CNS RESPONSE, INC. (Form: S-1/A, Received: 07/06/2010 06:03:25)

Research and development expenses consist of clinical study patient expenses, payroll and benefit costs (including stock-based compensation), patents costs, consulting fees, marketing and recruitment costs, database enhancements and maintenance, travel and conference and other miscellaneous costs. Research and development costs for the year ended September 30, 2009 totaled $2,137,200 and were largely comprised of the following: clinical study patient costs of $789,300, payroll and benefit costs of $792,100, patent costs of $213,100, consulting costs of $105,700, marketing and recruiting costs $161,100, database costs of $16,800 and travel and conference costs of $15,600. For the year ended September 30, 2008 research and development costs totaled $2,097,300 and were largely comprised of the following: clinical study patient costs of $579,100, payroll and benefit costs of $855,600, patent costs of $108,800, consulting costs of $285,000, marketing and recruiting costs $136,200, database costs of $36,400 and travel and conference costs of $50,200.

Clinical study patient costs increased by $210,200 in fiscal 2009 as our clinical trial was running for twelve months in fiscal 2009 compared to approximately nine months in fiscal 2008. Patent costs also increased in fiscal 2009 by $104,300 as a result of filing patent applications in Western Europe and marketing and recruitment expenses increased by $25,000 in fiscal 2009 as we accelerated patient enrollment in our clinical study. Conversely, payroll and benefit costs declined in fiscal 2009 by $63,500 due to changes in the staff-mix and reduced stock compensation and bonus expenses and consulting expenses declined by $179,300 as expertise was brought in-house and the clinical trial moved beyond the design stage which involved the use of consultants. In fiscal 2009, database costs fell by $19,600 compared to fiscal 2008 as the company reduced development efforts relating to the CNS Database.

The Company is applying for grants which, if obtained, will help the Company accelerate its research and development efforts, and improve the functionality of its CNS Database.

Sales and marketing

	Year Ended September 30, 2009		Year Ended September 30, 2008		Percent Change
Sales and Marketing
Laboratory Information Services	$	908,500	$	847,600		7	%
Clinical Services		7,300		33,800		(78	)%
Total Sales and Marketing	$	915,800	$	881,400		4	%

Sales and marketing expenses associated with our Laboratory Information Services business consist primarily of payroll and benefit costs, consulting fees, marketing costs, computer services, travel and conference costs and miscellaneous costs. Sales and marketing expenses for fiscal 2009 were comprised of the following: payroll and benefit costs of $596,200, consulting fees of $82,400, marketing costs of $147,600, computer services costs of $31,700, and travel and conference costs of $40,600. For fiscal 2008 the company incurred: payroll and benefit costs of $403,000, consulting fees of $221,100, marketing costs of $18,500, computer services costs of $25,000, and travel and conference costs of $110,900.

In fiscal 2009, payroll and benefits increased by $193,200 principally as a result of the hiring of a Vice President for commercial operations and additional sales and support staff. This increase was partially offset by a reduction in consulting fees of $138,900 as marketing expertise was brought in house. Marketing expenses increased in fiscal 2009 by $129,100 in an effort to advertise our rEEG technology to service providers and consumers. This was partly offset by a reduction in travel and conference costs of $70,300.

In fiscal 2010, we have reduced our sales and marketing expenditure for Laboratory Information Services pending receipt of our 510(k) clearance from the FDA, after which we plan to increase our Direct-to-Consumer marketing. Furthermore, with the successful completion of our clinical trial and publication of the results, we plan to introduce our rEEG technology to additional psychiatric providers and medical insurance payers later in fiscal 2010 and in 2011, which will increase our sales and marketing expenditures.

Clinical Services sales and marketing expenses consist of advertising in various media so as to attract patients to our clinic in Denver. We do not anticipate materially increasing sales and marketing expenses relating to our Clinical Services business.

General and administrative

	Year Ended September 30, 2009		Year Ended September 30, 2008		Percent Change
General and administrative
Laboratory Information Services		3,217,800	$	2,349,000		35	%
Clinical Services		669,600		756,700		(12	)%
Total General and administrative	$	3,887,400	$	3,105,700		25	%

General and administrative expenses for our Laboratory Information Services business are primarily related to salaries and benefits (including stock-based compensation), legal and other professional fees, consulting services, general administration and occupancy costs, dues and fees, marketing and investor relations, and travel and conferences. For the year ended September 30, 2009 these expenses were as follows: Salaries and benefits $792,700, legal fees $1,362,000, other professional fees $151,300, consulting costs $369,700, general administration and occupancy costs $183,000, dues and fees $80,000, marketing and investor relations $86,500, and travel and conference costs $69,800. For the year ended September 30, 2008 these expenses were: Salaries and benefits $1,420,900, legal fees $193,900, other professional fees $157,800, consulting costs $94,600, general administration and occupancy costs $189,300, dues and fees $46,300, marketing and investor relations $112,800, and travel and conference costs of $78,100.

Changes in general and administrative expenditures in 2009 were as follows: Salaries and benefit costs decreased by $628,200 as a result of staff reductions, including the termination of our former CEO Leonard Brandt in April 2009, a non-recurring bonus expense of $69,900 declared in 2008 that did not reoccur in 2009 and as a result of stock based compensation charges falling $214,900 in fiscal 2009 compared to the prior year period. Partly offsetting the reduction in salaries and benefits was an increase in consulting fees of $275,100 as a result of the hiring of consultants to perform functions previous undertaken by salaried employees. Legal fees increased by $1,168,100 in 2009 principally due to costs associated with defending against lawsuits brought by our former CEO and Chairman of the Board, Leonard Brandt, as well as our fund raising efforts. Dues and fees increased by $33,800 in 2009 as a result of the payment of Delaware Franchise taxes for 2009, Blue Sky filings necessitated by our private placement, and increased transfer agent fees associated with the holding of our annual stockholders’ meeting. Certain other costs categories decreased in 2009 including marketing and investor relations costs which decreased by $26,300.

The company incurred certain miscellaneous charges in 2009 which included Delaware Franchise Tax assessments for fiscal 2007 and 2008 totaling $74,400; additionally, the company accrued for a $34,800 payroll tax assessment which was related to 2006, and a write-off of $22,600 of doubtful debts. In 2008 the company wrote off $56,900 in costs associated with a financing effort that did not materialize.

General and administrative expenses for our Clinical Services business for the year ended September 30, 2009 were $669,600 which includes all costs associated with running the clinic, including all payroll costs, medical supply costs, occupancy costs and other general and administrative costs. These costs declined $87,100 from $756,700 in 2008 primarily due to lower patient volume.

Goodwill impairment charges

During the fiscal year 2009, we conducted a goodwill impairment test and determined that all of the goodwill related to the NTC acquisition was impaired. Accordingly, we recorded a goodwill impairment charge of $320,200 for the year ended September 30, 2009.

Other income (expense)

	Year Ended September 30, 2009			Year Ended September 30, 2008			Percent Change

Laboratory Information Services (Expense), net	$	(1,822,700	)	$	104,600			*
Clinical Services (Expense)		(200	)		(600	)		33	%
Total interest income (expense)	$	(1,822,900	)	$	104,000			*

* not meaningful

With respect to our Laboratory Information Services business, we incurred a $90,000 financing fee in connection with the bridge note issued to Mr. Pappajohn on June 12, 2009 and $20,900 in interest expenses on the bridge notes issued to Mr. Brandt and Sail Venture Partners. Additionally, $1,058,000 of expenses associated with the valuation of bridge warrants and $642,000 associated with the value of the beneficial conversion feature of the bridge notes were written off to interest expense upon conversion of the bridge notes. Furthermore, $13,300 of interest expense was incurred on long-term debt issued in connection with our acquisition of NTC. These expenses were offset by interest income of $9,500 for the fiscal year ended September 30, 2009 from interest bearing accounts. For the fiscal year ended September 30, 2008, interest income of $127,000 was earned on cash in interest bearing accounts. This was offset by $22,000 of interest expense on long term debt.

Net Loss

	Year Ended September 30, 2009			Year Ended September 30, 2008			Percent Change

Laboratory Information Services net loss	$	(8,451,300	)	$	(5,166,200	)		64	%
Clinical Services net loss		(70,900	)		(205,300	)		(35	)%
Total Net Loss	$	(8,522 ,200	)	$	(5,371,500	)		59	%

The increase in net loss for Laboratory Information Services of $3.28 million for the year ended September 30, 2009 is due primarily to charges associated with our bridge note financings of $1.83 million, including the discount on bridge notes and the value of the beneficial conversion features of the notes; and a $1.17 million increase in legal fees primarily relating to costs incurred in defending against lawsuits brought by our former CEO and Chairman of the Board, Leonard Brandt. The impairment write down of goodwill associated with our acquisition of NTC added a further $320,200 to the loss.

The decrease in the net loss for Clinical Services of $134,400 for the year ended September 30, 2009 is primarily due to reduced marketing expenses and reduced general and administrative expenses.

Results of Operations for the three months ended March 31, 2010 and 2009

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

	Three Months Ended March 31,
	2010			2009

Revenues		100	%		100	%
Cost of revenues		22			19
Gross profit		78			81
Research and development		179			284
Sales and marketing		114			154
General and administrative expenses		566			434
Operating loss		(781	)		(792	)
Other income (expense), net		(1	)		(3	)
Net income (loss)		(782	)%		(795	)%

Revenues

	Three Months Ended March 31,
	2010		2009		Percent Change

Laboratory Information Service Revenues	$	34,400	$	31,200		10	%
Clinical Services Revenues		143,900		152,600		6	%
Total Revenues	$	178,300	$	183,800		(3	)%

With respect to our Laboratory Information Services business, the number of non-clinical study related paid rEEG Reports delivered increased from 79 for the quarter ended March 31, 2009 to 89 for the quarter ended March 31, 2010, while the average price per report decreased from approximately $394 for the quarter ended March 31, 2009 to $387 for the quarter ended March 31, 2010 (clinical study, training, database-enhancing and compassionate-use rEEG reports are provided free of charge). We do not expect to drive broader adoption of reports based on our rEEG technology until the Company obtains FDA 510(k) clearance and the results of our multi-site clinical study to validate the efficacy of our products is published. Accordingly, we anticipate that Laboratory Services Revenues will not increase substantially in the current fiscal year.

Our Clinical Services revenue declined by $8,700 for the quarter ended March 31, 2010, as compared to the corresponding prior year period, because of a reduction in the volume of patients treated as a result of a reduction in the number of psychiatrists on staff. We have recruited a new psychiatrist who will start working with our Clinical Services in the fourth quarter, at which time patient volume should start increasing. Currently, we do not plan to materially expand our Clinical Services business, and therefore we do not anticipate a significant increase in revenues generated by this business segment beyond being a self sustaining, stand-alone clinic.

Cost of Revenues

	Three Months Ended March 31,
	2010		2009		Percent Change

Cost of Laboratory Information Services revenues	$	39,400	$	35,600		11	%

Cost of Laboratory Information Services revenues consists of payroll costs, consulting costs, and other miscellaneous charges . Consulting costs primarily represent external costs associated with the processing and analysis of rEEG Reports and range between $75 and $100 per rEEG Report. For the quarter ended March 31, 2010, cost of revenues consisted primarily of direct labor and benefit costs (including stock-based compensation costs) of $25,700, and consulting fees of $12,600. For the quarter ended March 31, 2009, cost of revenues included direct labor and benefit costs (including stock based compensation costs) of $24,500, and consulting fees of $9,600. Direct labor and benefits remained consistent for the two periods. Consulting fees increased in 2010 due to the higher number of rEEG Reports delivered. We ultimately expect cost of revenues to decrease as a percentage of revenues as operating efficiencies improve with the volume of reports processed.

Research and Development

	Three Months Ended March 31,
	2010		2009		Percent Change

Laboratory Information Services research and development	$	318,700	$	521,800		(39	)%

Research and development expenses consist of clinical studies, projects for training doctors associated with our research studies, consulting fees, payroll costs (including stock-based compensation costs), expenses related to database enhancements and maintenance, and other miscellaneous costs. Research and development costs for the quarter ended March 31, 2010, primarily consisted of the following: payroll and benefit costs (including stock based compensation) of $207,400, consultant costs of $96,800 and other miscellaneous costs of $14,400. For the comparable period for 2009, research and development costs included: payroll and benefit costs (including stock based compensation) of $196,600, consultant costs of $6,300 and other miscellaneous costs of $15,000. Additionally, as the clinical study was in progress for the 2009 quarter, clinical study costs were $214,000 and patient marketing and recruitment costs were $90,200.

Comparing the three months ended March 31, 2010 with the similar period in 2009, clinical study costs and patient marketing and recruitment costs were eliminated in the 2010 quarter as the study was completed in September 2009. Consequently, the focus of the research and development department moved from the clinical study to the preparation of scientific papers for publications, and the generation of grant applications for research funding. Additionally, the focus moved to the enhancing the rEEG production system and the application for 510(k) clearance with the FDA. As a result of this shift in focus, consulting fees increased by $90,500, of which $56,900 was spent on consultants hired to assist the Company with its FDA 510(k) application filed with the FDA on April 1, 2010. An additional $28,000 was spent on programming consultants to enhance and document the production system; the balance of the increase was the hiring of a technical writer to assist with a research paper. Payroll and benefits increased by $10,800 in the 2010 quarter primarily due a reassignment of a staff member between departments.

Sales and marketing

	Three Months Ended March 31,
	2010		2009		Percent Change
Sales and Marketing
Laboratory Information Services	$	201,900	$	282,300		(28	)%
Clinical Services		600		1,400		(57	)%
Total Sales and Marketing	$	202,500	$	283,700		(29	)%

Sales and marketing expenses associated with our Laboratory Information Services business consist primarily of payroll and benefit costs, including stock-based compensation; advertising and marketing; consulting fees and conference and travel expenses. Sales and marketing expenses for the quarter ended March 31, 2010 primarily consisted of the following expenses: payroll and benefits $101,500, advertising and marketing $24,700, consulting $27,800 and conferences and travel $33,100. For the comparable period in 2009 expenses were as follows: payroll and benefits $148,400, advertising and marketing $75,600, consulting $48,500 and conferences and travel $3,400.

Comparing the three month period ended March 31, 2010 with the similar quarter in 2009, payroll and benefits decreased by $46,700 in the 2010 quarter as a result a reduction in staff and the reassignment of staff to another department. Advertising and marketing expenses decreased by $50,900 as advertising was curtailed while the Company awaits its 501(k) clearance and marketing efforts were largely limited to program development, whereas for the 2009 quarter the Company was actively executing its advertising and marketing plans. Conference and travel expense increased by $30,600 in the 2010 quarter as the Company conducted its first user-group meeting in January 2010.

The Clinical Services sales and marketing expenses consists of advertising to attract patients to the clinic. We anticipate a moderate increase in marketing expenditure to expand our Clinical Services business in the future, which expenditures will be tailored based on the knowledge we have acquired in attracting patients to our clinical trials and further market analysis.

General and administrative

	Three Months Ended March 31,
	2010		2009		Percent Change
General and administrative
Laboratory Information Services	$	818,800	$	630,200		30	%
Clinical Services	$	191,000		168,300		13	%
Total General and administrative	$	1,009,800	$	798,500		26	%

General and administrative expenses for our Laboratory Information Services business are largely comprised of payroll and benefit costs, including stock based compensation, legal, patent costs, other professional and consulting fees, general administrative and occupancy costs, conference and travel and miscellaneous costs. For the quarter ended March 31, 2010, General and Administrative costs consisted of salaries and benefit costs of $224,100; legal fees of $340,700 and other professional and consulting fees of $130,100; general administrative and occupancy costs of $74,600, patent costs $32,600 and conference and travel costs of $15,400. Miscellaneous costs were $1,000 in the 2010 quarter. For the similar period in 2009, General and Administrative costs consisted of the following: salaries and benefit costs of $216,800; legal fees of $59,100 and other professional and consulting fees of $155,600; general administrative and occupancy costs of $51,700, patent costs of $32,400 and conference and travel expenses of $10,100. Miscellaneous costs for the 2009 quarter were $105,000.

With respect to our Laboratory Information Services business, in the quarter ended March 31, 2010 in comparison to the same period in 2009, payroll and benefit expenses increased by a net $7,300 due to a change in the staff mix as the Chief Financial Officer (CFO) joined the staff midway through the quarter, an increase in base salary for the CEO and an increase in stock based compensation as a result of the options granted in March 2010. Professional and consulting fees decreased by a $25,500 largely by hiring the CFO, who had formerly served as a consultant. Legal fees increased by a net $281,800 which was due to 293,800 being incurred in defending against actions brought by Mr. Brandt (see Matters Involving our Former Chief Executive Officer and Former Director, Leonard Brandt). These litigation costs were slightly offset by a reduction of $12,000 in regular legal fees. General and administrative costs increased by a net $22,900 due to filing fees, increased computer service costs and costs associated with relocating the office. Patent and conference and travel costs did not substantially change quarter over quarter. Miscellaneous expenses incurred in the 2009 quarter of $105,000 were as a result of a revised IRS assessment on 2006 payroll taxes and Delaware Franchise Tax assessments for calendar years 2007 and 2008 did not reoccur to the same degree in the 2010 quarter.

