CNS Response, Inc. – ‘SB-2’ on 5/21/07

On:  Monday, 5/21/07, at 9:50pm ET   ·   As of:  5/22/07   ·   Accession #:  1170918-7-447   ·   File #:  333-143139

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Registration of Securities by a Small-Business Issuer   —   Form SB-2
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: SB-2        Registration of Securities by a Small-Business       121    589K 
                          Issuer                                                 
 2: EX-5        Opinion re: Legality -- ex5-1                          2      8K 
 3: EX-23       Consent of Experts or Counsel -- ex23-2                1      5K 

SB-2   —   Registration of Securities by a Small-Business Issuer
Document Table of Contents

SB-2
1st Page of 121
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
As filed with the Securities and                                                
Exchange Commission on May 21, 2007              Registration No. _____________ 
================================================================================

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 -----------------

 FORM SB-2
REGISTRATION STATEMENT
 UNDER THE
SECURITIES ACT OF 1933
 -----------------

CNS RESPONSE, INC.
(Name of Small Business Issuer in its Charter)

    DELAWARE                         8734                   87-0419387
(State or Jurisdiction of          (Primary Standard         (I.R.S Employer  
Incorporation or Organization)   Industrial Classification   Identification No.)
          Code Number)

 2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(714) 545-3288
 (Address and Telephone Number of Principal Executive Offices)

 2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(Address of Principal Place of Business or intended Place of Business)

 LEONARD BRANDT, CHIEF EXECUTIVE OFFICER
CNS RESPONSE, INC.

 2755 BRISTOL ST., SUITE 285
COSTA MESA, CA 92626
(714) 545-3288

Copy to:

SCOTT ALDERTON, ESQ.
 STUBBS ALDERTON & MARKILES, LLP
 15260 VENTURA BOULEVARD, 20TH FLOOR
SHERMAN OAKS, CALIFORNIA 91403
(818) 444-4500
 (Name, Address and Telephone Number of Agent for Service)

Approximate  date of proposed  sale to the  public:  From time to time after the
effective date of this Registration Statement.                                  

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the  Securities  Act  registration  statement  number of the  earlier  effective
registration statement for the same offering. [_]                               

If this form is a  post-effective  amendment filed pursuant to Rule 462(c) under
the  Securities  Act,  check  the  following  box and  list the  Securities  Act
registration  statement number of the earlier effective  registration  statement
for the same offering. [_]                                                      

If this form is a  post-effective  amendment filed pursuant to Rule 462(d) under
the  Securities  Act,  check  the  following  box and  list the  Securities  Act
registration  statement number of the earlier effective  registration  statement
for the same offering. [_]                                                      

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]                                                          

SB-2
2nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 2nd
                                                        [Enlarge/Download Table]
                         CALCULATION OF REGISTRATION FEE                                                     

============================================= ================ ============== ================== ============
                                              PROPOSED MAXIMUM    PROPOSED       AMOUNT OF                   
           TITLE OF EACH CLASS OF              AMOUNT TO BE    OFFERING PRICE MAXIMUM AGGREGATE  REGISTRATION
        SECURITIES TO BE REGISTERED            REGISTERED (1)    PER UNIT (2) OFFERING PRICE (2)     FEE     
--------------------------------------------- ---------------- -------------- ------------------ ------------
                                                                                                             
Common Stock, par value $.001 per share......        7,355,199 $         1.65 $    12,136,078.35 $     372.58
--------------------------------------------- ---------------- -------------- ------------------ ------------
Common Stock, par value $.001 per share                                                                      
issuable upon exercise of warrants ..........        2,627,939 $         1.65 $     4,336,099.35 $     133.12
--------------------------------------------- ---------------- -------------- ------------------ ------------
    TOTAL ...................................        9,983,138          --    $    16,472,177.70 $     505.70
--------------------------------------------- ---------------- -------------- ------------------ ------------

(1)      In the  event  of a stock  split,  stock  dividend,  or  other  similar
         transaction  involving  the  Registrant's  common  stock,  in  order to
         prevent dilution,  the number of shares registered shall  automatically
         be increased to cover the  additional  shares in  accordance  with Rule
416(a) under the Securities Act.                              

