest in this Agreement, to any senior lender to BUYER without being required to obtain the consent of SUPPLIER, and SUPPLIER shall have the right to assign this Agreement to an affiliate of SUPPLIER upon written notice to BUYER, without being required to obtain the consent or approval of BUYER. Without limiting the foregoing, SUPPLIER shall not, voluntarily or by operation of law (including, without limitation, by transfer of the stock of SUPPLIER), assign or transfer, this Agreement or any interest herein, or any right or obligation hereunder, without first obtaining the written consent of BUYER, which consent shall not be unreasonably withheld. -5- 12.4 Notices. All legal notices required or permitted hereunder will be given in writing addressed to the respective Parties as set forth below and will either be (i) personally delivered, (ii) transmitted by postage prepaid certified mail, return receipt requested, or (iii) transmitted by nationally recognized private express courier, and will be deemed to have been given on the date of receipt if delivered personally, or three (3) days after deposit in mail or express courier. Either party may change its address for purposes hereof by written notice to the other in accordance with the provisions of this Subsection. The addresses for the Parties are as follows: SUPPLIER Printcolor Screen Ltd. Attn: Welschloh 299 CH-8965 Bericon Switzerland BUYER Applied DNA Sciences, Inc. Attn: Kurt Jensen 25 Health Sciences Dr., Suite 113 Stony Brook, NY 11790 USA 12.5 Rights to Injunctive Relief. The Parties acknowledge that remedies at law may be inadequate to provide full compensation in the event of a material breach relating to either party’s obligations, representations, and warranties hereunder, and the non-breaching party will therefore be entitled to seek injunctive relief in the event of any such material breach. 12.6 Force Majeure. No party will be liable for, or will be considered to be in breach of or default under this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions that are beyond such party’s reasonable control (such as war, riot, attack of terror, insurrection, rebellion, strike, lockout, unavoidable casualty, or damage to personnel, material or equipment, fire, flood, storm, earthquake, tornado, or any act of God) and that such party is unable to overcome through the exercise of commercially reasonable diligence. If any force majeure event occurs, the affected party will give prompt written notice to the other party and will use commercially reasonable efforts to minimize the impact of the event. However, if a force majeure event prevents a party’s performance of a material covenant set forth herein, the other party can immediately terminate this Agreement. 12.7 Waiver. The waiver, express or implied, by any party of any breach of or right under this Agreement by another party will not waive any subsequent breach or right by such party of the same or a different kind. 12.8 Headings. The headings to the Sections and Schedules of this Agreement are included merely for convenience of reference and will not affect the meaning of the language included therein. -6- 12.9 Independent Contractors. The Parties acknowledge and agree that they are dealing with each other hereunder as independent contractors. Nothing contained in this Agreement will be interpreted as constituting either party the joint venturer, employee or partner of the other party or as conferring upon either party the power of authority to bind the other party in any transaction with third parties. 12.10 Severability. In the event any provision of this Agreement is held by a court or other tribunal of competent jurisdiction to be unenforceable, such provision will be reformed only to the extent necessary to make it enforceable, and the other provisions of this Agreement will remain in full force and effect. 12.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, will be deemed to be an original. Notwithstanding the foregoing, the Parties will deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof. 12.12 Cooperation in Drafting. The Parties have cooperated in the drafting and preparation of this Agreement, and it will not be construed more favorably for or against any party. 12.13 Attorney’s Fees. Should any party hereto initiate a legal or administrative action or arbitration proceeding (an "Action”) to enforce any of the terms or conditions of this Agreement, the prevailing party (as determined by the court, arbitrator or other fact-finder) will be entitled to recover from the losing party all reasonable costs of the Action, including without limitation, reasonable attorneys’ fees and costs. [Signature Page Follows] -7- IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date. EXHIBIT 10.5 Confidential Treatment SUPPLIER Printcolor Screen Ltd. By: /s/ Dieter Hermann__________ Name: Dieter Hermann CEO Title: BUYER APPLIED DNA SCIENCES, INC. By: /s/ James A. Hayward_______ Name: Title: James A. Hayward CEO EXHIBIT 10.5 Confidential Treatment SCHEDULE A AzSure Pricing Scheme From PrintColor to APDN Ship in 200 liter Drums 60 day terms Prepay (2) Ship in 20, 30 or 50 liter Pourer Cans 60 day terms (1) Prepay (2) Total Volume Per Order (liters) Price Per Liter Price Per Liter 200 1,000 3,000 6,000 10,000 € *** € *** Blanket Orders (3) € *** € *** € *** € *** € *** € *** € *** € *** € *** € *** € *** € *** € *** € *** (1) 7% Increase in Price Per Liter (2) 5% Decrease if APDN Prepays Blanket Order (3) Blanket orders: minimum 3,000 liters or above per order CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-163478) of Applied DNA Sciences, Inc. of our report dated December 23, 2009, relating to the consolidated financial statements and the effectiveness of Applied DNA Sciences, Inc.’s internal control over financial reporting, which appear in this annual report on Form 10-K. New York, New York December 23, 2009 /s/ RBSM LLP Exhibit 23.2 EXHIBIT 31.1 I, James A. Hayward, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Applied DNA Sciences, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: December 23, 2009 /s/ James A. Hayward James A. Hayward President, Chief Executive Officer and Chairman EXHIBIT 31.2 I, Kurt H. Jensen, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Applied DNA Sciences, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: December 23, 2009 /s/ Kurt H. Jensen Kurt H. Jensen Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 In connection with the Annual Report on Form 10-K of Applied DNA Sciences, Inc. (the "Company”) for the fiscal year ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report”), I, James A. Hayward, President, Chief Executive Officer and Chairman of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James A. Hayward James A. Hayward President, Chief Executive Officer and Chairman Date: December 23, 2009 * A signed original of this written statement required by Section 906 has been provided to Applied DNA Sciences, Inc. and will be retained by Applied DNA Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.2 In connection with the Annual Report on Form 10-K of Applied DNA Sciences, Inc. (the "Company”) for the fiscal year ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report”), I, Kurt H. Jensen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. * A signed original of this written statement required by Section 906 has been provided to Applied DNA Sciences, Inc. and will be retained by Applied DNA Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Kurt H. Jensen Kurt H. Jensen Chief Financial Officer Date: December 23, 2009 

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