General and administrative expenses for our Clinical Services business include all costs associated with operating NTC. This includes payroll costs, medical supplies, occupancy costs and other general and administrative costs. Costs increased in the quarter ended March 31, 2010 by $22,700 as compared to the prior year quarter. This increase is largely due to clinical services staff who worked on the clinical trial were no longer reimbursed by the Laboratory Information Services for their time spent on the study.

Interest income (expense)

	Three Months Ended March 31,
	2010			2009			Percent Change

Laboratory Information Services (Expense), net	$	(100	)	$	(4,600	)		(98	)%
Clinical Services (Expense)		-			(100	)		*
Total interest income (expense)	$	(100	)	$	(4,700	)		(98	)%

* not meaningful

With respect to our Laboratory Information Services business, we earned interest income of $1,800 for the quarter ended March 31, 2010 from interest bearing accounts. This was offset by $1,900 of interest expense on promissory notes. For the comparable period in 2009, net interest income was $1,200 and interest expense was $5,800 of interest expense on promissory notes.

Net Loss

	Three Months Ended March 31,
	2010			2009			Percent Change

Laboratory Information Services net loss	$	(1,340,100	)	$	(1,468,200	)		(9	)%
Clinical Services net loss		(53,700	)		6,900			*
Total Net Loss	$	(1,393,800	)	$	(1,461,300	)		(5	)%

* not meaningful

The decrease in net loss of $67,500 in the three months ended March 31, 2010 compared to the prior year period is due primarily to net decreases in costs within our research and development and sales and marketing departments. These decreases were substantially offset by expenses incurred in defending the lawsuit brought by Mr. Brandt.

Results of Operations for the six months ended March 31, 2010 and 2009

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

	Six Months Ended March 31,
	2010			2009

Revenues		100	%		100	%
Cost of revenues		21			19
Gross profit		79			81
Research and development		168			323
Sales and marketing		125			154
General and administrative expenses		795			416
Operating loss		(1,010	)		(812	)
Other income (expense), net		(1	)		(2	)
Net income (loss)		(1,011	)%		(814	)%

Revenues

	Six Months Ended March 31,
	2010		2009			Percent Change

Laboratory Information Service Revenues	$	56,800		$	59,700		(5	)%
Clinical Services Revenues		265,000			295,800		(10	)%
Total Revenues	$	321,800		$	355,500		(9	)%

With respect to our Laboratory Information Services business, the number of non-clinical study related paid rEEG Reports delivered for the period decreased from 153 in 2009 to 147 in 2010, while the average price per report decreased from approximately $390 in 2009 to $386 in 2010 (clinical study, training, database-enhancing and compassionate-use rEEG reports are provided free of charge). We do not expect to drive broader adoption of reports based on our rEEG technology until the Company obtains FDA 510(k) clearance and the results of our multi-site clinical study to validate the efficacy of our products is published. Accordingly, we anticipate that Laboratory Services Revenues will not increase substantially in the current fiscal year.

Our Clinical Services revenue is as a result of patient billings for psychiatric services rendered. Revenues declined by $30,800 in the first half of 2010 versus the same period in 2009 because of a reduction in the volume of patients treated as a result of a reduction in the number of psychiatrists on staff. We have recruited a new psychiatrist who will start working with our Clinical Services in the fourth quarter of the current fiscal year, at which time patient volume should start increasing. Currently, we do not plan to materially expand our Clinical Services business, and therefore we do not anticipate a significant increase in revenues generated by this business segment beyond being a self sustaining stand-alone clinic.

Cost of Revenues

	Six Months Ended March 31,
	2010		2009		Percent Change

Cost of Laboratory Information Services revenues	$	69,100	$	69,100		-	%

Cost of Laboratory Information Services revenues consists of payroll costs, consulting costs, and other miscellaneous charges. Consulting costs primarily represent external costs associated with the processing and analysis of rEEG Reports and range between $75 and $100 per rEEG Report. For the six months ended March 31, 2010, cost of revenues were $69,100 consisting primarily of direct labor and benefit costs (including stock-based compensation costs) of $50,900 and consulting fees of $16,400. For the six months ended March 31, 2009, cost of revenues were also $69,100, which includes direct labor and benefit costs (including stock based compensation costs) of $50,400, and consulting fees of $17,500. There has been no material change in Cost of Laboratory Information Services revenues for the two six-month periods ending March 31, 2010 and 2009.

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

Research and Development

	Six Months Ended March 31,
	2010		2009		Percent Change

Laboratory Information Services research and development	$	541,300	$	1,147,800		(53)	%

Research and development expenses consist of payroll costs (including stock-based compensation costs), consulting fees, clinical study costs, patient marketing and recruitment costs and other miscellaneous costs. Research and development costs for the six months ended March 31, 2010, primarily consisted of the following: payroll and benefit costs (including stock based compensation) of $396,900, consultant costs of $115,200 and other miscellaneous costs of $29,000. There were no clinical study costs or patient marketing and recruitment costs during the period. For the comparable period for 2009, research and development costs included: payroll and benefit costs (including stock based compensation) of $396,200, consultant costs of $12,300 and other miscellaneous costs of $41,900. Additionally, as the clinical study was in progress during the 2009 period, research and development costs included clinical study costs of $573,200 and patient marketing and recruitment costs of $124,200.

Comparing the six-month period ended March 31, 2010 with the similar period in 2009, clinical study costs and patient marketing and recruitment costs were eliminated in the 2010 quarter as the study was completed in September 2009. Consequently, the focus of the research and development department moved from the clinical study to the preparation of scientific papers for publications, and the generation of grant applications for research funding. Additionally the focus moved to the enhancing the rEEG production system and the application for 510(k) clearance with the FDA. As a result of this shift in focus, consulting fees increased by $102,900, of which $64,100 was spent on consultants hired to assist the Company with its FDA 510(k) application which was filed with the FDA on April 1, 2010. Additionally, $11,200 was spent on the services of a biostatistician to analyze the results of the clinical trial. A further $28,000 was spent on programming consultants to enhance and document the production system. Payroll and benefits remained constant for the two periods despite a change in the staff mix.

Sales and marketing

	Six Months Ended March 31,
	2010		2009		Percent Change
Sales and Marketing
Laboratory Information Services	$	400,250	$	542,900		(26)	%
Clinical Services		2,500		4,100		(39)	%
Total Sales and Marketing	$	402,750	$	547,000		(26)	%

Sales and marketing expenses associated with our Laboratory Information Services business consist primarily of payroll and benefit costs, including stock-based compensation; advertising and marketing; consulting fees and conference and travel expenses. Sales and marketing expenses for the six-month period ended March 31, 2010 primarily consisted of the following expenses: payroll and benefits $237,100, advertising and marketing $66,200, consulting $50,400 and conferences and travel $35,500. For the comparable period in 2009 expenses were as follows: payroll and benefits $320,900, advertising and marketing $124,300, consulting $67,600 and conferences and conferences and travel $17,100.

Comparing the six months ended March 31, 2010 with the same period in 2009, payroll and benefits decreased by $83,800 in the 2010 period as a result a reduction in staff and the reassignment of staff to another department. Advertising and marketing expenses decreased by $58,100 as advertising was curtailed while the Company awaits its 501(k) clearance and marketing efforts were largely limited to program development, whereas for the 2009 period the Company was actively executing its advertising and marketing plans. Conference and travel expenses increased by $18,400 in the 2010 period as the Company conducted its first user-group meeting in January.

General and administrative

	Six Months Ended March 31,
	2010		2009		Percent Change
General and administrative
Laboratory Information Services	$	2,218,000	$	1,161,400		91	%
Clinical Services	$	339,500		317,100		7	%
Total General and administrative	$	2,557,500	$	1,478,500		84	%

General and administrative expenses for our Laboratory Information Services business are largely comprised of payroll and benefit costs, including stock based compensation, legal, patent costs, other professional and consulting fees, general administrative and occupancy costs, conference and travel and miscellaneous costs. For the six-months ended March 31, 2010, General and Administrative costs consisted of salaries and benefit costs of $364,700; legal fees of $1,218,350 and other professional and consulting fees of $290,200, general administrative and occupancy costs of $233,600, patent costs $43,200 and conference and travel costs of $64,200. Miscellaneous costs were $3,600 in the 2010 quarter. For the similar period in 2009, General and Administrative costs consisted of the following: salaries and benefit costs of $455,600; legal fees of $131,400 and other professional and consulting fees of $228,300; general administrative and occupancy costs of $133,500, patent costs of $89,100 and conference and travel expenses of $25,300. Miscellaneous costs for the 2009 period were $99,700.

With respect to our Laboratory Information Services business, in the six months ended March 31, 2010 in comparison to the same period in 2009, payroll and benefit expenses decreased by a net $90,900 largely due to a change in the staff mix as the former CEO, Mr. Brandt left the Company in April 2009 and the former President, Mr. Carpenter became the CEO. Additionally the Chief Financial Officer (CFO) joined the staff in mid February, 2010. Furthermore, stock based compensation was reduced by 20,400 to $202,600 in the 2010 period. Professional and consulting fees increased by $62,000 partly due to an increase in audit fees due to the timing, complexity and increased frequency of SEC filings. Additionally, consultants were hired in connection with the Brandt litigation and private placement financing. Legal fees increased by a net $1,218,400 which was due to $1,065,300 being incurred in defending against actions brought by Mr. Brandt (see page 25 Matters Involving our Former Chief Executive Officer and Former Director, Leonard Brandt). Additionally non-litigation legal fees increased by $21,600 due to increased activity related to SEC filings, fund-raising and FDA-related work. General and administrative costs increased by a $100,100 due to an increase in investor relations and corporate promotional expenses, increased computer service costs and costs associated with relocating the office. Patent costs declined by $44,100 as costs were largely associated with patent maintenance. Conference and travel costs increased by $38,900 as a result of increased travel associated with raising capital and litigation activities. Miscellaneous expenses incurred in the 2009 six-month period of $99,700 were largely the result of a revised IRS assessment on 2006 payroll taxes and Delaware Franchise Tax assessments for calendar years 2007 and 2008 did not reoccur to the same degree in the 2010 period.

General and administrative expenses for our Clinical Services business include all costs associated with operating NTC. This includes payroll costs, medical supplies, occupancy costs and other general and administrative costs. These costs increased by $22,400 to $339,500 in the six months ending March 31, 2010 from $317,100 for the comparable period in 2009. This increase is largely due to the fact that clinical services staff who had worked on the clinical trial were no longer reimbursed by the Laboratory Information Services for their time spent on the study.

Interest income (expense)

	Six Months Ended March 31,
	2010			2009			Percent Change

Laboratory Information Services (Expense), net	$	(1,500	)	$	(3,400	)		(56	)%
Clinical Services (Expense)		(200	)		(100	)		100	%
Total interest income (expense)	$	(1,700	)	$	(3,500	)		(51	)%

* not meaningful

With respect to our Laboratory Information Services business, we earned interest income of $2,800 for the six months ended March 31, 2010 from interest bearing accounts. This was offset by $4,300 of interest expense on promissory notes. For the comparable period in 2009, we earned interest income of $8,300 for the six months ended March 31, 2009 from interest bearing accounts. This was offset by $11,700 of interest expense on promissory notes.

Net Loss

	Six Months Ended March 31,
	2010			2009			Percent Change

Laboratory Information Services net loss	$	(3,199,100	)	$	(2,892,500	)		11	%
Clinical Services net loss		(53,900	)		(700	)		7,700	%
Total Net Loss	$	(3,253,000	)	$	(2,893,200	)		12	%

The increase in net loss of $359,800 in the six months ended March 31, 2010 compared to the prior year period is primarily due to net decreases in costs within our research and development and sales and marketing departments. These decreases were more than offset by expenses incurred in defending against the lawsuit brought by Mr. Brandt.

Liquidity and Capital Resources

Since our inception, we have incurred significant losses. As of September 30, 2009, we had an accumulated deficit of approximately $25.2 million and as of March 31, 2010, we had an accumulated deficit of approximately $28.4 million. We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, selling and marketing and general and administrative expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.

As of September 30, 2009 we had approximately $0.99 million in cash and cash equivalents and a working capital deficit of approximately $1.1 million compared to approximately $2.0 million in cash and cash equivalents and a working capital balance of approximately $0.83 million at September 30, 2008.

As of March 31, 2010 we had approximately $0.68 million in cash and cash equivalents and a working capital deficit balance of approximately $0.98 million compared to approximately $0.56 million in cash and cash equivalents and a working capital deficit of approximately $1.66 as at March 31, 2009.

Operating Capital and Capital Expenditure Requirements

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

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

Sources of Liquidity

Since our inception substantially all of our operations have been financed primarily from equity and debt financings. Through March 31, 2010, we had received proceeds of $13.7 million from the sale of stock, $4.8 million from the issuance of convertible promissory notes and $220,000 from the issuance of common stock to employees in connection with expenses paid by such employees on behalf of the company.

On June 3, 2010, the Company entered into a Bridge Note and Warrant Purchase Agreement (the “Purchase Agreement”) with John Pappajohn, pursuant to which Mr. Pappajohn a greed to purchase two secured promissory notes (each, a “Note”) in the aggregate principal amount of $500,000, with each Note in the principal amount of $250,000 maturing on December 2, 2010. On June 3, 2010 Mr. Pappajohn loaned the Company $250,000 in exchange for the first Note (there were no warrants issued on this first Note).

The Company has agreed to issue to Mr. Pappajohn a warrant to purchase up to 250,000 shares of common stock (the “Warrant”) upon the issuance of the second Note, at an exercise price (subject to customary anti-dilution adjustments) equal to the fair market value per share at the time of issuance of the Warrant. Issuance of the Warrant is subject to and conditioned upon the purchase of the second Note by Mr. Pappajohn. The Company and Mr. Pappajohn have agreed to enter into a registration rights agreement covering the securities issuable upon exercise of the Warrant.

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

Cash Flows

Net cash used in operating activities was $4.6 million for the fiscal year ended September 30, 2009 compared to $3.7 million for fiscal year ended September 30, 2008. The increase in cash used of $0.9 million was primarily attributable to increased legal fees associated with the Brandt litigation, our private placement and bridge financings, investigation of FDA licensure issues and the filing of patent applications.

Net cash used in operating activities was $3.24 million for the six months ended March 31, 2010 compared to $1.89 million for six months ended March 31, 2009. The increase in cash used of $1.35 million was primarily attributable to increased legal fees associated with the Brandt litigation of $1.06 million and other increases in general and administrative costs.

For the fiscal year ended September 30, 2009, net cash used in investing activities was $2,000 for the purchase of office equipment as compared to $74,600 for the fiscal year ended September 30, 2008. Our 2008 investing activities related to the acquisition of the Neuro-Therapy Clinic and the purchase of furniture and equipment for our offices. Investing activities during the six months ended March 31, 2010 consisted of $8,900 spent on office furniture at our new Laboratory Information Services location. There were no investing activities in the comparable period in 2009.

Net cash proceeds from financing activities for the fiscal year ended September 30, 2009 were $1.8 million, net of offering costs, raised on August 26, 2009 in connection with the first closing of our private placement transaction; $1.7 million raised in bridge financing transactions (which ultimately converted into equity as further described under Note 2 to our year-end Financial Statements included elsewhere in this prospectus), and $295,500 due to the exercise of options and warrants. These proceeds were partly offset by the repayment of a convertible promissory note, with accrued interest, totaling $92,600 and the repayment of $86,700 on a promissory note issued to Daniel Hoffman in connection with our acquisition of NTC. Net cash used by financing activities in 2008 primarily related to the payment of $60,600 on a promissory note in connection with our NTC acquisition.

Net cash proceeds from financing activities for the six months ended March 31, 2010 were $2.99 million, net of placement agent fees, legal fees and other offering costs, raised on December 24 and 31, 2009 and January 4, 2010 in connection with the second, third and fourth closings of our private placement transaction. These proceeds were partly offset by the repayment of $46,100 on a promissory note issued to Daniel Hoffman M.D. in connection with our acquisition of NTC. Net cash used by financing activities in the period ended March 31, 2009 primarily related to the payment of $43,400 on the promissory note issued in connection with our NTC acquisition.

Contractual Obligations and Commercial Commitments

As of March 31, 2010, we have a contractual obligation to pay the remaining balance on a promissory note to Daniel Hoffman M.D. of $72,600 issued in connection with our acquisition of NTC, which bears interest at a rate of 8% per annum. Additionally, in December 2009, we signed a lease for our new headquarters and Laboratory Information Services premises located in Aliso Viejo, California. This lease expires on January 31, 2013 and our remaining rent obligation during the term of the lease is $127,000. In March 2010, we signed an amendment which extends our lease for our Clinical Services premises located in Greenwood Village, Colorado. This lease expires on April 30, 2013 and our total rent obligation during the term of the lease is $ 188,500. As of March 31, 2009, the balance outstanding on the aforementioned promissory note issued to Daniel Hoffman was $162,700 and our obligations for leased space were $73,500. Please see Notes 5 and 8 to our unaudited condensed consolidated financial statements in this prospectus for further details.