(2)      Estimated  solely for the purpose of calculating the  registration  fee
         pursuant to Rule 457(c)  under the  Securities  Act of 1933,  using the
         average of the high and low price as reported  on the  Over-the-Counter
Bulletin Board on May 17, 2007.                               

THE REGISTRANT HEREBY AMENDS THIS  REGISTRATION  STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT  SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY  STATES THAT THIS REGISTRATION  STATEMENT
SHALL  THEREAFTER  BECOME  EFFECTIVE  IN  ACCORDANCE  WITH  SECTION  8(A) OF THE
SECURITIES  ACT OF  1933  OR  UNTIL  THE  REGISTRATION  STATEMENT  SHALL  BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION,  ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.                                                                  
================================================================================

SB-2
3rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 3rd
 Subject to Completion, Dated May 21, 2007

CNS RESPONSE, INC.

 9,983,138 SHARES COMMON STOCK

         This  prospectus  relates to the offer and sale from time to time of up
to 9,983,138 shares of our common stock that are held by the stockholders  named
in the "Selling  Stockholders"  section of this prospectus.  The prices at which
the selling stockholders may sell the shares in this offering will be determined
by the prevailing market price for the shares or in negotiated transactions.  We
will not receive any of the proceeds  from the sale of the shares.  We will bear
all expenses of  registration  incurred in connection  with this  offering.  The
selling stockholders whose shares are being registered will bear all selling and
other expenses.                                                                 

         Our common stock is quoted on the Over-The-Counter Bulletin Board under
the symbol  "CNSO.OB."  On May 17, 2007,  the last  reported  sales price of the
common stock on the Over-The-Counter Bulletin Board was $1.65 per share.        

         INVESTING  IN OUR  COMMON  STOCK  INVOLVES  RISKS.  SEE "RISK  FACTORS"
BEGINNING ON PAGE 4.                                                            

         Neither the Securities and Exchange Commission nor any state securities
commission has approved or  disapproved  of these  securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.                                                               

 The date of this prospectus is ______________

SB-2
4th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 4th
 TABLE OF CONTENTS

                                                                            PAGE

Prospectus Summary ........................................................    1
Risk Factors ..............................................................    4
Cautionary Note Regarding Forward - looking Statements ....................   21
Corporate Background and Merger Transaction ...............................   22
Use of Proceeds ...........................................................   28
Market for Common Equity and Related Stockholder Matters ..................   28
Management's Discussion and Analysis of Financial Condition                     
   and Results of Operations ..............................................   29
Business ..................................................................   41
Management ................................................................   62
Executive Compensation ....................................................   66
Principal and Selling Stockholders ........................................   68
Related Party Transactions ................................................   77
Description of Capital Stock ..............................................   81
Plan of Distribution ......................................................   84
Legal Matters .............................................................   86
Experts ...................................................................   86
Where You Can Find More Information .......................................   86
Index to Financial Statements .............................................  F-1

         You should rely only on the information contained in this prospectus or
any supplement.  We have not authorized  anyone to provide  information  that is
different from that contained in this prospectus.  The information  contained in
this prospectus is accurate only as of the date of this  prospectus,  regardless
of the time of delivery of this prospectus or of any sale of our common stock.  

         Except as otherwise indicated,  information in this prospectus reflects
a  one-for-fifty  reverse  stock split of our common  stock which took effect on
January 10, 2007.                                                               

SB-2
5th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 5th
PROSPECTUS SUMMARY

         THIS  SUMMARY  HIGHLIGHTS  SELECTED  INFORMATION  CONTAINED  IN GREATER
DETAIL  ELSEWHERE  IN THIS  PROSPECTUS.  THIS  SUMMARY  DOES NOT CONTAIN ALL THE
INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD
READ THE ENTIRE  PROSPECTUS  CAREFULLY  BEFORE  MAKING AN  INVESTMENT  DECISION,
INCLUDING  "RISK  FACTORS" AND THE  CONSOLIDATED  FINANCIAL  STATEMENTS  AND THE
RELATED  NOTES.  REFERENCES  IN THIS  PROSPECTUS  TO "CNS  RESPONSE,  INC,"  THE
"COMPANY," "WE," "OUR" AND "US" REFER TO CNS RESPONSE, INC. AND OUR CONSOLIDATED
SUBSIDIARY.                                                                     

OUR BUSINESS

         We are a life sciences  company focused on the  commercialization  of a
patented  system  that  guides   psychiatrists   and  other  physicians  in  the
identification  and  determination of appropriate and effective  medications for
patients with certain behavioral (mental or addictive) disorders. 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
which are contained in a proprietary outcomes database. This methodology, called
"Referenced-EEG"  or "rEEG"  represents  an innovative  approach to  identifying
effective  medications  for  patients  suffering  from  debilitating  behavioral
disorders.                                                                      

         In addition,  rEEG provides us with  significant  opportunities  in the
area of  pharmaceutical  development.  Using the rEEG methodology in combination
with our  proprietary  outcomes  database,  we believe we have the  potential to
identify new uses for existing drugs and drug  combinations.  We intend to enter
into relationships with established drug and biotechnology  companies to further
explore these opportunities.                                                    

 OUR HISTORY AND CONTACT INFORMATION

         Our company was  originally  incorporated  on July 10, 1984,  under the
name  Mammon  Oil & Gas,  Inc.  in the  state of Utah.  In  February  1986,  our
shareholders approved proposals to change our business direction to the business
of health care including research,  development and marketing, and a name change
to Volt Research,  Inc. From August 1986 to August 1988, we engaged in operating
clinics  dedicated  to Retin-A skin  therapy.  In August  1988,  our  management
decided to phase out our  clinic  operations  and  concentrate  on  selling  our
expertise and skin care products directly to physicians.  On January 1, 2004, we
discontinued  our business  activities and operations and, since that date until
our acquisition of NBD Marketing, Inc., ProspectWorks, Inc., SalesWare, Inc. and
xSellsys,  Inc.  (collectively  "Acquired  Companies")  in June 2004,  we had no
revenues or earnings from operations.                                           

         In a series of  transactions  consummated in June 2004, we acquired all
of  the  outstanding  capital  stock  of  NBD  Marketing,   Inc.,  a  California
corporation, or NBD, and SalesWare Inc., a Nevada corporation, or SalesWare, and
formed an acquisition  subsidiary,  xSellsys,  Inc., a California corporation to
acquire substantially all of the assets and liabilities of CRM SalesWare,  Inc.,
a  California  corporation.  As a  result  of  the  consummation  of  the  above
transactions,  SalesWare, NBD, and xSellsys became our wholly-owned subsidiaries
and  ProspectWorks,  Inc.,  a  Nevada  corporation  and  a  subsidiary  of  NBD,
ProspectWorks,  became an indirect,  wholly-owned  subsidiary of the Company. In
connection  with the  acquisition  of  SalesWare,  Inc.,  on August 2, 2004,  we
changed our corporate name to "SalesTactix, Inc."                               

         On October 6, 2004, the Acquired  Companies,  William  Noonan,  Vincent
Michael  Keyes III,  and  Thomas  Ketchum  filed a  complaint  in Orange  County
Superior Court, Case No. 04CC00669 against us, Scott Absher,  George LeFevre and
Mark Absher.  On November 15, 2004, we entered into a settlement  agreement with
the plaintiffs  whereby (i) the acquisition  agreements by and among the parties
were rescinded  including an asset purchase agreement and certain stock purchase
agreements; (ii) certain assets                                                 

1 

SB-2
6th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 6th
owned by SalesTaxtix,  Inc. and xSellsys were transferred to certain plaintiffs;
(iii) certain  trademarks and tradenames were transferred to CRM SalesWare;  and
(iv)  our  outstanding  shares  owned  by  the  plaintiffs  were  canceled.  The
Settlement  Agreement  essentially  unwound the  acquisition  and  restored  the
parties to their prior positions, as if the acquisitions had never occurred. The
claim was  dismissed in the fourth  quarter of 2004 pursuant to the terms of the
settlement agreement.  In connection with the settlement  agreement,  we changed
our name to Strativation, Inc. in September 2005.                               