Income Taxes

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

Off-Balance Sheet Arrangements

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

BUSINESS

With respect to this discussion, the terms “we” “us” “our” “CNS” and the “Company” refer to CNS Response, Inc., a Delaware corporation and its wholly-owned subsidiaries CNS Response, Inc., a California corporation (“CNS California”), Colorado CNS Response, Inc., a Colorado corporation (“CNS Colorado”) and Neuro-Therapy Clinic, Inc., a Colorado professional medical corporation and a wholly-owned subsidiary of CNS Colorado (“NTC”).

Background

CNS Response, Inc. was incorporated in Delaware on March 16, 1987, under the name Age Research, Inc. Prior to January 16, 2007, CNS Response, Inc. (then called Strativation, Inc.) existed as a “shell company” with nominal assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On January 16, 2007, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response, Inc., a California corporation formed on January 11, 2000 (“CNS California”), and CNS Merger Corporation, a California corporation and our wholly-owned subsidiary (“MergerCo”) pursuant to which we agreed to acquire CNS California in a merger transaction wherein MergerCo would merge with and into CNS California, with CNS California being the surviving corporation (the “Merger”). On March 7, 2007, the Merger closed, CNS California became our wholly-owned subsidiary, and on the same date we changed our corporate name from Strativation, Inc. to CNS Response, Inc. Simultaneous with the closing of the Merger, we received gross proceeds of approximately $7.0 million from the first closing of a private placement transaction with institutional investors and other high net worth individuals. On May 16, 2007, we completed a second closing of the private placement which resulted in $797,300 of additional gross proceeds to us. After commissions and expenses, we received net proceeds of approximately $6.7 million in the private placement.

Overview

CNS Response is a life sciences company with two distinct business segments. Our Laboratory Information Services business operated by CNS California, which we consider our primary business, is focused on the research, development, and commercialization of a patented system that guides psychiatrists and other physicians/prescribers to determine a proper treatment for patients with behavioral (psychiatric and/or addictive) disorders. Our Clinical Services business operated by NTC is a full service psychiatric clinic.

Laboratory Information Services

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

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

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

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

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

Clinical Services

In January 2008, we acquired our largest customer, NTC, located in Colorado. Upon the completion of the transaction, NTC became our wholly-owned subsidiary. At the time, NTC operated one of the largest psychiatric medication management practices in the state of Colorado, under contracts with national health plans. Daniel A. Hoffman, M.D. is the medical director at NTC, and, after the acquisition, became our Chief Medical Officer and more recently, our President.

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

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

Laboratory Information Services

The Challenge and the Opportunity

The 1990’s were known as “the Decade of the Brain,” a period in which basic neuroscience yielded major advances in drug discovery and neurotherapy. Several trends have emerged which may propel significant adoption of these advances over the next decade:

Comparative Effectiveness Research is incorporated into the Obama health plan. The cost to treat Americans under care for depression and other mental illnesses rose by nearly two-thirds from $35 billion to $58 billion in the last 10 years, according to a recent report from the Agency for Healthcare Research and Quality. Finding more cost-effective treatment modalities in mental disorders will be critical to successful health care reform;

Mental Health Parity Act (Parity Act) requires payers, beginning in 2010, to pay for behavioral medications and treatments using the same standards for evidence and coverage as they currently use for medical/surgical treatments;

According to a recent RAND report, 275,000 returning military personnel from the Iraq and Afghanistan theatres suffer from Major Depression, Post Traumatic Stress Disorder (PTSD), traumatic brain injury; and

Consumers have emerged as active decision makers in behavioral treatment, driven by over $4.8 billion in annual Pharma direct-to-consumer advertising and the internet. At the same time, media costs for reaching those consumers are at historic lows.

Today, there are over 100 prescription drugs available to patients suffering from a behavioral disorder, representing one of the largest and fastest-growing drug classes. Unfortunately, psychotropic drugs often do not work, or lose their effect over time, and over 17 million Americans who have failed two or more medication treatments are now considered “treatment resistant”. For these patients, the conventional “trial and error” method of prescribing psychotropic drugs has resulted in low efficacy, high relapse and treatment discontinuation rates, significant patient suffering and billions in additional cost to payers.

We believe we are the ﬁrst company to create a biomarker database that correlates a patient’s response to major drug classes and speciﬁc medications with their individual brain physiology. We developed this tool to improve pharmacotherapy outcomes, particularly in treatment resistant patients, a particularly expensive patient population with profound unmet clinical needs. Our rEEG technology has been used by physicians to guide prescribing in behavioral disorders such as depression, anxiety, anorexia, OCD, bipolar, ADHD, addiction and others.

rEEG® was developed by a pathologist/psychiatrist who recognized that correlation of a patient’s unique brain patterns to known long-term medication outcomes in similar patients might significantly improve therapeutic performance. This approach — commonly referred to as Personalized Medicine, and exemplified by biomarker companies such as Genomic Health (GHDX) — is in the process of transforming both clinical practice and the pharmaceutical industry. CNS Response brings this science to behavioral medicine, where the unmet clinical need is well-documented, expensive, and growing.

The rEEG® Method

rEEG® Reports are offered as a service, much like a reference lab, in which standard electroencephalogram (EEG) readings are referenced to a biomarker database to suggest patient-specific probabilities of response to different medications. EEG recording devices are widely available, inexpensive to lease, and are available in most cities by independent mobile EEG providers.

The service works as follows:

Patients are directed to a national rEEG® provider, who performs a standard digital EEG.

EEG data is uploaded over the web to our central analytical laboratory.

We analyze the data against the CNS Database for patients with similar brain patterns.

We provide a report describing the probability of patient success with different medication options (much like an antibiotic sensitivity report commonly used in medicine).

The rEEG® Report is sent back to the doctor, typically the next day.

Treatment Decisions Made by Licensed Professionals

With the exception of our subsidiary, the Neuro-Therapy Clinic based in Denver, CO, we do not currently operate our own healthcare facilities, employ our own treating physicians or provide medical advice or treatment to patients. Physicians who contract for our rEEG Reports own their own facilities or professional licenses, and control and are responsible for the clinical activities provided on their premises. Patients receive medical care in accordance with orders from their attending physicians or providers. Physicians who contract for rEEG Reports are responsible for exercising their independent medical judgment in determining the specific application of the information contained in the rEEG Reports, and the appropriate course of care for each patient. Following the prescription of any medication, Physicians are presumed to administer and provide continuing care treatment.

Estimated Market for rEEG Reports

Currently, the wholesale (direct to physician) price for standard rEEG testing is $400 per test, and the retail (payer and consumer) price is approximately $800. Thus far, payments have typically been from psychiatrists whose patients pay privately for the rEEG® Report. The National Institute of Mental Health (NIMH) estimates that only 12.7% of patients get minimally effective treatment, with over 17 million Americans now classified as “treatment resistant”, meaning they’ve failed to find relief after trying two or more medications.

We therefore estimate the potential market for our rEEG Reports at $1.7 billion annually, based on an addressable market of 17 million Treatment Resistant patients, with only 12.5% of patients seeking care and complying with treatment.

Path to Adoption

Several biomarker firms have successfully commercialized products that predict medication response, including Genomic Health’s OncotypeDx which predicts response to chemotherapy, and Roche/Affymetrix Cytochrome P450 test which shows how each patient is likely to metabolize a given antidepressant. We are following the paths to adoption used by these successful biomarker firms by focusing on growth in three stages:

(1)

Private pay market.

Consumers and private-pay psychiatrists drive over 33% of the market for psychiatric visits, and a significant proportion of all licensed psychiatrists now describe themselves as private pay only. We believe consumers who have experienced treatment failure will seek out our network of physicians once they become aware of the successful outcomes demonstrated in our clinical trial.

During 2008, the recruiting for our Depression Efficacy Trial (the Depression Efficacy Trial is further described under the heading Laboratory Services Accomplishments on page 53) generated many important lessons about integrated marketing for our rEEG® service. By using a media mix of web, radio and TV, interested patients were delivered into the trial at an average cost of $40-$68 per contact. Upon obtaining 510(k) clearance from the FDA, we will continue to pursue integrated consumer marketing as a means to introduce interested patients to our rEEG® provider network.

To drive growth in private pay, consumer-driven rEEG testing, we plan to do the following:

Grow our focused physician network: We currently have 51 active practicing physicians utilizing rEEG in their practices, defined as having paid for testing within the last 12 months. An additional 52 physicians are currently involved in training or clinical trials utilizing rEEG. Physicians who become “power users” (which we define as physicians who conduct several tests per month) report significantly better results than casual users of rEEG technology, and have certain economies of scale in using the test in their practices. Similar to the adoption of LASIK technology in consumer-driven opthalmology, successful practices using rEEG have reported that as their word-of-mouth referrals increase, their procedure billings increase, and their average patient visits decrease (as patients improve). Accordingly, their patient turnover may increase over time, requiring additional marketing efforts to grow their practice volume.

We plan to focus on supporting these power users through direct marketing, clinical practice support (patient intake, scheduling, washout support and reporting), and technical support. This focused network approach has been successful in other specialties (for example, in organ transplant networks and in disease management) because it is easier to sell to payers, facilitates data collection, and is more cost-effective in delivering care even at higher provider margins.

Increase unit pricing: Currently, the wholesale (direct-to-physician) price for standard rEEG testing is $400 per test, and the retail (payer and consumer) is approximately $800. We anticipate that our pricing will be increased over time with greater acceptance of the test as a standard of care, rewarding power users for committed volume and affording improvement in test margins overall.

Utilize our product laboratory: In 2008, we purchased the psychiatric clinic in Denver, co-founded by our Chief Medical Officer, Daniel Hoffman, MD. The clinic currently serves as a platform for perfecting rEEG workflow, information systems, product development and research. We also test local marketing strategies in Denver which can then be generalized to other rEEG® network clinics. The Denver clinic may ultimately become a national Center of Excellence for neuropsychiatry, where insurers may direct certain treatment-resistant patients.

Scalable platform for delivery: During 2008 and 2009, significant development effort was focused on production systems and lab infrastructure to accommodate potential growth in the production volume of our rEEG Reports. Our current production application is able to accommodate up to 100 tests per day without additional manpower. In addition to providing scalable capacity, the production system provides for online delivery of tests and delivery of test data to physicians’ desktops. Currently, we are investing in projects to reduce or eliminate the remaining manual processes in test production: ”artifacting” of EEG data and Neurologist review of each case. It is estimated that these processes will, over time, be replaced with validated algorithms and/or post-facto sampling for quality assurance.

(2)

Payer economic trials.

Health plans currently spend over $30 billion on psychotropic medications each year according to the Substance Abuse and Mental Health Services Administration (SAMHSA), and most are aware that these agents only work on about 30% of patients who take them. The lack of medication adherence and poor treatment outcomes in behavioral health have been longstanding issues for payers, but they’ve lacked a targeted, cost-efficient approach to solve the problem.

Presently, rEEG is not a reimbursable procedure for most health care payers. Initially, payer response to most new technologies is a reflexive denial of coverage, regardless of the superiority of evidence or economics. Over time, however, certain payers may adopt technologies which confer a clear marketing or underwriting advantage, or which protect them from legal claims for reimbursement under new legislation (e.g. Parity). Because of this, it is possible that with sufficient marketing efforts, we may shift payer “fear of adoption” to “fear of not adopting” and increase the number of payers that approve our rEEG Reports as a reimbursable expense.

We intend to prove that our rEEG Reports are a compelling value for payers through independent research, budget impact models, and payer pilots (economic trials):

Evidence for payers: We will share well-designed research on rEEG® efficacy, showing the weight of superior evidence in controlled and real-world clinical trials and case series.

Parity: In 2010, Mental Health Parity Act (Parity Act) will change all payers’ coverage criteria, requiring equal coverage for behavioral and medical therapies, using the same coverage criteria and evidence. Milliman Global Actuarial Services estimates a 1-3% increase in overall health costs resulting from a significant increase in behavioral health expenditures driven by the Parity Act. Of particular interest to us, however, is the specific language in the Parity Act which requires that coverage of a scope-of-service for one type of diagnosis (for example: a Neurologist performing a diagnostic EEG for Epilepsy) be applied equally as the use of an EEG by a Psychiatrist for medication management.

Budget Impact Model: A Budget Impact Model for rEEG® has been developed by Analysis Group Economics based on the published research of Kessler, Russell, and others covering the cost of treatment failure in mental disorders. Modeling the economic impact of rEEG® in a health plan with five million members, we estimate that full utilization of rEEG® in treatment-resistant depression, anxiety, bipolar and ADHD could save $8,500 per treatment resistant member for a savings of $45 million per year.

Economic Trials: Economic Trials are intended to demonstrate the comparative effectiveness of rEEG versus prevailing Trial & Error medication management through pilot programs within a payer’s own population. Although no payer is currently reimbursing physicians for the use of rEEG technology, we are currently negotiating pilot programs for reimbursement coverage with several of the nation’s largest payers, representing over 80 million covered lives.

(3)

Full payer coverage.

Full reimbursement of referenced-EEG is likely to follow successful direct-to-consumer adoption of the rEEG test, along with continued release of confirmatory rEEG research in peer-reviewed publications. Following the example of the biomarker firms discussed above, it appears possible to accelerate the effect of these initiatives in the following ways:

Patient Advocacy: we believe that some components of the rEEG test may be billable to payers under Mental Health Parity Act. Historically, patients of our physician network providers, and those in our own clinic in Colorado, have paid out of pocket for rEEG testing and then sought reimbursement from their insurance carrier. Although these providers frequently furnish information to support these claims, the success of their prosecution by patients is unclear.

Accordingly, we intend to follow the example of biomarker firms such as Genomic Health, which developed Patient Advocacy services where patient claims were documented and tracked, and the company helped organize the advocacy of each claim with third party payers. Using this approach, Genomic Health was able to win a retrospective reversal of claim denials for its test from Medicare (the Centers for Medicare and Medicaid Services) in 2006.

Guideline development : we intend to continue internal and externally-sponsored clinical research to prove the efficacy of our technology to professional associations, such as the American Psychiatric Association. We believe that with strong clinical results, professional associations may endorse rEEG in their treatment guidelines, which may drive full payer coverage.

We also believe that the inclusion of historical and new rEEG research in Comparative Effectiveness studies conducted under the Agency for Healthcare Research and Quality (AHRQ) would be a significant milestone. As a consequence of this recent focus on cost-effective treatment, an unprecedented level of funding has been made available under the Economic Recovery Act, the budgets for NIH and AHRQ, and earmarked budgets for Defense and the Veterans Association (VA). We intend to pursue research opportunities with several external sponsors of research, including:

the National Institutes of Mental Health , focusing on the cost-effectiveness of rEEG as a more deployable version of brain imaging to guide prescribing;

the Department of Defense and the Veterans Administration , to address the potential for rEEG in treating returning soldiers with PTSD and Major Depression; and

the Centers for Medicare and Medicaid Services (CMS) , as a mechanism for improving quality and cost performance in programs that spend billions on psychotropic medications.

Laboratory Services Accomplishments

Over the last few years, we have been primarily focused on proving the efficacy of rEEG-guided treatments through multiple clinical trials. The largest of these — the Depression Efficacy Trial — was a multi-center, randomized, parallel controlled trial completed in 2009 at 12 medical centers, including Harvard, Stanford, Cornell, UCI and Rush. The study began in late 2007 and was completed in September 2009, screening 465 potential subjects with Treatment Resistant Depression and ultimately randomizing 114 participants to a 12-week course of treatment utilizing rEEG in the experimental group, and a modified STAR*D algorithm in the control group (STAR*D, or Sequenced Alternatives to Relieve Depression, was a large, seven-year study sponsored by the National Institute of Mental Health and completed in 2006). Top-line results were consistent with previous clinical trials of rEEG:

The study found that rEEG significantly outperformed the modified STAR*D treatment algorithm from the beginning. The difference, or separation, between rEEG and the STAR*D control group was 50 and 100 percent for the study’s two primary endpoints. By contrast, separation between a new treatment and a control group often averages less than 10 percent in antidepressant studies. Interestingly, separation was achieved early (week 2) and durable, continuing to grow through week 12.

The control group in this case, STAR*D, was a particularly tough comparator, representing a level of evidence-based depression care that is available to only 10% of the US population, according to one of the study’s authors.

Statistical significance (p < .05) was achieved on all primary and most secondary endpoints.