         As a result of our lack of revenue generation and the rescission of the
acquisition,  we reassessed  our business plan and  determined to seek out other
business opportunities capable of increasing stockholder value.                 

         On July 18,  2006,  we entered  into a stock  purchase  agreement  with
seventeen  accredited  investors pursuant to which we issued 3,800,000 shares of
our common  stock  (76,000  shares of our common stock after taking into account
our 1-for-50  reverse stock split which became effective on January 10, 2007) in
consideration  for an  aggregate of  $237,669.00  in cash.  In  addition,  these
investors   acquired  shares  in  private   transactions  with  certain  of  our
stockholders,  and  acquired  a majority  stake in our  issued  and  outstanding
shares.  In connection  with these  transactions,  effective  July 18, 2006, Mr.
Scott  Absher and Mr.  George  LeFevre  resigned as officers  and members of the
board of directors,  and Mr. Silas  Philips was  appointed  our Chief  Executive
Officer, Chief Financial Officer, Secretary, and sole director.                 

         On  March 7,  2007,  we  acquired  CNS  Response,  Inc.,  a  California
corporation  ("CNSR  California")  through  a merger of CNSR  California  with a
wholly-owned  subsidiary  that we formed for the  purpose of  facilitating  this
transaction. Upon the closing of this merger transaction, CNSR California became
our wholly-owned  subsidiary,  and we changed our name to CNS Response, Inc. The
merger  was  accounted  for  as a  "reverse  acquisition,"  and  for  accounting
purposes,  CNSR  California  was demed to be the  "accounting  acquirer"  in the
"reverse acquisition."                                                          

         In  addition,  in  connection  with the closing of the merger with CNSR
California,  we received  gross  proceeds  of  approximately  $7.8  million in a
private  placement  with  institutional  investors  and  other  high  net  worth
individuals.  Pursuant  to  subscription  agreements  entered  into  with  these
investors,  we sold 6,504,765  investment  units, at $1.20 per investment  unit.
Each investment unit consists of one share of our common stock,  and a five year
non-callable  warrant to purchase  three-tenths of one share of our common stock
at an exercise price of $1.80 per share.  After broker  commissions and expenses
and legal and other  expenses,  we received net proceeds of  approximately  $6.9
million in the private placement financing.                                     

         In  connection  with  the  private  placement,  we  agreed  to  file  a
registration  statement  covering  the resale of the common stock and the common
stock  underlying  the warrants sold in the private  placement  financing.  This
prospectus  is part of a  registration  statement  on Form  SB-2  that we  filed
pursuant  to the  terms of our  agreement  with  the  investors  in the  private
placement financing. The registration statement on Form SB-2 and this prospectus
also covers the resale of common stock held by other  security  holders named in
the "Selling Stockholders" section of this prospectus.                          

         The address of our  principal  executive  office is 2755  Bristol  St.,
Suite 285, Costa Mesa CA 92626, and our telephone number is (714) 545-3288.     

2 

SB-2
7th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 7th
THE OFFERING

Common stock offered............... Up  to  9,983,138   shares  by  the  selling
    stockholders

Common stock outstanding                                                        
before this offering............. 25,303,302 shares                         

Common stock to be outstanding                                                  
after this offering.............. Up to 27,931,241 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 4 for a
                                    discussion   of  factors   that  you  should
                                    consider   carefully   before   deciding  to
                  purchase our common stock.

         In the table above,  the number of shares to be outstanding  after this
offering is based on  25,303,302  shares  outstanding  as of May 17,  2007,  and
assumes the issuance to the selling  stockholders  of the  following  additional
shares which are being offered for sale under the prospectus:                   

         o        2,627,939  shares  issuable  upon the exercise of  outstanding
                  warrants  at a weighted  average  exercise  price of $1.73 per
share.                                      

         In the table above,  the number of shares to be outstanding  after this
offering  does not reflect the issuance of the following  shares,  which are not
being offered for sale under this prospectus:                                   

         o        8,407,517  shares of common stock  reserved for issuance  upon
         exercise of warrants and options, as of May 17, 2007.

3 

SB-2
8th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 8th
RISK FACTORS

         INVESTING IN CNS  RESPONSE,  INC.  INVOLVES A HIGH DEGREE OF RISK.  YOU
SHOULD CAREFULLY  CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER  INFORMATION
CONTAINED IN THIS PROSPECTUS  BEFORE  PURCHASING OUR COMMON STOCK. THE RISKS AND
UNCERTAINTIES  DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS
AND UNCERTAINTIES  THAT WE ARE UNAWARE OF, OR THAT WE CURRENTLY DEEM IMMATERIAL,
ALSO MAY BECOME IMPORTANT  FACTORS THAT AFFECT US. IF ANY OF THE FOLLOWING RISKS
OCCUR,  OUR  BUSINESS,  FINANCIAL  CONDITION OR RESULTS OF  OPERATIONS  COULD BE
MATERIALLY AND ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE SOME OR ALL OF YOUR INVESTMENT.           

RISKS RELATING TO OUR BUSINESS                                                  

WE HAVE A LIMITED OPERATING HISTORY,  MAKING IT DIFFICULT TO EVALUATE OUR FUTURE
PERFORMANCE.                                                                    

         CNS  Response,   Inc.,  a  California  Corporation  and  the  operating
subsidiary of CNS Response,  Inc., a Delaware corporation  (collectively,  "we",
"us",  "our",  "the  company"),  was  incorporated  in 2000.  As a result of our
limited  operating  history,   investors  have  limited  substantive   financial
information on prior  operations to evaluate the company as an  investment.  Our
potential  must be  viewed  in light of the  problems,  expenses,  difficulties,
delays and  complications  often encountered in the operation of a new business.
We will be subject to the risks  inherent in the  ownership  and  operation of a
company  with a limited  operating  history  such as  fluctuations  in expenses,
competition,  the general  strength  of regional  and  national  economies,  and
governmental  regulation.  Any failure to  successfully  address these risks and
uncertainties would seriously harm our business and prospects.                  

WE  CURRENTLY  DEPEND  ON SALES OF OUR rEEG  ANALYTICAL  REPORTS  FOR ALL OF OUR
REVENUE,  AND IF OUR REPORTS DO NOT GAIN WIDESPREAD MARKET ACCEPTANCE,  THEN OUR
REVENUES MAY NOT EXCEED OUR EXPENSES.                                           

         We have  developed  a  methodology  that aids  psychiatrists  and other
physicians in selecting  appropriate and effective medications for patients with
certain behavioral or addictive  disorders based on physiological  traits of the
patient's  brain and  information  contained in a proprietary  database that has
been developed over the last twenty years. We began selling reports, referred to
as rEEG Analytical  Reports,  based on our methodology in 2000. To date, we have
not  received  widespread  market  acceptance  of the  usefulness  of  our  rEEG
Analytical  Reports  in  helping   psychiatrists  and  physicians  inform  their
treatment  strategies for patients  suffering from behavioral  and/or  addictive
disorders.  Because we currently  depend on the sale of rEEG Analytical  Reports
for all or our revenue,  and we have no other significant  products or services,
if we fail to  achieve  widespread  market  acceptance  for our rEEG  Analytical
Reports, we will not be able to sustain or grow our revenues.                   