In the course of undertaking the study, we also gained insights into marketing of the rEEG technology, highlighting aspects of marketing which proved to be more successful than others. Furthermore, we also developed a foundation for commercialization of the rEEG technology with insurance companies, and signed a payer group, Cal Optima (a Southern California health plan for Medicare/Medicaid enrollees), to run a pilot study with us. A second large insurer is in the process of negotiating a pilot study. Additionally, over the course of the last few years, much time has been spent securing sufficient financing to continue our operations and ensure that the clinical trial was completed.

Going forward, we plan to continue expanding the CNS Database with the addition of more pharmaceuticals and their respective outcomes. Additionally, we plan on improving the functionality and clinical utility of our rEEG Reports, in order to improve adoption and compress the training period necessary for physicians to become proficient with the report. Finally, we plan to increase and refine our marketing efforts to consumers and psychiatrists, and expand our effort to obtain regular insurance reimbursement for rEEG-guided therapies.

Use of rEEG Technology in Pharmaceutical Development

In addition to its utility in providing psychiatrists and other physicians with medication sensitivity guidance, rEEG provides us with significant opportunities in the area of pharmaceutical development. In the future, we aim to use our propriety data and processes to advance central nervous system (CNS) pharmaceutical development and economics, in one or more of the following ways:

Enrichment : selecting patients for clinical trial who not only have the symptoms of interest, but are shown by rEEG® screening to likely respond to the developer’s drug. An oft-cited example is the antidepressant Prozac, which failed several clinical trials before it achieved success in two separate trials. The ability to design trials in which exclusion criteria identify and exclude patients who are clearly resistant, as determined by rEEG, has the potential to sharpen patient focus and productivity in clinical trials of psychotropic medications.

Repositioning : rEEG® may suggest new applications/indications of existing medications. For example, Selective Serotonin Reuptake Inhibitors Antidepressants (SSRI’s) are now commonly given by primary care physicians for depression and other complaints, but often produce unwanted side effects or inadequate results. The ability to biomarker patients who respond better to tricyclics (TCA’s), or combinations of TCA’s and stimulants, offers the potential for new indications for existing compounds.

Salvage : resuscitation of medications that failed phase II or III studies. One example of this opportunity is Sanofi-Aventis’ unsuccessful PMA filing for Rimonabant, a promising anti-obesity/cardiometabolic compound which was denied approval in the U.S. due to CNS side-effects in their clinical trial populations. Being able to screen out trial participants with resistance to a certain medication is an application for rEEG, and could create “theranostic” products (where an indication for use is combined with rEEG) for compounds which have failed to receive broader approval.

New Combinations : unwanted adverse effects occur with medications in fields from cancer to hepatitis. The ability to improve these medications, in combination with psychotropics, may improve safety, compliance, and, sometimes, patient outcomes.

Decision Support : improved understanding supports improved decision making at all levels of pharmaceutical development.

Competition

Comparable Biomarker Companies

Although there are no companies offering a service directly comparable to rEEG, the following companies might be noted as pursuing similar strategies:

GENOMIC HEALTH (Nasdaq: GHDX) Genomic Health, Inc. is a life science company focused on the development and commercialization of genomic-based clinical laboratory services for cancer that allow physicians and patients to make individualized treatment decisions. The company was founded in 2000 and is based in Redwood City, California. In 2004, the company launched the Oncotype DX breast cancer test, which has been shown to predict the likelihood of chemotherapy benefit, as well as recurrence in early-stage breast cancer. By the end of 2008, the company reported that over 90% of health plans were reimbursing use of this test. In addition to its adopted Oncotype DX breast cancer test, Genomic Health launched its Oncotype DX colon cancer test in early 2010.

ASPECT MEDICAL SYSTEMS, INC. (Nasdaq: ASPM), an EEG anesthesia monitoring company, is developing a specific EEG measurement system that indicates a patient's likely response to some antidepressant medications. Its biomarker, based on research from the UCLA Neuropsychiatric Institute, is called Cordance.

A 375-subject multi-site clinical trial on the efficacy of this biomarker in guiding treatment of treatment resistant depression — the BRITE trial — demonstrated positive predictive outcomes for a single antidepressant, escitalopram (Lexapro). Patients in the trial were measured prior to and after taking medication. Publicly available data suggests that the technology may validate a patient's treatment but does not guide specific treatment. Initial trials have shown efficacy in correlating a patient's ultimate response to antidepressants. The revenue model may involve sale of equipment and a per-patient charge, but the company does not currently appear to be close to a commercial release of its product.

BRAIN RESOURCE COMPANY (Aust: BRRZF) (www.brainresource.com), is an Australian Clinical Research Organization (CRO) and biomarker company focused on personalized medicine solutions for patients, clinicians, pharmaceutical trials and discovery research. As a CRO, its main focus has been iSPOT, an $18 million international biomarker study with a private biotechnology company. Their revenue model includes physician services and sale of systems and services to pharmaceutical development companies in the CNS discovery field. As a biomarker provider, it signed a $6 million agreement in 2008 with Optum (United Healthcare) to provide screening for plan members.

We believe that we have a competitive advantage with respect to the behavioral biomarker firms such as Aspect Medical or Brain Resource Company as we offer more comprehensive testing (e.g. to cover the full range of CNS medications, not just certain antidepressants in the case of Aspect Medical) and have conducted studies to validate the efficacy of our service. We also believe that we offer greater clinical utility (ease of use, rapid results) in day-to-day clinical practice than our competitors.

Emerging Medical Device Technologies

The field of neuropsychiatry is undergoing dramatic change as a result of the introduction of new technologies. Many of these technologies are focused on the same treatment-resistant patient populations which are the focus of rEEG, and are priced from $10,000 to over $50,000 for a full course of treatment. Two of the three examples presented here are invasive, implantable devices.

CYBERONICS, INC. (Nasdaq: CYBX) is a neuromodulation company, engages in the design, development, manufacture, and marketing of implantable medical devices that provide vagus nerve stimulation (VNS) therapy for the treatment of epilepsy and treatment-resistant depression. The VNS therapy system consists of an implantable generator that delivers an electrical signal to an implantable lead attached to the left vagus nerve, as well as a bipolar lead, a programming wand and software, and a tunneling tool.

Cyberonics has developed an implantable Vagus Nerve Stimulation device approved for treatment-resistant depression. This device has received pre-market approval from the Food and Drug Agency for patients and is believed to be under reimbursement review by insurance payers.

MEDTRONIC, INC. (NYSE: MDT). Medtronic has an implantable deep brain stimulation device (DBS) in development which is similar to their device approved for Parkinson's treatment. Deep brain stimulation uses an implanted electrode – essentially a pacemaker for the brain — to deliver electrical stimulation to specific structures within the brain. The Food and Drug Administration (FDA) approved DBS as a treatment for essential tremor in 1997, for Parkinson's disease in 2002, and dystonia in 2003. DBS is also routinely used to treat chronic pain and has been used to treat various affective disorders, including major depression. While DBS has proven helpful for some patients, there is potential for serious complications and side effects.

NEURONETICS (Privately held) (www.neuronetics.com). Neuronetics has pioneered and refined the NeuroStar TMS Therapy system for non-invasive, non-systemic treatment for depression using a focused, pulsed magnetic field to stimulate function in targeted brain regions. NeuroStar TMS Therapy stimulates nerve cells in an area of the brain that is linked to depression by delivering highly focused MRI-strength magnetic field pulses.

TMS is performed in a physician's office with each treatment lasting about 40 minutes daily for four to six weeks. In an open-label clinical trial, which is most like real world clinical practice, approximately one in two patients experienced significant improvement in symptoms, and one in three experienced complete symptom resolution. NeuroStar TMS Therapy was cleared by the FDA in October 2008 for patients who have not adequately benefited from prior antidepressant medication.

From a competitive standpoint, we view these emerging treatment options as expensive augmentations to existing therapies for treatment-resistant patients, and as competitive therapeutic options to medications. To the best of our knowledge, rEEG-guided therapy provides a higher probability of treatment success at a significantly lower cost than device-based solutions, which gives us a competitive advantage in the marketplace.

Intellectual Property

rEEG Patents

We have three issued U.S. Patents which we believe provide us with the right to exclude others from using our rEEG technology. In addition, we believe these patents cover the analytical methodology we use with any form of neurophysiology measurement including SPECT (Single Photon Emission Computed Tomography), fMRI (Functional Magnetic Resonance Imaging), PET (Positron Emission Tomography), CAT (Computerized Axial Tomography), and MEG (Magnetoencephalography)). We do not currently have data on the utility of such alternate measurements, but we believe they may, in the future, prove to be useful to guide therapy in a manner similar to rEEG. We have also filed patent applications for our technology in various foreign jurisdictions, and have issued patents in Australia and Israel.

rEEG Trademarks

“Referenced-EEG” and “rEEG” are registered trademarks of CNS California in the United States. We will continue to expand our brand names and our proprietary trademarks worldwide as our operations expand.

CNS Database

The CNS Database consists of over 17,000 medication trials across over 2,000 patients who had psychiatric or addictive problems. The CNS Database is maintained in two parts:

1. The QEEG Database

The QEEG Database includes EEG recordings and neurometric data derived from analysis of these recordings. This data is collectively known as the QEEG Data. QEEG or “Quantitative EEG” is a standard measure that adds modern computer and statistical analyses to traditional EEG studies. The Company utilizes two separate, FDA-approved external QEEG databases which provide statistical and normative information in the rEEG process.

2. The Clinical Outcomes Database

The Clinical Outcomes Database consists of physician provided assessments of the clinical long-term outcomes (average of 405 days) of patients and their associated medications. The clinical outcomes of patients are recorded using an industry-standard outcome rating scale, the Clinical Global Impression Global Improvement scale (“CGI-I”). The CGI-I requires a clinician to rate how much the patient's illness has improved or worsened relative to a baseline state. A patient's illness is compared to change over time and rated as: very much improved, much improved, minimally improved, no change, minimally worse, much worse, or very much worse.

The format of the data is standardized and that standard is enforced at the time of capture by a software application. Outcome data is input into the database by the treating physician or in some cases, their office staff. Each Physician has access to his/her own patient data through the software tool that captures clinical outcome data.

We consider the information contained in the CNS Database to be a valuable trade secret and are diligent about protecting such information. The CNS Database is stored on a secure server and only a limited number of employees have access to it.

Research and Development

In the remainder of 2010, we plan to continue to enhance, refine and improve the accuracy of our CNS Database and rEEG through expansion of the number of medications covered by our rEEG Reports, expansion of our biomarkers, refinement of our biomarker system, and by reducing the time to turnaround a report to the physician.

Government Regulation

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

On December 28, 2009, we received a response from the FDA indicating that it still believes rEEG constitutes a “medical device” under the Act. Although we continue to believe that the FDA is in error over whether our Laboratory Information Services constitute a device and over whether the FDA has jurisdiction over such Laboratory Information Services, on April 1, 2010 we filed an application to obtain 510(k) clearance for our rEEG service. We believe that 510(k) clearance will provide us with increased commercial acceptance of our service. To date, we have spent an aggregate of $64,100 for consulting and $56,900 for legal services to prepare and file our 510(k) application and at this time, we do not anticipate that the communications received from the FDA, or our decision to seek 510(k) clearance, will have a material adverse effect on our liquidity, capital resources and results of operations. We anticipate that obtaining licensure will take from three to six months based on similar application filings with the FDA.

In addition to the foregoing, federal and state laws and regulations relating to the sale of our Laboratory Information Services are subject to future changes, as are administrative interpretations of regulatory agencies. In the event that federal and state laws and regulations change, we may need to incur additional costs to seek government approvals for the sale of our Laboratory Information Services.

In the future, we may seek approval for medications or combinations of medications for new indications, either with corporate partners, or potentially, on our own. The development and commercialization of medications for new indications is subject to extensive regulation by the U.S. Federal government, principally through the FDA and other federal, state and governmental authorities elsewhere. Prior to marketing any central nervous system medication, and in many cases prior to being able to successfully partner a central nervous system medication, we will have to conduct extensive clinical trials at our own expense to determine safety and efficacy of the indication that we are pursuing.

Description of Property

On January 22, 2010, we moved to our new leased facility for our headquarters and Laboratory Information Services business, located at 85 Enterprise, Suite 410, Aliso Viejo, California 92656. We entered into a 36 month lease for the 2,023 square foot facility, which expires on January 31, 2013. The average cost of the lease for the period is $3642 per month.

With respect to our Clinical Services operations, on April 1, 2010, we negotiated a 37 month extension to the original lease for our clinical services space, which expired in February 2010. The new lease for our 3,542 square foot facility will expire on April 30, 2013, and has an average cost for the lease term of $5,100 per month.

We believe that our current space is adequate for our needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations.

Employees

As of June 1, 2010, we had approximately 15 full-time and 5 part-time employees, and 3 independent contractors. We provide all full-time employees with medical insurance, dental insurance and paid vacation. We believe that our relations with our employees are good. None of our employees belong to a union.

Legal Proceedings

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

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

The Chancery Court also denied an injunction sought by Mr. Brandt to prevent the voting of shares issued by the Company in connection with our bridge financing in June 2009 and securities offering in August 2009, and dismissed Brandt's claims regarding those financings and stock issuances. On January 4, 2010, Brandt also filed an appeal in relation to this ruling with the Delaware Supreme Court. On February 25, 2010, Mr. Brandt voluntarily dismissed this appeal, and the ruling of the Chancery Court thereby became final and non-appealable.

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

An action before the United States District Court for the Central District of California remains outstanding. We are vigorously prosecuting our claims and vigorously defending Mr. Brandt’s counterclaims, which we believe to be without merit.

The following is a summary of the litigation proceedings involving the Company and Brandt:

Delaware Chancery Court – CNS Response, Inc. v. Leonard Brandt, Meyerlen LLC, EAC Investment Limited Partnership and “John Does 1-20” (Any CNS Stockholder Purporting to be Among Holders of Shares Constituting 25% Of the Company's Stock As Referenced In the June 20, 2009 Notice Of Special Meeting) – C.A. No. 4688-CC

On June 26, 2009, we commenced an action in the Delaware Court of Chancery against Leonard Brandt and certain other parties in connection with Brandt’s efforts to seize control of the Company by unseating the incumbent directors (other than Brandt). In our complaint, we alleged that Brandt’s actions in connection with his purported special meeting notices and attempts to call and hold a special meeting violate certain provisions of the Delaware General Corporation Law (the “DGCL”), and we sought declaratory and injunctive relief to invalidate a special meeting called by Brandt.

On June 26, 2009, we also moved for issuance of a temporary restraining order to prevent Mr. Brandt from holding his purported special meeting. Brandt opposed the motion. On June 29 the Chancery Court heard and denied our motion for a temporary restraining order, on the grounds that we could seek relief from Brandt’s actions after his special meeting occurred.

On August 12, 2009, Brandt and Defendant MeyerLen, LLC filed an answer and affirmative defenses to our June 26, 2009 complaint. In addition, Brandt filed a counterclaim and third-party complaint against us, our other directors, affiliates of one of the directors, and investors who are not employees, officers or directors of the Company. In his answer, and in the counterclaims and third party claims, Brandt alleged, among other things, that the other directors acted without authority in connection with his removal as the CEO in April 2009 and violated their fiduciary duties in connection with their consideration and approval of certain financings completed by us subsequent to Brandt’s termination as CEO. Brandt alleged that certain defendants aided and abetted the directors in their breaches and wrongful acts. Brandt also asked the court to invalidate certain bylaw changes adopted by our board of directors.

On August 24, 2009, Brandt filed a motion seeking an injunction against our issuance of shares of our stock to John Pappajohn or Sail Ventures pursuant to existing agreements between us and those investors, and against the implementation of our previously-announced bylaw amendments.

On October 22, 2009, Brandt and Defendant MeyerLen, LLC filed an amended answer and affirmative defenses to our June 26, 2009 complaint and an amended counterclaim and third-party complaint against us, our other directors, affiliates of one of the directors, and investors who are not employees, officers or directors of the Company. On the same day, Brandt filed an amended motion for a preliminary injunction, which sought to prevent the voting of shares issued by the Company in connection with our bridge financings in May and June, 2009 and the securities offering in August, 2009. On the same day, Brandt moved to expedite proceedings in the action, coordinate discovery with his Section 225 action described below, and have the motion for a preliminary injunction argued at the conclusion of the trial of the Section 225 action.

On October 30, 2009, the Delaware Chancery Court granted the motion to expedite proceedings in the action, coordinate discovery with his Section 225 action described below, and have the motion for a preliminary injunction argued at the conclusion of the trial of the Section 225 action.

On December 2, 2009, after full briefing, evidentiary submissions, and argument of the motion for a preliminary injunction, the Chancery Court denied the injunctive relief sought by Brandt to prevent the voting of shares issued by the company in connection with our bridge financings in May and June and securities offering in August. Instead, the Court dismissed Brandt's counterclaims regarding those financings and stock issuances. On the same date, the Delaware Chancery Court dismissed the underlying Section 211 action against Brandt as moot. On January 4, 2010, Brandt filed an appeal with the Supreme Court of the State of Delaware in relation to the case. On February 25, 2010, Mr. Brandt voluntarily dismissed this appeal.