OUR  OPERATING  RESULTS MAY  FLUCTUATE  SIGNIFICANTLY  AND OUR STOCK PRICE COULD
DECLINE OR FLUCTUATE IF OUR RESULTS DO NOT MEET THE  EXPECTATION  OF ANALYSTS OR
INVESTORS.                                                                      

         Management  expects that we will experience  substantial  variations in
our operating results from quarter to quarter. We believe that the factors which
influence this variability of quarterly results include:                        

         o        the use of and demand for rEEG  Analytical  Reports  and other
                  products  and/or services that we may offer in the future that
are based on our patented methodology.      

 o        the effectiveness of new marketing and sales programs.

o        turnover among our employees.                        

4 

SB-2
9th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 9th
o        changes in management.                               

         o        the  introduction  of products or services  that are viewed in
               the marketplace as substitutes for the services we provide.

         o        communications  published by industry  organizations  or other
                  professional   entities  in  the   psychiatric  and  physician
   community that are unfavorable to our business.

         o        the introduction of regulations  which impose additional costs
on or impede our business.                  

         o        the timing and amount of our expenses,  particularly  expenses
                  associated  with the  marketing and promotion of our services,
                  the training of physicians and psychiatrists in the use of our
          rEEG Analytical Reports, and research and development.

         As a result of fluctuations in our revenue and operating  expenses that
may occur, management believes that period-to-period  comparisons of our results
of  operations  are  not a good  indication  of our  future  performance.  It is
possible that in some future quarter or quarters,  our operating results will be
below the  expectations of securities  analysts or investors.  In that case, our
common stock price could fluctuate significantly or decline.                    

IF THE ESTIMATES WE MAKE, AND THE  ASSUMPTIONS ON WHICH WE RELY IN PREPARING OUR
FINANCIAL  STATEMENTS PROVE  INACCURATE,  OUR ACTUAL RESULTS MAY VARY FROM THOSE
REFLECTED IN OUR FINANCIAL STATEMENTS.                                          

         Our  financial   statements  have  been  prepared  in  accordance  with
accounting  principles  generally accepted in the United States. The preparation
of these financial  statements  requires us to make estimates and judgments that
affect the reported amounts of our assets,  liabilities,  revenues and expenses,
the amounts of charges accrued by us and related disclosure of contingent assets
and  liabilities.  This  includes  estimates  and  judgments  regarding  revenue
recognition,   allowances  for  doubtful  accounts,  valuation  of  derivatives,
warrants and other equity  transactions.  We base our estimates and judgments on
historical  experience  and on various other  assumptions  that we believe to be
reasonable under the circumstances at the time such estimates and judgments were
made. There can be no assurance,  however, that our estimates and judgments,  or
the assumptions underlying them, will be correct.                               

IF WE EXPAND OUR OPERATIONS MORE AGGRESSIVELY  THAN WE ANTICIPATE,  WE WILL NEED
ADDITIONAL FUNDING TO SUPPORT OUR OPERATIONS AND CAPITAL EXPENDITURES, WHICH MAY
NOT BE AVAILABLE TO US AND WHICH LACK OF AVAILABILITY COULD ADVERSELY AFFECT OUR
BUSINESS.                                                                       

         We have not generated  significant  revenues or become profitable,  may
never do so, and may not generate  sufficient  working capital to cover costs of
operations.  We intend to fund our  operations  and  capital  expenditures  from
revenues and our cash on hand. We believe that we will have sufficient  funds to
finance the cost of our operations, our operating and management infrastructure,
and planned  expansion for the next 15 months.  However,  in the event we expand
our  operations  more  aggressively  than we currently  anticipate,  we may need
additional capital sooner than anticipated for this purpose. In addition, we may
need additional funds sooner than  anticipated to pursue business  opportunities
(such as  acquisitions  of  complementary  businesses),  to react to  unforeseen
difficulties,  such as the need to defend or enforce our  intellectual  property
rights, to respond to competitive  pressures,  or to obtain regulatory approvals
needed to market our services and/or products.                                  

         We currently have no committed sources of additional capital, and there
can be no assurance that any financing arrangements will be available in amounts
or on terms acceptable to us, if at all.                                        

5 

SB-2
10th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 10th
Furthermore,  the sale of additional  equity or convertible  debt securities may
result in additional dilution to existing  stockholders.  If adequate additional
funds are not  available,  we may be required  to delay,  reduce the scope of or
eliminate material parts of the  implementation of our business  strategy.  This
limitation  could  substantially  harm our business,  results of operations  and
financial condition.                                                            

OUR  INDUSTRY  IS  HIGHLY  COMPETITIVE,  AND  WE  MAY  NOT BE  ABLE  TO  COMPETE
SUCCESSFULLY,  WHICH COULD RESULT IN PRICE  REDUCTIONS AND DECREASED  DEMAND FOR
OUR PRODUCTS.                                                                   

         The healthcare business in general, and the behavioral health treatment
business in particular, are highly competitive.  In the event that we are unable
to  convince  physicians,  psychiatrists  and  patients  of the  efficacy of our
products and  services,  individuals  seeking  treatment for  behavioral  health
disorders may seek alternative treatment methods,  which could negatively impact
our sales and profitability.                                                    

OUR rEEG  TECHNOLOGY  MAY NOT BE AS USEFUL AS WE BELIEVE IT TO BE,  WHICH  COULD
LIMIT OR PREVENT US FROM GROWING OUR REVENUES.                                  

         Our belief in the efficacy of our rEEG technology is based on a limited
number of studies.  Such results may not be statistically  significant,  and may
not be  indicative  of the  long-term  future  efficacy  of the  information  we
provide. Controlled scientific studies, including those that have been announced
and that are planned for the future,  may yield results that are  unfavorable or
demonstrate that our services,  including our rEEG Analytical  Reports,  are not
clinically  useful.  While we have not experienced such problems to date, if the
initially indicated results cannot be successfully replicated or maintained over
time,  utilization  of  services  based on our rEEG  technology,  including  the
delivery  of our  rEEG  Analytical  Reports,  could  decline  substantially  and
therefore harm our operating results and stock price.                           

DATA RELATING TO OUR PRODUCTS AND SERVICES MAY BE INTERPRETED UNFAVORABLY, WHICH
COULD ADVERSELY AFFECT OUR REVENUES AND EARNINGS.                               

         While  we have  been  able to  generate  initial  interest  in our rEEG
Analytical Reports among a limited number of psychiatrists and physicians, there
can be no assurance that our efforts or the efforts of others will be successful
in  increasing  the  acceptance  of our  rEEG  Analytical  Reports.  Marketplace
acceptance of our rEEG  Analytical  reports may largely  depend upon  healthcare
providers'  interpretation  of our limited data, the results of pending studies,
or upon reviews and reports that may be given by independent researchers. In the
event that health care providers  interpret data relating to our rEEG technology
unfavorably,  and if our marketing and promotional efforts are not as successful
as we expect them to be, our revenues and earnings will be harmed.              

IF WE DO NOT  MAINTAIN  AND  EXPAND OUR  RELATIONSHIPS  IN THE  PSYCHIATRIC  AND
PHYSICIAN  COMMUNITY,  OUR GROWTH  WILL BE  LIMITED  AND OUR  BUSINESS  COULD BE
HARMED.  IF PSYCHIATRISTS  AND OTHER PHYSICIANS DO NOT RECOMMEND AND ENDORSE OUR
PRODUCTS AND SERVICES, OUR SALES MAY DECLINE OR WE MAY BE UNABLE TO INCREASE OUR
SALES, AND IN SUCH INSTANCES OUR PROFITABILITY WOULD BE HARMED.                 