Delaware Chancery Court – Leonard J. Brandt v. CNS Response, Inc., C.A. No, 4773-CC

On July 31, 2009, Brandt filed an action under Section 220 of the DGCL asking the Chancery Court to require us to provide him with certain books and records, including stockholder information. On July 31, Brandt also requested emergency injunctive relief against us compelling us to provide the records immediately. We opposed the motion. On August 3, 2009 the Chancery Court heard argument and denied the requested emergency relief. On August 24, 2009, we answered the complaint and asserted affirmative defenses to it. On December 2, 2009, the Chancery Court dismissed Brandt’s action with prejudice.

Purported September 4 Stockholders Meeting and Subsequent Action Filed by Brandt Under DGCL 225 — Leonard J. Brandt v. CNS Response, Inc., George Carpenter, Henry T . Harbin, M.D., David B. Jones, Jerome Vaccaro, M.D., John Pappajohn and Tommy Thompson, C.A. N o. 4867-CC

Pursuant to a notice dated August 25, Brandt purported to hold a special meeting of stockholders on September 4, 2009. In his proxy materials accompanying the notice, Brandt claimed that the record date for the purported meeting was August 24. Brandt claimed that a quorum was present and proceeded to call a vote on his proposal to elect himself and his nominees as directors. He then claimed that his own shares and the shares for which he purportedly held proxies were sufficient to elect Brandt and the other nominees. We took the position that no valid stockholder action was taken on September 4, that no changes to the board of directors occurred, and that the election of the company’s directors would occur at the scheduled CNS annual meeting of stockholders on September 29, 2009. While our bylaws permit stockholders to call special meetings under certain circumstances, those meetings (i) require the stockholders wishing to call the meeting to follow certain procedures that Brandt did not follow and (ii) cannot involve the election of directors. In addition, Brandt’s purported record date of August 24 was invalid because our board of directors had already established August 27 as the record date and, as a result, not all of the stockholders entitled to vote at his purported meeting were permitted to do so.

On September 4, Brandt filed an action seeking relief under Section 225 of the DGCL in the Delaware Court of Chancery against us and our directors George Carpenter, Henry T. Harbin, M.D., David B. Jones, Jerome Vaccaro, M.D., John Pappajohn and former Wisconsin Governor Tommy Thompson. Section 225 provides a statutory mechanism for review of contested elections. Brandt sought to have the Court declare that his meeting and election were valid.

On September 25, 2009, the Company and its incumbent directors answered the complaint and asserted affirmative defenses. On September 29, 2009, the Chancery Court issued a “status quo” order, which maintained the Board of Directors in place immediately prior to the purported September 4 meeting (Messrs. Carpenter, Jones, Pappajohn, Thompson and Brandt, and Drs. Harbin and Vaccaro). The status quo order also placed certain restrictions on certain corporate actions during the pendency of the Section 225 action.

Later on September 29, the Company convened its Annual Meeting of Stockholders, which had been duly noticed earlier in September. At the meeting we submitted certain matters to a vote of security holders through the solicitation of proxies. At the meeting, our stockholders elected George Carpenter, Henry Harbin, M.D., David B. Jones, John Pappajohn, Tommy Thompson and Jerome Vaccaro, M.D. to serve as Directors on our Board of Directors for one year or until their respective successors have been elected.

Full discovery in the action occurred in September, October and November. On December 1 and 2, 2009, the Chancery Court conducted a trial of the matter. At the close of the trial, the court granted judgment to the Company on Brandt’s complaint and dismissed Brandt’s action with prejudice. The Chancery Court thereby found that the purported special meeting of stockholders convened by Brandt on September 4, 2009 was not valid and that the directors purportedly elected at that meeting are not entitled to be seated. On January 4, 2010, Brandt filed an appeal with the Supreme Court of the State of Delaware in relation to the case. On April 20, 2010 the Delaware Supreme Court summarily affirmed the ruling of the Chancery Court dismissing the Section 225 action.

Delaware Chancery Court – CNS Response, Inc. v. Leonard Brandt, C.A. No. 4901-CC (Breach of Fiduciary Duty)

On September 16, 2009, we filed a complaint in the Delaware Chancery Court against Brandt for violations of his fiduciary duty of loyalty to the Company and its stockholders. On December 2, 2009, the Chancery Court dismissed the Company’s breach of fiduciary duty claims without prejudice.

United States District Court for the Central District of California - CNS Response, Inc. v. Leonard Brandt, EAC Investment Limited Partnership and EAC Investment, Inc. (Case No. SACV 09-00756-CJC)

On July 2, 2009, we filed a complaint against Brandt, EAC Investment Limited Partnership and EAC Investment, Inc. (collectively, “EAC”), another stockholder of the Company. In that complaint, we allege that Brandt has violated sections 14(a) and 13(d) of the Securities Exchange Act of 1934, as amended, and related SEC rules and regulations (the “Exchange Act”), in connection with his ongoing campaign to seize control of the company by unseating the incumbent directors (other than Brandt). We allege that EAC violated Section 13(d) of the Exchange Act. The Company sought injunctive and declaratory relief to prevent the use of proxies and written consents that Brandt or the other defendants obtained in violation of law, declaring the proxies obtained by Brandt invalid, prohibiting any further unlawful proxy solicitation and any further violations of Section 13(d) and 14(a) of the Exchange Act, and requiring remedial disclosures. The Company also sought damages in an amount to be determined.

The defendants responded to our complaint by filing motions to dismiss on July 27, 2009 pursuant to Federal Rule of Civil Procedure 12(b)(6), based on two primary arguments: (i) that the defendants had filed preliminary proxy materials, preliminary consent solicitation materials and/or amended Schedule 13Ds with the SEC, and those filings cured any alleged violations, and (ii) that we faced no imminent threat of irreparable injury and, therefore, were not entitled to injunctive relief. EAC also moved to dismiss the complaint against it for improper venue. We filed our oppositions to the motions to dismiss on August 10, 2009. On August 18, 2009, the court denied the motions to dismiss, finding, among other things, that our complaint adequately pled a basis for relief and that whether Brandt’s filings could cure the alleged violations of sections 14(a) and 13(d) were questions of fact that could not be resolved in a motion to dismiss.

On August 17, 2009, Brandt distributed to our stockholders by email preliminary proxy materials with a proxy card. On August 21, 2009, we filed a motion for temporary restraining order to enjoin Brandt from using any invalidly obtained proxies or consents, including any proxies or consents obtained in response to his preliminary proxy statement distribution. We asserted, among other things, that the delivery of preliminary proxy materials including a proxy card violated Rule 14a-4(f) of the Exchange Act and that the disclosures contained in, or omitted from, the materials distributed by Brandt violated Rule 14a-9 of the Exchange Act. On August 25, 2009, the court denied our motion for the temporary restraining order citing, among other things, an affidavit provided by Brandt that he would not solicit proxies until he has filed a definitive proxy statement with the Securities and Exchange Commission.

On September 17, 2009, the defendants in the case filed counterclaims against us, our Chief Executive Officer and director George Carpenter, and “Roes 1 through 10,” alleging violations of Section 14 of the Exchange Act in the solicitation of proxies or the revocation of proxies. Unspecified damages and injunctive relief are sought. On December 14, 2009, the company and George Carpenter answered the counterclaims in the case.

On March 10, 2010, we dismissed the Company’s claims against EAC, and EAC dismissed its claims against us and Mr. Carpenter. On April 10, 2010 Mr. Brandt's attorneys moved to withdraw from representing Mr. Brandt in the case. The District Court action continues with respect to our claims against Mr. Brandt and Mr. Brandt’s counterclaims against us and the other counterclaim defendants. We are vigorously prosecuting our claims and vigorously defending Mr. Brandt’s counterclaims.

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

Website

We maintain a website at www.CNSResponse.com. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

MANAGEMENT

The following table sets forth the name, age and position of each of our executive officers and directors as of June 1, 2010.

Name	Age	Position
George Carpenter	52	Chairman of the Board, Chief Executive Officer and Secretary
Paul Buck	54	Chief Financial Officer
Daniel Hoffman	62	President, Chief Medical Officer
John Pappajohn	81	Director
David B. Jones	66	Director
Jerome Vaccaro, M.D.	54	Director
Dr. Henry T. Harbin	63	Director

George Carpenter, Chairman of the Board, Chief Executive Officer, Secretary

George Carpenter joined our board of directors as Chairman on April 10, 2009. Mr. Carpenter has been serving as our Chief Executive Officer since April 10, 2009 and prior to that date served as our President since October 1, 2007. As President, Mr. Carpenter’s primary responsibility involved developing strategy and commercializing our rEEG technology. From 2002 until he joined CNS, Mr. Carpenter was the President & CEO of WorkWell Systems, Inc., a national physical medicine firm that manages occupational health programs for Fortune 500 employers. Prior to his position at WorkWell Systems, Mr. Carpenter founded and served as Chairman and CEO of Core, Inc., a company focused on integrated disability management and work-force analytics. He served in those positions from 1990 until Core was acquired by Assurant, Inc. in 2001. From 1984 to 1990, Mr. Carpenter was a Vice President of Operations with Baxter Healthcare, served as a Director of Business Development and as a strategic partner for Baxter’s alternate site businesses. Mr. Carpenter began his career at Inland Steel where he served as a Senior Systems Consultant in manufacturing process control. Mr. Carpenter holds an MBA in Finance from the University of Chicago and a BA with Distinction in International Policy & Law from Dartmouth College. The Board selected Mr. Carpenter to serve as a director because of his extensive experience as chief executive officer for several companies and his service in a variety of leadership positions in the areas of fund raising, business development and building a management team. Mr. Carpenter provides critical insight into the areas of organizational and operational management.

Paul Buck, Chief Financial Officer

Effective February 18, 2010, we appointed Paul Buck, 54, to the position of Chief Financial Officer. Mr. Buck has been working with the Company as an independent consultant since December 2008, assisting management with finance and accounting matters as well as the Company’s filings with the Securities and Exchange Commission. Mr. Buck has worked as an independent consultant since 2004 and has broad experience with a wide variety of public companies. His projects have included forensic accounting, restatements, acquisitions, interim management and system implementations. Mr. Buck, a Swiss National, was raised in Southern Africa and holds a Bachelor of Science degree in Chemistry and a Bachelor of Commerce degree both from the University of Cape Town, South Africa. He started his career with Touche Ross & Co. in Cape Town and qualified as a Chartered Accountant. In 1985, Mr. Buck joined the Los Angeles office of Touche Ross & Co. where he was an audit manager. In 1991 he joined the American Red Cross Biomedical Services as the CFO of the Southern Californian Region. After five years with the organization, he returned to Deloitte & Touche as a manager in the Solutions Consulting Group. In 1998, Mr. Buck was recruited back to the American Red Cross Biomedical Services as CFO and became the Director of Operations for the Southern California Region until 2003.

Daniel Hoffman, Chief Medical Officer and President

Dr. Hoffman, 61, became our President on April 10, 2009 and our Chief Medical Officer on January 15, 2008 upon our acquisition of Neuro-Therapy Clinic, Inc., which at the time of the acquisition was our largest customer and which was owned by Dr. Hoffman. He had served as the Medical Director of Neuro-Therapy Clinic, Inc. since 1993. Dr. Hoffman is a Neuropsychiatrist with over 25 years experience treating general psychiatric conditions such as depression, bipolar disorder and anxiety. He provides the newest advances in diagnosing and treating attentional and learning problems in children and adults. Dr. Hoffman has authored over 40 professional articles, textbook chapters, poster presentations and letters to the editors on various aspects of neuropsychiatry, Quantitative EEG, LORETA, Referenced EEG, advances in medication management, national position papers and standards, Mild Traumatic Brain Injury, neurocognitive effects of Silicone Toxicity, sexual dysfunction and other various topics. Dr. Hoffman has given over 58 major presentations and seminars, including Grand Rounds at Universities and Hospitals, workshops and presentations at national society meetings (such as American Psychiatric Association and American Neuropsychiatric Association), national CME conferences, insurance companies, national professional associations, panel member discussant, and presenter of poster sessions. He has also lectured internationally as part of a consortium advancing Quantitative EEG in Psychiatry and done research with the major national academic institutions on the use of Referenced EEG to help guide treatment choices and as a Biomarker. Dr. Hoffman has a Bachelor of Science in Psychology from the University of Michigan, an MD from Wayne State University School of Medicine and conducted his Residency in Psychiatry at the University of Colorado Health Sciences Center. During the past five years, Dr. Hoffman has served as the President of Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of the company that is focused on discovering ways to integrate technology into the creation of better business practices.

John Pappajohn, Director

John Pappajohn joined our board of directors on August 26, 2009. Since 1969, Mr. Pappajohn has been the President and sole owner of Pappajohn Capital Resources, a venture capital firm, and President and sole owner of Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines, Iowa. He serves as a director on the boards of the following public companies: American CareSource Holdings, Inc., Dallas, TX since 1994; PharmAthene, Inc., Annapolis, MD, since 2007; Spectrascience, Inc., San Diego, CA, since 2007, and ConMed Healthcare Management, Inc., Hanover, MD, since 2005. Mr. Pappajohn also serves as director of CareGuide, Inc., Florida (formerly Patient Infosystems, Inc.) since 1996, which was a public company through January 2009. Mr. Pappajohn was chosen to serve as a director of the Company because of his unparalleled experience serving as a director of more than 40 companies and the substantial insight he has gained into the life sciences and healthcare industries by actively investing in the industries for more than 40 years, and by founding and supporting several public healthcare companies.

David B. Jones, Director

David B. Jones has been a director of CNS California since August 2006, and became a director of the company upon the completion of our merger with CNS California on March 7, 2007. Mr. Jones currently serves as a partner of Sail Venture Partners, L.P., a position which he has held since 2003. Mr. Jones served as Chairman and Chief Executive Officer of Dartron, Inc., a computer accessories manufacturer. From 1985 to 1997, Mr. Jones was a general partner of InterVen Partners, a venture capital firm with offices in Southern California and Portland, Oregon. From 1979 to 1985, Mr. Jones was President and Chief Executive Officer of First Interstate Capital, Inc., the venture capital affiliate of First Interstate Bancorp. Mr. Jones is a graduate of Dartmouth College and holds Masters of Business Administration and law degrees from the University of Southern California. Mr. Jones is the longest-serving member on our board and adds substantial expertise from his venture capital finance background and his executive experience. His experience provides the Company with valuable insight with respect to financing and operational strategies and corporate governance issues.

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

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

As of September 30, 2009 the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with ASC 820-10.

Accounts Receivable

The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer. Allowances are provided for specific receivables deemed to be at risk for collection.

Fixed Assets

Fixed assets, which are recorded at cost, consist of office furniture and equipment and are depreciated over their estimated useful life on a straight-line basis. The useful life of these assets is estimated to be from 3 to 5 years. Depreciation and accumulated depreciation for the years ended September 2009 and 2008 is $9,100 and $6,300 respectively.

Goodwill

In accordance with ASC 350-20 (formerly Statement of Financial Accounting Standards (“SFAS” ) No. 142, Goodwill and Other Intangible Assets ) (“ASC 350-10”) , goodwill is not amortized but instead is measured for impairment at least annually, or more frequently if certain indicators are present.

The Company measures for impairment by applying fair value-based tests at the reporting unit level. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and no further testing is performed. The Company, if necessary, measures the amount of impairment by applying fair value-based tests to individual assets and liabilities within each reporting unit. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

To determine the reporting unit’s fair values, the Company uses the income approach. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). Estimates and assumptions with respect to the determination of the fair value of the Company’s reporting units using the income approach include the Company’s operating forecasts, revenue growth rates and risk-commensurate discount rates.

The Company’s estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed by the Company’s regular long-range planning process.

During the fourth quarter of fiscal year 2009, the Company conducted a goodwill impairment test and determined that the amount of the recorded goodwill related to the NTC acquisition was fully impaired. Accordingly, the Company recorded a goodwill impairment charge of $320,200 for the year ended September 30, 2009.

Long-Lived Assets

As required by ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ) (“ASC 350-30”), the Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value. No impairment loss, apart from the abovementioned goodwill impairment, was recorded for the years ended September 30, 2009 and 2008.

F-10

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

Revenues

The Company recognizes revenue as the related services are delivered.

Research and Development Expenses

The Company charges all research and development expenses to operations as incurred.

Advertising Expenses

The Company charges all advertising expenses to operations as incurred.

Stock-Based Compensation

The Company has adopted ASC 718-20 (formerly SFAS No. 123R, Share-Based Payment -revised 2004) (“ASC718-20”) and related interpretations which establish the accounting for equity instruments exchanged for employee services. Under ASC 718-20, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award.

Income Taxes

The Company accounts for income taxes to conform to the requirements of ASC 740-20 (formerly SFAS No. 109, Accounting for Income Taxes ) (“ASC 740-20”). Under the provisions of ASC 740-20, an entity recognizes deferred tax assets and liabilities for future tax consequences of events that have already been recognized in the Company's financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Comprehensive Income (Loss)

ASC 220-10 (formerly, SFAS No. 130, Reporting Comprehensive Income ) (“ASC 220-10”), requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive income (loss) is the same as its reported net income (loss) for the years ended September 30, 2009 and 2008.

Income (Loss) per Share

Basic and diluted net income (loss) per share has been computed using the weighted average number of shares of common stock outstanding during the period.

Segment Information

The Company uses the management approach for determining which, if any, of its products and services, locations, customers or management structures constitute a reportable business segment. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of any reportable segments. Management uses two measurements of profitability and does disaggregate its business for internal reporting and therefore operates two business segments which are comprised of a reference laboratory and a clinic. The Reference Laboratory provides reports (“rEEG Reports”) that assist physicians with treatment strategies for patients with behavioral (psychiatric and/or addictive) disorders based on the patient’s own physiology. The Clinic operates NTC, a full service psychiatric practice.

F-11

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

Reclassifications

Certain amounts in prior years have been reclassified to conform to current year presentation. These reclassifications had no effect on previously reported operating loss or net income.

Recent Accounting Pronouncements

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

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

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

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

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

4.	STOCKHOLDERS’ EQUITY

Common and Preferred Stock

As of September 30, 2009 the Company is authorized to issue 750,000,000 shares of common stock.

As of September 30, 2009, CNS California is authorized to issue 100,000,000 shares of two classes of stock, 80,000,000 of which was designated as common shares and 20,000,000 of which was designated as preferred shares.

As of September 30, 2009, Colorado CNS Response, Inc. is authorized to issue 1,000,000 shares of common stock.

F-12

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

As of September 30, 2009, Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado CNS Response, Inc., is authorized to issue ten thousand (10,000) shares of common stock, no par value per share.

Stock-Option Plan

On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options(ISO) or non-statutory stock options (NSO)), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the board of directors. A total of 10 million shares of stock are reserved for issuance under the 2006 Plan. As of September 30, 2009, 2,124,740 options were exercised and there were 6,662,014 options and 183,937 restricted shares outstanding under the 2006 Plan and 1,029,309 shares available for issuance of awards.

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

Options granted in:	Dividend Yield			Risk-free interest rate			Expected volatility			Expected life
Fiscal 2006		0	%		5.46	%		100	%	5 years
November 2006		0	%		5.00	%		100	%	10 years
August 2007		0	%		4.72	%		91	%	5 years
October 2007		0	%		4.60	%		105	%	5 years
December 2007		0	%		4.00	%		113	%	5 years
April 2008		0	%		3.78	%		172	%	5 years
September 2008		0	%		3.41	%		211	%	5 years
October 2008		0	%		3.77	%		211	%	5 years
March 2009		0	%		3.00	%		385	%	5 years

The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the years ended September 30, 2009 and 2008 is as follows:

	For the fiscal year ended September 30,
	2009		2008
Operations	$	16,100	$	16,100
Research and development		260,800		321,100
Sales and marketing		137,500		83,100
General and administrative		436,100		651,000

Total	$	850,500	$	1,071,300

F-13

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

Total unrecognized compensation as of September 30, 2009 amounted to $1,094,100.

A summary of stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding at September 30, 2007		7,436,703		$	0.57

Granted		1,880,621		$	0.85
Exercised		-			-
Forfeited		(352,757	)	$	1.09
Outstanding at September 30, 2008		8,964,567		$	0.60

Granted		80,000		$	0.43
Exercised		(2,124,740	)	$	0.132
Forfeited		(257,813	)	$	0.51

Outstanding at September 30, 2009		6,662,014		$	0.76

Weighted average fair value of options granted during:
Year ended September 30, 2008				$	0.73
Year ended September 30, 2009				$	0.43

Following is a summary of the status of options outstanding at September 30, 2009:

Exercise Price		Number of Shares		Weighted Average Contractual Life	Weighted Average Exercise Price
$	0.12		859,270	10 years	$	0.12
$	0.132		987,805	7 years	$	0.132
$	0.30		135,700	10 years	$	0.30
$	0.59		28,588	10 years	$	0.59
$	0.80		140,000	10 years	$	0.80
$	0.89		968,875	10 years	$	0.89
$	0.96		496,746	10 years	$	0.96
$	1.09		2,614,232	10 years	$	1.09
$	1.20		333,611	5 years	$	1.20
$	0.51		275,000	10 years	$	0.51
$	0.40		56,000	10 years	$	0.40
Total			6,662,014		$	0.76

Warrants to Purchase Common Stock

At September 30, 2007, there were warrants outstanding to purchase 6,899,353 shares of the Company’s common stock at exercise prices ranging from $0.01 to $1.812 with a weighted average exercise price of $1.04. The warrants expire at various times through 2017. No warrants were issued or exercised during the 12 months ended September 30, 2008.

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

F-14

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

During the year ended September 30, 2009, the following additional 10,137,118 warrants were granted and are outstanding as of September 30, 2009:

Warrants to Purchase	Exercise Price		Issued in Connection With:

100,000 shares	$	0.25	A $200,000 bridge note with SAIL on May 14, 2009 as described in Note 2

3,333,333 shares	$	0.30	A $1,000,000 bridge note with Pappajohn on June 12, 2009 as described in Note 2

3,404,991 shares	$	0.30	Associated with the private placement transaction of 6,810,002 shares at $0.30 with 50% warrant coverage as described in Note 2

956,164 shares	$	0.27	Associated with the automatic conversion of
401,096 shares	$	0.255	$1,700,000 of convertible promissory notes and
1,666,667 shares	$	0.30	$20,900 accrued interest upon completion an equity
			financing in excess of $1,500,000 as described in Note 2

274,867 shares	$	0.33	The placement agent for private placement as described in Note 2

At September 30, 2009, there were warrants outstanding to purchase 15,537,485 shares of the Company’s common stock at exercise prices ranging from $0.01 to $1.812 with a weighted average exercise price of $0.65. The warrants expire at various times through 2017.

5.	INCOME TAXES

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance to reduce our deferred tax assets to their estimated realizable value.

Reconciliations of the provision (benefit) for income taxes to the amount compiled by applying the statutory federal income tax rate to profit (loss) before income taxes is as follows for each of the years ended September 30:

	2009			2008
Federal income tax (benefit) at statutory rates		(34	)%		(34	)%
Stock-based compensation		0	%		20	%
Non deductible interest expense		0	%		0	%
Change in valuation allowance		37	%		14	%
Goodwill write off		(3	)%		0	%

F-15

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes relate to the following at September 30, 2009 and 2008:

	2009			2008
Deferred income tax assets:
Net operating loss carryforward	$	8,765,900		$	4,953,000
Deferred interest, consulting and compensation liabilities		987,500			17,000
Amortization		(24,300	)		223,300
Deferred income tax assets - other		7,800			-
		9,736,900			5,193,300
Deferred income tax liabilities—other		-			(12 ,300	)
Deferred income tax asset—net before valuation allowance		9,736,900			5,181,000
Valuation allowance		(9,736,900	)		(5,181,000	)
Deferred income tax asset—net	$	-		$	-

Current and non-current deferred taxes have been recorded on a net basis in the accompanying balance sheet. As of September 30, 2009, the Company has net operating loss carryforwards of approximately $20.8 million. The net operating loss carryforwards expire by 2028. Utilization of net operating losses and capital loss carryforwards may be subject to the limitations imposed by Section 382 of the Internal Revenue Code. The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.

6 . ACQUISITION OF NEURO THERAPY CLINIC, PC

On January 15, 2008, the Company, through its wholly owned subsidiary, Colorado CNS Response, Inc., acquired all of the outstanding common stock of Neuro-Therapy Clinic, PC (“NTC”) in exchange for a non-interest bearing note payable of $300,000 payable in equal monthly installments over 36 months. Upon the completion of the acquisition, the sole shareholder of NTC was appointed Chief Medical Officer of the Company. Prior to the acquisition, NTC was the Company’s largest customer.

The acquisition was accounted under the purchase method of accounting, and accordingly, the purchase price was allocated to NTC’s net tangible assets based on their estimated fair values as of January 15, 2008. The excess purchase price over the value of the net tangible assets was recorded as goodwill. The purchase price and the allocation thereof are as follows:


Fair value of note payable issued	$	265,900
Direct transaction costs		43,700
Purchase price		309,600
Allocated to net tangible liabilities, including cash of $32,100		(10,600	)
Allocated to goodwill	$	320,200

The acquisition was not material, and accordingly, no pro forma results are presented. As of September 30, 2009, goodwill was measured and determined to be fully impaired and consequently written off.

7 . LONG-TERM DEBT

As described in Note 6 above, during the year ended September 30, 2008 the Company issued a note payable to an officer in connection with the acquisition of NTC. The note is non-interest bearing and the Company determined its fair value by imputing interest at an annual rate of 8%. As of September 30, 2009 the note has an outstanding principal balance in the amount of $118,600, of which $93,800 is current.

F-16

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

8 . REPORTABLE SEGMENTS

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

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

	Year ended September 30,2009
	Reference Laboratory			Clinic			Eliminations			Total
Revenues		138,900			628,200			(67,000	)		700,100

Operating expenses:
Cost of revenues		131,600			18,500			(18,500	)		131,600
Research and development		2,137,200			-			-			2,137,200
Sales and marketing		908,500			7,300			-			915,800
General and administrative		3,266,300			669,600			(48,500	)		3,887,400
Goodwill impairment charges		320,000			-			-			320,000
Total operating expenses		6,763,800			695,400			(67,000	)		7,392,200

Loss from operations	$	(6,624,900	)	$	(67,200	)	$	0		$	(6,692,100	)

The following table includes selected segment financial information as of September 30, 2009, related to goodwill and total assets:

	Reference Laboratory		Clinic		Total

Goodwill	$	-	$	-	$	-

Total assets	$	1,118,000	$	42,900	$	1,160,900

9.	EARNINGS PER SHARE

In accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per Share”), basic net income (loss) per share is computed by dividing the net income (loss) to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the years ended September 30, 2009 and 2008, the Company has excluded all common equivalent shares from the calculation of diluted net loss per share as such securities are anti-dilutive.

F-17

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

A summary of the net income (loss) and shares used to compute net income (loss) per share for the years ended September 30, 2009 and 2008 is as follows:

	2009			2008
Net loss for computation of basic net income (loss) per share	$	(8,522,200	)	$	(5,371,500	)
Net income (loss) for computation of dilutive net income (loss) per share	$	(8,522,200	)	$	(5,371,500	)

Basic net income (loss) per share	$	(0.31	)	$	(0.21	)

Diluted net income (loss) per share	$	(0.31	)	$	(0.21	)

Basic weighted average shares outstanding		27,778,171			25,299,547
Dilutive common equivalent shares		-			-
Diluted weighted average common shares		27,778,171			25,299,547

Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share:
Convertible debt		-			4,995,000
Warrants		8,318,310			6,899,353
Options		8,548,206			8,767,212

10.	COMMITMENTS AND CONTINGENT LIABILITIES

Litigation

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

Since June of 2009, the Company has been involved in litigation against Leonard J. Brandt, a stockholder, former director and the Company’s former Chief Executive Officer (“Brandt”) in both the Delaware Chancery Court and the United States District Court for the Central District of California. For a full description of the events associated with the Brandt Litigation please refer to the section called “Business” under the heading “Legal Proceedings” contained elsewhere in this prospectus which is incorporated herein by reference.

Lease Commitments

The Company’s lease for its headquarters and Laboratory Information Services business, located at 2755 Bristol St., Suite 285, Costa Mesa, California, expired in November 2009. The Company continues to lease this space on a month to month basis at a cost of $4,410 per month.

The Company leases space for its Clinical Services operations under an operating lease. The base rental as of September 2009 is $6,021 per month. This lease terminates on February 28, 2010.

The Company also sub-leases space for its Clinical Services operations on a month-to-month basis for $1,075 per month.

The Company leases a copier for $216 per month which it accounts for as a capital lease with an interest rate of 9% per year. The lease terminates in February 2013 at which time the copier can be purchased at fair value.

F-18

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

Future Minimum Lease Payment and Debt Maturities

At September 30, 2009, the estimated future minimum lease payment under non-cancelable operating and capital leases and debt maturities were as follows:

Year ending September 30,	Operating Leases			Capital Lease			Debt Maturities			Total
2010		36,000			2,600			100,000			138,600
2011		-			2,600			25,000			27,600
2012		-			2,600						2,600
2013		-			1,100						1,100
Total	$	36,000		$	8,900		$	125,000		$	169,900
Less interest		(700	)		(1,200	)		(6,400	)		(8,300	)
Net present value		35,300			7,700			118,600			161,600
Less current portion		(35,300	)		(2,100	)		(93,800	)		(131,200	)
Long-term debt and lease obligation	$	-		$	5,600		$	24,800		$	30,400

11.	SIGNIFICANT CUSTOMERS

For the year ended September 30, 2009, three customers accounted for 39% of Laboratory Information Services revenue and 45% of accounts receivable at September 30, 2009.

For the year ended September 30, 2008, two customers accounted for 29% of Laboratory Information Services revenue and 24% of accounts receivable at September 30, 2008.

12.	SUBSEQUENT EVENTS

The following key events occurred after the end of the fiscal year dated September 30, 2009:

Results of Clinical Trial Announced

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

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

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

F-19

Ruling from Delaware Chancery Court in Relation to Company’s Litigation with Leonard Brandt

On December 2, 2009, the Delaware Chancery Court dismissed complaints brought against the Company by Brandt. At the conclusion of a two-day trial that commenced December 1, the Chancery Court entered judgment for the Company and dismissed with prejudice Brandt's action brought pursuant to Section 225 of the Delaware General Corporation Law. The Chancery Court thereby found that the purported special meeting of stockholders convened by Brandt on September 4, 2009 was not valid and that the directors purportedly elected at that meeting will not be seated. On January 4, 2010, Brandt filed an appeal with the Supreme Court of the State of Delaware in relation to the case, which the Company believes is without merit and intends to vigourously defend. For a full description of the events associated with the Brandt Litigation please refer to the heading “Legal Proceedings” on page 48 of this prospectus.

Completion of Second Closing of Private Placement Transaction

On December 24, 2009, the Company completed a second closing of its private placement (the first closing having occurred on August 26, 2009), resulting in additional gross proceeds to the Company of approximately $3.0 million from accredited investors.

Pursuant to Subscription Agreements entered into with the investors, the Company sold approximately 55 Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists of 180,000 shares of the Company’s common stock and a five year non-callable warrant to purchase 90,000 shares of the Company’s common stock at an exercise price of $0.30 per share.

After commissions and expenses, the Company received net proceeds of approximately $2.65 million at the second closing. The Company intends to use the proceeds from the second closing of its private placement for general corporate purposes, including clinical trial expenses, research and development expenses, and general and administrative expenses, including the payment of accrued legal expenses incurred in connection with the Company’s litigation with Leonard Brandt.

A FINRA member firm acted as lead placement agent (the “Placement Agent”) in connection with the second closing of the private placement. For its services in connection with the second closing, the Placement Agent received (i) a cash fee of $195,200, (ii) a cash expense allowance of $59,920, and (iii) a five year non-callable warrant to purchase 672,267 shares of the Company’s common stock at an exercise price of $ 0.33 per share, first exercisable no earlier than June 24, 2010.

In connection with the second closing of the Company’s private placement, each investor who participated in the financing became party to the Registration Rights agreement described above under Note 2 and will receive the same rights and benefits as the investors in the first closing of the Company’s Private Placement on August 26, 2009.

Completion of Third and Fourth Closings of Private Placement Transcation

The Company completed a third and fourth closing of its private placement, on December 31, 2009 and January 4, 2010, respectively, resulting in gross proceeds to the Company of approximately $540,000, thereby completing its Private Placement.

Pursuant to Subscription Agreements entered into with the investors, the Company sold 10 Investment Units at $54,000 per Investment Unit. Each “Investment Unit” consists of 180,000 shares of the Company’s common stock and a five year non-callable warrant to purchase 90,000 shares of the Company’s common stock at an exercise price of $0.30 per share.

After commissions and expenses, the Company received net proceeds of approximately $480,000 in the Private Placement. The Company intends to use the net proceeds from the Private Placement for general corporate purposes, including clinical trial expenses, research and development expenses, and general and administrative expenses, including the payment of accrued legal expenses incurred in connection with the Company’s litigation with Leonard Brandt.

F-20

CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

SEPTEMBER 30, 2009 AND 2008

A FINRA member firm acted as lead placement agent (the “Placement Agent”) in connection with the Private Placement. For its services in connection with the December 31, 2009 closing of the Private Placement, the Placement Agent received (i) a cash fee of $4,320, (ii) a cash expense allowance of $8,640, and (iii) a five year non-callable warrant to purchase 14,400 shares of the Company’s common stock at an exercise price of $.33 per share.

For its services in connection with the January 4, 2010 closing of the Private Placement, the lead Placement Agent received (i) a cash fee of $1,080, (ii) a cash expense allowance of $2,160, and (iii) a five year non-callable warrant to purchase 3,600 shares of the Company’s common stock at an exercise price of $.33 per share.

In connection with the third and fourth closings of the Company’s Private Placement, each investor who participated in the financing became party to the Registration Rights agreement described above under Note 2 and will receive the same rights and benefits as the investors in the earlier closings of the Company’s Private Placement.

Receipt of letter from Food and Drug Administration

On December 28, 2009, the Company's regulatory counsel received a letter (“the Letter”) from the FDA in response to its prior correspondence relating to the possible classification of the Company's rEEG, as a medical device. The Company will continue its ongoing dialogue with the FDA regarding its rEEG (which may be subject to pre-market review). If pre-market review is required the Company’s revenue could be negatively impacted until such review is completed and clearance to market or approval is obtained. The Letter does not have any impact on the consolidated financial statements as of and for the years ended September 30, 2009 and 2008. See “Government Regulation” section for detailed discussion.

F-21

CNS RESPONSE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended March 31,						For the six months ended March 31,
	2010			2009			2010			2009
REVENUES
Laboratory Information Services	$	34,400		$	31,200		$	56,800		$	59,700
Clinical Services		143,900			152,600			265,000			295,800
		178,300			183,800			321,800			355,500

OPERATING EXPENSES
Cost of laboratory services revenues		39,400			35,600			69,100			69,100
Research and development		318,700			521,800			541,300			1,147,800
Sales and marketing		202,500			283,700			402,800			547,000
General and administrative		1,009,800			798,500			2,557,500			1,478,500

Total operating expenses		1,570,400			1,639,600			3,570,700			3,242,400

OPERATING LOSS		(1,392,100	)		(1,455,800	)		(3,248,900	)		(2,886,900	)

OTHER INCOME (EXPENSE):
Interest income (expense), net		(100	)		(4,700	)		(1,700	)		(3,500	)

Total other income		(100	)		(4,700	)		(1,700	)		(3,500	)

LOSS BEFORE PROVISION FOR INCOME TAXES		(1,392,200	)		(1,460,500	)		(3,250,600	)		(2,890,400	)
Income taxes		1,600			800			2,400			2,800

NET LOSS	$	(1,393,800	)	$	(1,461,300	)	$	(3,253,000	)	$	(2,893,200	)

NET LOSS PER SHARE:
Basic	$	(0.03	)	$	(0.06	)	$	(0.07	)	$	(0.11	)
Diluted	$	(0.03	)	$	(0.06	)	$	(0.07	)	$	(0.11	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		54,512,337			25,299,547			48,530,317			25,299,547
Diluted		54,512,337			25,299,547			48,530,317			25,299,547

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

F-22

CNS RESPONSE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2010			September 30, 2009
	(unaudited)
ASSETS

CURRENT ASSETS
Cash	$	682,800		$	988,100
Accounts receivable (net of allowance for doubtful accounts of $6,600 (unaudited) as of March 31, 2010 and $11,200 as of September 30, 2009)		69,200			61,700

Prepaid and other		120,700			89,500
Total current assets		872,700			1,139,300

Furniture and Fittings		21,100			17,500
Other Assets		18,700			4,100

TOTAL ASSETS	$	912,500		$	1,160,900

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable (including amounts due to related parties of $0 (unaudited) as of March 31, 2010 and $7,000 as of September 30, 2009)	$	955,600		$	1,285,600
Accrued liabilities		337,100			261,400
Deferred compensation (including $69,100 (unaudited) and $81,200 to related parties as of March 31, 2010 and September 30, 2009 respectively)		228,700			220,100
Accrued patient costs		193,100			305,500
Accrued consulting fees		66,100			72,100
Current portion of long-term debt		74,700			95,900
Total current liabilities		1,855,300			2,240,600

LONG –TERM LIABILITIES
Note payable to officer		-			24,800
Capital lease		4,500			5,600
Total long term liabilities		4,500			30,400

COMMITMENTS AND CONTINGENCIES

Stockholders’ equity (deficit):
Common stock, $0.001 par value; authorized, 750,000,000 shares, issued and, 56,023,921 and 41,781,129 shares outstanding as of March 31, 2010 and September 30, 2009 respectively		56,000			41,800
Additional paid-in capital		27,445,600			24,044,000
Accumulated deficit		(28,448,900	)		(25,195,900	)
Total stockholders’ equity (deficit)		(947,300	)		(1,110,100	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	912,500		$	1,160,900

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

F-23

CNS RESPONSE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,253,000	)	$	(2,893,200	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization		5,300			4,500
Stock-based compensation		420,400			441,500
Doubtful debt write-off		5,800			-
Changes in operating assets and liabilities:
Accounts receivable		(13,300	)		4,500
Prepaids and other current assets		(31,200	)		19,000
Accounts payable		(330,000	)		336,500
Accrued liabilities		69,700			128,100
Deferred compensation		8,600			(15,700	)
Accrued patient costs		(112,400	)		83,600
Security deposits on leases		(14,600	)		-
Net cash used in operating activities		(3,244,700	)		(1,891,200	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of office furniture		(8,900	)		-
Net cash used in investing activities		(8,900	)		-

CASH FLOWS FROM FINANCING ACTIVITIES
Cash from Secured Convertible notes		-			500,000
Repayment of note		(46,100	)		(42,500	)
Prepayment of lease		(1,000	)		(900	)
Proceeds from sale of common stock, net of offering costs		2,995,400			-
Net cash from financing activities		2,948,300			456,600

Net decrease in cash		(305,300	)		(1,434,600	)
Cash, beginning of period		988,100			1,997,000
Cash, end of period	$	682,800		$	562,400


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest	$	1,700	$	7,900
Income taxes	$	2,400	$	2,800

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

F-24

CNS RESPONSE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the six months ended March 31, 2010	Common Stock				Additional Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
BALANCE - September 30, 2009		41,781,129	$	41,800	$	24,044,000		$	(25,195,900	)	$	(1,110,100	)
Stock- based compensation		-		-		420,400			-			420,400
Issuance of stock in connection with the Maxim PIPE net of offering costs of $540,600		11,786,666		11,800		2,983,600			-			2,995,400
Warrants issued in association with the Maxim PIPE		-		-		7,615,100			-			7,615,100
Offering cost pertaining to the Maxim PIPE		-		-		(7,615,100	)		-			(7,615,100	)
Value of warrants surrendered for cashless exercise		-		-		(415,800	)		-			(415,800	)
Stock issued for cashless exercise		2,456,126		2,400		413,400			-			415,800
Net loss for the six months ended March 31, 2010		-		-		-			(3,253,000	)		(3,253,000	)
Balance at March 31, 2010		56,023,921	$	56,000	$	27,445,600		$	(28,448,900	)	$	947,300

For the six months ended March 31, 2009	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
BALANCE - September 30, 2008		25,299,547	$	25,300	$	17,701,300	$	(16,673,700	)	$	1,052,900
Stock- based compensation		-		-		441,500		-			441,500
Net loss for the six months ended March 31, 2009		-		-		-		(2,893,200	)		(2,893,200	)
Balance at March 31, 2009		25,299,547	$	25,300	$	18,142,800	$	(19,566,900	)	$	(1,398,800	)

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

F-25

CNS RESPONSE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization and Nature of Operations

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

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

Going Concern Uncertainty

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

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

F-26

Basis of Presentation

The unaudited condensed consolidated financial statements of CNS Response, Inc. (“CNS,” “we,” “us,” “our” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include all the accounts of CNS and its wholly owned subsidiaries CNS California and NTC. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our financial position as of March 31, 2010 and our operating results, cash flows, and changes in stockholders’ equity for the interim periods presented. The September 30, 2009 balance sheet was derived from our audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements and the related notes should be read in conjunction with our consolidated financial statements and notes for the year ended September 30, 2009 which are included in our current report on Form 10-K, filed with the Securities and Exchange Commission on December 30, 2009.

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

The results of operations for the six months ended March 31, 2010 are not necessarily indicative of the results that may be expected for future periods or for the year ending September 30, 2010.

Reclassifications

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

Fair Value of Financial Instruments

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

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

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

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

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

F-27

Delaware	8734	87-0419387
(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S Employer
incorporation or organization)	Classification Code Number)	Identification No.)

	Large Accelerated Filer ¨	Accelerated Filer ¨

	Non-Accelerated Filer ¨	Smaller Reporting Company þ
	(Do not check if a smaller reporting company)

Title of Each Class of Securities To Be Registered	Amount To Be Registered (1)		Proposed Maximum Offering Price Per Unit (2)		Proposed Maximum Aggregate Offering Price (2)		Amount Of Registration Fee (3)
Common stock, par value $0.001 per share (3)		2,875,385	$	0.95	$	2,731,615.75	$	194.76
TOTAL		2,875,385			$	2,731,615.75	$	194.76

Common stock offered		Up 65,879,838 shares by the selling stockholders
Common stock outstanding before this offering		56,023,921

Common stock to be outstanding after this offering		Up to 74,432,936 shares

Use of proceeds		We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. See “Use of Proceeds.”

Over-the-Counter Bulletin Board symbol		CNSO.OB

Risk Factors		See “Risk Factors” beginning on page 5 for a discussion of factors that you should consider carefully before deciding to purchase our common stock.

	High		Low

Year Ended September 30, 2008
First Quarter	$	0.90	$	0.75
Second Quarter	$	2.25	$	0.75
Third Quarter	$	3.00	$	0.55
Fourth Quarter	$	0.75	$	0.51

Year Ended September 30, 2009
First Quarter	$	1.01	$	0.10
Second Quarter	$	0.90	$	0.05
Third Quarter	$	0.69	$	0.15
Fourth Quarter	$	0.72	$	0.20

Year Ended September 30, 2010
First Quarter	$	1.20	$	0.50
Second Quarter	$	1.20	$	0.52

	Page

Prospectus Summary	1
Risk Factors	5
Cautionary Note Regarding Forward- looking Statements	20
Use of Proceeds	21
Market for Common Equity and Related Stockholder Matters	21
Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Business	46
Management	63
Executive Compensation	68
Principal and Selling Stockholders	77
Related Party Transactions	88
Description of Capital Stock	96
Plan of Distribution	100
Legal Matters	104
Experts	104
Where You Can Find More Information	104
Index to Financial Statements	105

Name of Director	Audit Committee	Compensation Committee

John Pappajohn	Member	Chair

David B. Jones	Chair	Member

Jerome Vaccaro	Member

Henry T. Harbin		Member

Name and Principal Position	Fiscal Year Ended September 30,	Salary ($)		Bonus ($)		Option Awards ($)			All Other Compensation ($)			Total ($)
George Carpenter (Chief Executive Officer,	2009		180,000		0		0			20,500	(2 )		200,500
Principal Executive Officer, Director)	2008		180,000		0		680,700	(1 )		16,300	(2 )		877,000

Daniel Hoffman (President, Chief Medical Officer)	2009		150,000		0		0	(4 )		33,400	(3 )		183,400
	2008		108,100		0		0			39,200	(3 )		147,300

Leonard Brandt (Former Chief Executive Officer,	2009		119,800		0		0	(5 )		20,500			140,300
Former Principal Executive Officer, Former Director)	2008		175,000		0		0			19,000	(2 )		194,000

Name	Number of Securities Underlying Unexercised Options (#)				Option Exercise Price ($)		Option Expiration Date
	Exercisable		Unexercisable
George Carpenter (1)		484,454		484,421		0.89	October 1, 2017
Daniel Hoffman (2)		508,796 119,013		305,796 0		1.09 0.12	August 8, 2017 August 11, 2016
Leonard Brandt (3)		229,353 827,930		104,258 140,959		1.20 1.09	August 8, 2012 August 8, 2017

Non-Employee Director Compensation
Name	All Other Compensation ($)		Total ($)
Jerome Vaccaro (1)		0		0
Henry Harbin (2)		46,400		46,400
John Pappajohn (3)		0		0
Tommy Thompson (3)(4)		0		0
David Jones (3)		0		0

Executive Officers and Directors:	Number of Options Granted on March 3, 2010		Vesting Period: Number of month Starting March 3, 2010

George Carpenter Chief Executive Officer, Secretary		4,000,000	48 months

Paul Buck Chief Financial Officer		450,000	48 months

Dr. Daniel Hoffman President and Chief Medical Officer		500,000	48 months

David B. Jones (3) Director		250,000	36 months

Dr. Jerome Vaccaro Director		250,000	36 months

Dr. Henry Harbin (1) Director		650,000	36 months

John Pappajohn (3) Director		250,000	36 months

Tommy Thompson (2) Director		400,000	36 months

	Number of Shares Beneficially Owned Prior to Offering					Number of		Number of Shares Beneficially Owned After Offering
Name of Beneficial Owner	Number		Percentage of Shares Outstanding			Shares Being Offered		Number		Percentage of Shares Outstanding
Paul Buck (2) Chief Financial Officer		326,250		*			270,000		56,250		*

Dr. Daniel Hoffman (3) President and Chief Medical Officer		970,956		1.7	%		110,545		860,411		1.5	%

David B. Jones(4) Director		8,737,735		15.0	%		8,696,055		41,680		*

Dr. Jerome Vaccaro (5) Director		61,680		*			-		61,680		*

Dr. Henry Harbin (6) Director		275,184		*			10,834		264,350		*

John Pappajohn (7) Director		11,762,592		19.8	%		11,720,912		41,680		*

Directors and officers as a group (7 persons) (8)		23,860,672		37.1	%		21,348,346		2,512,326		3.9	%

5% Stockholders:
Leonard Brandt (9)		11,081,982		19.0	%		9,970,523		1,111,459		1.9	%

Sail Venture Partners LP (4)		8,696,055		15.0	%		8,696,055		-		-

Other Selling Stockholders:									-		-
Argyris Vassiliou (10)		500,001		*			500,001		-		-
James Howard Desnick, M.D. (11)		1,620,000		2.9	%		1,620,000		-		-
Peter Unanue (12)		974,990		1.7	%		974,990		-		-
Ann Vassiliou Children’s Trust P2587 (13)		500,001		*			500,001		-		-
AC Care, LLC (14)		100,000		*			100,000		-		-
AJWC Ltd. (15)		540,000		1.0	%		540,000		-		-
Andy’s Liquor, Inc. (16)		750,000		1.3	%		750,000		-		-
Theodore Chafoulias (17)		150,000		*			150,000		-		-
Dennis James Colbert and Patti J. Colbert, as joint tenants with right of survivorship (18)		540,000		1.0	%		540,000		-		-
Ronald I. Dozoretz, M.D. (19)		540,000		1.0	%		540,000		-		-
Richard L. Hexum, Jr. (20)		770,000		1.4	%		770,000		-		-
Larry Hopfenspirger (21)		600,000		1.1	%		600,000		-		-
William and Joanne Jellison (22)		500,000		*			500,000		-		-
Jeffrey P. Knightly (23)		540,000		1.0	%		540,000		-		-
Meyer Leon Proler (24)		1,853,274		3.3	%		1,847,274		6,000		*
Dale Ragan (25)		645,000		1.1	%		645,000		-		-
Richard Lee Roehl (26)		1,080,000		1.9	%		1,080,000		-		-
Lindsay A. Rosenwald, M.D. (27)		1,080,000		1.9	%		1,080,000		-		-
Gene Salkind, M.D. (28)		540,000		1.0	%		540,000		-		-
Starr F. Schlobohm Rev. Trust U/D/A 12/09/04 (29)		540,000		1.0	%		540,000		-		-

	Page

Report of Independent Registered Public Accounting Firm		F-1

Consolidated Balance Sheets as of September 30, 2009 and 2008		F-2

Consolidated Statements of Operations for the Years Ended September 30, 2009 and 2008		F-3

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended September 30, 2009 and 2008		F-4

Consolidated Statements of Cash Flows for the Years Ended September 30, 2009 and 2008		F-5

Notes to Consolidated Financial Statements for the Years Ended September 30, 2009 and 2008		F-6

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2010 and 2009		F-22

Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and September 30, 2009		F-23

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2010 and 2009		F-24

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the six months ended March 31, 2010 and 2009		F-25

Notes to Unaudited Condensed Consolidated Financial Statements		F-26

	As at September 30,
	2009			2008
ASSETS
CURRENT ASSETS:
Cash	$	988,100		$	1,997,000
Accounts receivable (net of allowance for doubtful accounts of $11,700 and $17,200 in 2009 and 2008 respectively)		61,700			98,200
Prepaids and other		89,500			189,400
Total current assets		1,139,300			2,284,600
Other Assets		21,600			28,700
Goodwill		-			320,200
TOTAL ASSETS	$	1,160,900		$	2,633,500

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable (including $7,000 and $6,800 to related parties in 2009 and 2008 respectively)	$	1,285,600		$	335,700
Accrued liabilities		261,400			207,500
Deferred compensation (including $81,200 and $107,000 to related parties in 2009 and 2008 respectively)		220,100			264,900
Accrued patient costs		305,500			397,500
Accrued consulting fees (including $18,000 and $0 to related parties in 2009 and 2008, respectively)		72,100			67,600
Accrued interest		-			42,600
Convertible promissory notes		-			50,000
Current portion of long-term debt		95,900			88,500
Total current liabilities		2,240,600			1,454,300

LONG-TERM LIABILITIES
Note payable to officer		24,800			118,600
Capital lease		5,600			7,700
Total long-term liabilities		30,400			126,300
TOTAL LIABILITIES		2,271,000			1,580,600
COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; authorized 750,000,000 shares; 41,781,129 and 25,299,547 shares outstanding as of September 30, 2009 and 2008		41,800			25,300
Additional paid-in capital		24,044,000			17,701,300
Accumulated deficit		(25,195,900	)		(16,673,700	)
Total stockholders' equity		(1,110,100	)		1,052,900
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,160,900		$	2,633,500

	YEARS ENDED SEPTEMBER 30,
	2009			2008
REVENUES
Laboratory Information Services		120,400			178,500
Clinical Services		579,700			595,000
	$	700,100		$	773,500
OPERATING EXPENSES:
Cost of Laboratory Service revenues		131,600			163,200
Research and development		2,137,200			2,097,300
Sales and marketing		915,800			881,400
General and administrative		3,887,400			3,105,700
Goodwill impairment charges		320,200			-

Total operating expenses		7,392,200			6,247,600

OPERATING LOSS		(6,692,100	)		(5,474,100	)

OTHER INCOME (EXPENSE):
Interest income (expense), net		(1,732,900	)		104,000
Financing premium		(90,000	)		-
Total other income (expense)		(1,822,900	)		104,000

LOSS BEFORE PROVISION FOR INCOME TAXES		(8,515,000	)		(5,370,100	)

PROVISION FOR INCOME TAXES		7,200			1,400

NET LOSS	$	(8,522,200	)	$	(5,371,500	)

BASIC NET LOSS PER SHARE	$	(0.31	)	$	(0.21	)

DILUTED NET LOSS PER SHARE	$	(0.31	)	$	(0.21	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		27,778,171			25,299,547
Diluted		27,778,171			25,299, 547

					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance at October 1, 2007		25,299,547	$	25,300	$	16,630,000		$	(11,302,200	)	$	5,353,100
Stock- based compensation		-		-		1,071,300			-			1,071,300
Net loss for the year ended September 30, 2008		-		-		-			(5,371,500	)		(5,371,500	)
Balance at September 30, 2008		25,299,547	$	25,300	$	17,701,300		$	(16,673,700	)	$	1,052,900

Stock- based compensation		-		-		850,500			-			850,500
Issuance of 3,433,333 bridge warrants		-		-		1,058,000			-			1,058,000
Exercise of 1,498,986 $0.01 warrants		1,498,986		1,500		13,500			-			15,000
Exercise of 2,124,740 $0.132 options		2,124,740		2,100		278,400			-			280,500
Issuance of stock in connection with the Maxim PIPE net of offering costs of $250,700		6,810,002		6,800		1,785,500			-			1,792,300
Value of beneficial conversion feature of bridge notes		-		-		642,000			-			642,000
Issuance of stock on conversion $1,720,900 of bridge notes and accrued interest		6,047,854		6,100		1,714,800			-			1,720,900
Warrants issued in association with the Maxim PIPE		-		-		1,607,000			-			1,607,000
Offering cost pertaining to the Maxim PIPE		-		-		(1,607,000	)		-			(1,607,000	)
Net loss for the year ended September 30, 2009		-		-					(8,522,200	)		(8,522,200	)

Balance at September 30, 2009		41,781,129	$	41,800	$	24,044,000		$	(25,195,900	)	$	(1,110,100	)

	YEAR ENDED SEPTEMBER 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,522,200	)	$	(5,371,500	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation & amortization		9,100			6,300
Discount on bridge notes issued		1,058,000			-
Value of beneficial conversion feature of bridge notes		642,000			-
Stock based compensation		850,500			1,071,300
Non-cash interest expense		20,900			-
Goodwill impairment		320,200			-
Write-off of doubtful accounts		22,700			-
Changes in operating assets and liabilities:
Accounts receivable		13,800			(39,000	)
Prepaids and other		99,900			(30,400	)
Accounts payable and accrued liabilities		1,003,800			116,300
Deferred compensation and others		(40,300	)		192,600
Accrued patient costs		(92,000	)		397,500
Net cash used in operating activities		(4,613,600	)		(3,656,900	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred offering relating to acquisition		-			(43,700	)
Furniture & Fixtures		(2,000	)		(30,900	)
Net cash used in investing activities		(2,000	)		(74,600	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of convertible debt with accrued interest		(92,600	)		-
Repayment of debt		(86,700	)		(60,600	)
Repayment of lease payable		(1,800	)		(1,000	)
Proceeds from the sale of common stock, net of offering costs		1,792,300			-
Proceeds from bridge notes		1,700,000			-
Proceeds from exercise of warrants and options		295,500			-
Net cash provided (used) by financing activities		3,606,700			(61,600	)
NET INCREASE (DECREASE) IN CASH		(1,008,900	)		(3,793,100	)
CASH- BEGINNING OF YEAR		1,997,000			5,790,100
CASH- END OF YEAR	$	988,100		$	1,997,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	64,100		$	22,440
Income taxes	$	7,200		$	5,972
Fair value of note payable to officer issued for acquisition	$	118,600		$	265,900
Fair value of equipment acquired through lease	$	7,600		$	10,500
Conversion of bridge notes and related accrued interest into common stock	$	1,720,900		$	-

	For the three months ended March 31,
	2010		2009
Cost of laboratory services revenues	$	4,900	$	4,000
Research and development		78,800		65,200
Sales and marketing		35,600		38,200
General and administrative		117,400		106,500
Total	$	236,700	$	213,900

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

Warrants to Purchase	Exercise Price		Issued in Connection With:

100,000 shares	$	0.25	A $200,000 bridge note with SAIL on May 14, 2009 as described in Note 2

3,333,333 shares	$	0.30	A $1,000,000 bridge note with Pappajohn on June 12, 2009 as described in Note 2

3,404,991 shares	$	0.30	Associated with the August 26, 2009 private placement transaction of 6,810,002 shares at $0.30 with 50% warrant coverage as described in Note 2

3,023,927 shares	$	0.30	Associated with the automatic conversion of $1,700,000 of convertible promissory notes and $20,900 accrued interest upon completion an equity financing in excess of $1,500,000 as described in Note 2

274,867 shares	$	0.33	The placement agent for private placement as described in Note 2

5,893,334 shares	$	0.30	Associated with the second, third and fourth closing of the private placement transaction of 11,786,667 shares at $0.30 with 50% warrant coverage as described in Note 2

1,200,267 shares	$	0.33	Associated with warrants for the lead and secondary placement agents for private placement as described in Note 2

(3,333,333) shares	$	0.30	These warrants were surrendered in a net exercise method and 2,456,126 shares were issued in lieu of cash.

	Three Months ended March 31, 2010
	Laboratory Information Services			Clinic		Eliminations			Total
Revenues	$	40,400		$	143,900	$	(6,000	)	$	178,300

Operating expenses:
Cost of revenues		39,400			6,000		(6,000	)		39,400
Research and development		318,700			-		-			318,700
Sales and marketing		201,900			600		-			202,500
General and administrative		818,800			191,000		-			1,009,800
Total operating expenses	$	1,378,800		$	197,600	$	-		$	1,570,400

Income (Loss) from operations	$	(1,338,400	)	$	53,700	$	-		$	(1,392,100	)

	Three Months ended March 31, 2009
	Laboratory Information Services			Clinic		Eliminations			Total
Revenues	$	34,600		$	180,100	$	(30,900	)	$	183,800

Operating expenses:
Cost of revenues		35,600			3,400		(3,400	)		35,600
Research and development		521,800			-		-			521,800
Sales and marketing		282,300			1,400		-			283,700
General and administrative		657,700			168,300		(27,500	)		798,500
Total operating expenses	$	1,497,400		$	173,100	$	(30,900	)	$	1,639,600

Income (Loss) from operations	$	(1,462,800	)	$	7,000	$	-		$	(1,455,800	)

	Six Months ended March 31, 2009
	Laboratory Information Services			Clinic		Eliminations			Total
Revenues	$	66,800		$	329,700	$	(41,000	)	$	355,500

Operating expenses:
Cost of revenues		69,100			7,100		(7,100	)		69,100
Research and development		1,147,800			-		-			1,147,800
Sales and marketing		542,900			4,100					547,000
General and administrative		1,195,300			317,100		(33,900	)		1,478,500
Total operating expenses	$	2,955,100		$	328,300	$	(41,100	)	$	3,242,400

Income (Loss) from operations	$	(2,888,300	)	$	1,400	$	-		$	(2,886,900	)

	For the Six Months ended March 31,
	2010			2009
Net loss for computation of basic net loss per share	$	(3,253,000	)	$	(2,893,200	)
Net loss for computation of dilutive net loss per share	$	(3,253,000	)	$	(2,893,200	)

Basic net loss per share	$	(0.07	)	$	(0.11	)

Diluted net loss per share	$	(0.07	)	$	(0.11	)

Basic weighted average shares outstanding		48,530,317			25,299,547
Dilutive common equivalent shares		-			-
Diluted weighted average common shares		48,530,317			25,299,547

	Amount
Registration fee – Securities and Exchange Commission	$	2,422
Legal fees and expenses	$	40,000
Accounting fees and expenses	$	20,000
Miscellaneous expenses	$	5,000
Total	$	67,422

Exhibit		Number

Certificate of Incorporation of Registrant, as amended		3.1.1

Bylaws of Registrant		3.2

Form of Indemnification Agreement		10.22

Exhibit Number		Exhibit Title

2.1		Agreement and Plan of Merger between Strativation, Inc., CNS Merger Corporation and CNS Response, Inc. dated as of January 16, 2007. Incorporated by reference to Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on January 22, 2007.
2.2		Amendment No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS Merger Corporation, and CNS Response, Inc. dated as of February 28, 2007. Incorporated by reference to Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 1, 2007.
3.1.1		Certificate of Incorporation, dated March 17, 1987. Incorporated by reference to Exhibit No. 3(i) to the Registrant’s Form 10-SB (File No. 000-26285) filed with the Commission on June 7, 1999.
3.1.2		Certificate of Amendment of Certificate of Incorporation, dated June 1, 2004. Incorporated by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on June 8, 2004.
3.1.3		Certificate of Amendment of Certificate of Incorporation, dated August 2, 2004. Incorporated by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on August 5, 2004.
3.1.4		Certificate of Amendment of Certificate of Incorporation, dated September 7, 2005. Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (File No. 333-150398) filed with the Commission on April 23, 2008.
3.1.5		Certificate of Amendment of Certificate of Incorporation, dated January 8, 2007.
3.1.6		Certificate of Ownership and Merger Merging CNS Response, Inc., a Delaware corporation, with and into Strativation, Inc., a Delaware corporation, dated March 7, 2007. Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.
3.2.1		Bylaws. Incorporated by reference to Exhibit No. 3(ii) to the Registrant’s Form 10-SB (File No. 000-26285) filed with the Commission on June 7, 1999.
3.2.2		Amendment No. 1 to Bylaws of CNS Response, Inc. Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on July 2, 2009.
3.2.3		Amendment No. 2 to Bylaws of CNS Response, Inc. Incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on July 23, 2009.
4.1		Amended and Restated 2006 Stock Incentive Plan. Incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 000-26285) filed with the Commission on April 1, 2010.*
5.1		Opinion of Stubbs, Alderton & Markiles, LLP.
10.1		Amended and Restated Registration Rights Agreement, dated January 16, 2007 by and among the Registrant and the stockholders signatory thereto. Incorporated by reference to Exhibit No. 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on January 16, 2007.
10.2		Form of Subscription Agreement between the Registrant and certain investors, dated March 7, 2007. Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.
10.3		Form of Indemnification Agreement by and among the Registrant, CNS Response, Inc., a California corporation, and certain individuals, dated March 7, 2007. Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.
10.4		Form of Registration Rights Agreement by and among the Registrant and certain Investors signatory thereto dated March 7, 2007. Incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.
10.5		Form of Registration Rights Agreement by and among the Registrant and certain stockholders of the Company signatory thereto dated March 7, 2007. Incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.

10.6		Employment Agreement by and between the Registrant and George Carpenter dated October 1, 2007. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on October 3, 2007.*
10.7		Employment Agreement by and between the Registrant and Daniel Hoffman dated January 11, 2008. Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-26285) filed with the Commission on January 17, 2008.*
10.8		Stock Purchase Agreement by and among Colorado CNS Response, Inc., Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11, 2008. Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with the Commission on January 13, 2009.
10.9		Form of Warrant issued to Investors in Private Placement. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-26285) filed with the Commission on March 13, 2007.
10.10		Senior Secured Convertible Promissory Note, dated March 30, 2009, by and between the Company and Brandt Ventures, GP. Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-26285) filed with the Commission on April 3, 2009.
10.11		Senior Secured Convertible Promissory Note, dated March 30, 2009, by and between the Company and SAIL Venture Partners, LP. Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-26285) filed with the Commission on April 3 2009.
10.12		Bridge Note and Warrant Purchase Agreement, dated May 14, 2009 by and between the Company and SAIL Venture Partners, LP. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on May 20, 2009.
10.13		Form of Secured Convertible Promissory Note. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on May 20, 2009.
10.14		Form of Warrant to Purchase Shares. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on May 20, 2009.
10.15		Bridge Note and Warrant Purchase Agreement, dated June 12, 2009, by and between the Company and John Pappajohn. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 18, 2009.
10.16		Form of Secured Convertible Promissory Note. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 18, 2009.
10.17		Form of Warrant to Purchase Shares. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 18, 2009.
10.18		Form of Subscription Agreement. Incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with the Securities and Exchange Commission on December 30, 2009.
10.19		Form of Warrant. Incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with the Securities and Exchange Commission on December 30, 2009.
10.20		Registration Rights Agreement. Incorporated by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with the Securities and Exchange Commission on December 30, 2009.
10.21		Amendment No. 1 to Registration Rights Agreement. Incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with the Securities and Exchange Commission on December 30, 2009.
10.22		Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K (File Number 000-26285) filed with the Securities and Exchange Commission on December 30, 2009.
10.23		Employment Agreement by and between the Registrant and Paul Buck effective as of February 18, 2010.*
10.24		Consulting Agreement by and among CNS Response, Inc. and Henry T. Harbin, effective January 1, 2010. Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File Number 000-26285) filed with the Securities and Exchange Commission on May 14, 2010.
10.25		Bridge Note and Warrant Purchase Agreement, dated as of June 3, 2010, between CNS Response, Inc. and John Pappajohn. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 7, 2010.

10.26		Form of Note. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 7, 2010.
10.27		Form of Warrant. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File Number 000-26285) filed with the Securities and Exchange Commission on June 7, 2010.
10.28		Placement Agent Agreement dated August 3, 2009 between the Registrant and Maxim Group LLC.
10.29		Form of warrant issued to Placement Agent.
10.30		Form of Registration Rights Agreement dated August 26, 2009 between the Registrant and Maxim Group, LLC.
21.1		Subsidiaries of the Registrant. Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26285) filed with the Commission on January 13, 2009.
23.1		Consent of Independent Registered Public Accounting Firm.
23.2		Consent of Stubbs, Alderton & Markiles, LLC (included in Exhibit 5.1)

	CNS RESPONSE, INC. (Registrant)

	By:	/s/ George Carpenter

		George Carpenter
		Chief Executive Officer and Secretary
		(Principal Executive Officer)

Signature	Title	Date

	Chief Executive Officer and Secretary, and	July 2, 2010
/s/ George Carpenter	Chairman of the Board
George Carpenter	(Principal Executive Officer)

	Chief Financial Officer (Principal Financial and	July 2, 2010
/s/ Paul Buck	Accounting Officer)
Paul Buck

	Director	July 2, 2010
*
David B. Jones

	Director	July 2, 2010
*
Jerome Vaccaro, M.D.

	Director	July 2, 2010
*
Henry T. Harbin, M.D.

	Director	July 2, 2010
*
John Pappajohn

*By : George Carpenter
George Carpenter
As Attorney-In-Fact

	STRATIVATION, INC.

	By:	/s/ Silas Phillips
		Silas Philips
		Chief Executive Officer

	Very truly yours,

	/s/ Stubbs Alderton & Markiles, LLP
	STUBBS ALDERTON & MARKILES, LLP

	Sincerely,

	CNS RESPONSE, INC.

	By:	/s/ George Carpenter
		George C. Carpenter IV
		CEO
AGREED AND ACCEPTED:

/s/ Paul Buck