         Purchases  by  psychiatrists  and  physicians  of our  rEEG  Analytical
Reports currently  account for  substantially all of our revenue.  Consequently,
our  relationships  with  psychiatrists  and  physicians  are  critical  to  our
continued growth.  We believe that these  relationships are based on the quality
and ease of use of our rEEG Analytical Reports, our commitment to the behavioral
health market, our marketing efforts, and our presence at tradeshows such as the
American  Psychiatric  Association  annual  meeting.  Any  actual  or  perceived
diminution in our reputation or the quality of our rEEG Analytical  Reports,  or
our failure or inability to maintain our  commitment  to the  behavioral  health
market and our other  marketing and product  promotion  efforts could damage our
current relationships, or prevent us from                                       

6 

SB-2
11th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 11th
forming new relationships, with psychiatrists and other physicians and cause our
growth to be limited and our business to be harmed.                             

         To sell our rEEG Analytical  Reports,  psychiatric  professionals  must
recommend and endorse them. We may not obtain the necessary  recommendations  or
endorsements  from this  community.  Acceptance of our rEEG  Analytical  Reports
depends on educating  psychiatrists and physicians as to the benefits,  clinical
efficacy,  ease of use, revenue opportunity,  and cost-effectiveness of our rEEG
Analytical Reports and on training the medical community to properly  understand
and utilize our rEEG Analytical  Reports.  If we are not successful in obtaining
the  recommendations  or endorsements of psychiatrists  and other physicians for
our rEEG  Analytical  Reports,  our  sales  may  decline  or we may be unable to
increase our sales and profitability.                                           

NEGATIVE PUBLICITY OR UNFAVORABLE MEDIA COVERAGE COULD DAMAGE OUR REPUTATION AND
HARM OUR OPERATIONS.                                                            

         In the event that the marketplace perceives our rEEG Analytical Reports
as not  offering  the  benefits  which we believe  they  offer,  we may  receive
significant  negative  publicity.  This  publicity may result in litigation  and
increased  regulation  and  governmental  review.  If we  were to  receive  such
negative  publicity  or  unfavorable  media  attention,   whether  warranted  or
unwarranted,  our  ability  to  market  our  rEEG  Analytical  Reports  would be
adversely  affected,   pharmaceutical  companies  may  be  reluctant  to  pursue
strategic  initiatives  with us relating to the  development of new products and
services based on our rEEG technology, we may be required to change our products
and services and become subject to increased  regulatory burdens,  and we may be
required to pay large judgments or fines. Any combination of these factors could
further  increase our cost of doing business and adversely  affect our financial
position, results of operations and cash flows.                                 

IF WE DO NOT  SUCCESSFULLY  GENERATE  ADDITIONAL  PRODUCTS AND SERVICES FROM OUR
PATENTED METHODOLOGY AND PROPRIETARY  DATABASE, OR IF SUCH PRODUCTS AND SERVICES
ARE DEVELOPED BUT NOT  SUCCESSFULLY  COMMERCIALIZED,  THEN WE COULD LOSE REVENUE
OPPORTUNITIES.                                                                  

         Currently,  our primary business is the sale of rEEG Analytical Reports
to  psychiatrists  and physicians  based on our rEEG methodology and proprietary
database. In the future, we may utilize our patented methodology and proprietary
database to produce pharmaceutical advancements and developments.  For instance,
we may use our patented  methodology  and  proprietary  database to identify new
medications that are promising in the treatment of behavioral  health disorders,
identify  new uses of  medications  which  have been  previously  approved,  and
identify new patient  populations that are responsive to medications in clinical
trials that have previously failed to show efficacy in United States Food & Drug
Administration   (FDA)  approved   clinical  trials.   The  development  of  new
pharmaceutical  applications  that are  based on our  patented  methodology  and
proprietary  database  will be costly,  since we will be  subject to  additional
regulations, including the need to conduct expensive and time consuming clinical
trials.                                                                         

         In addition, to successfully  monetize our pharmaceutical  opportunity,
we  will  need  to  enter  into  strategic   alliances  with   biotechnology  or
pharmaceutical  companies that have the ability to bring to market a medication,
an  ability  which we  currently  do not have.  We  maintain  no  pharmaceutical
manufacturing,  marketing or sales organization,  nor do we plan to build one in
the  foreseeable  future.   Therefore,  we  are  reliant  upon  approaching  and
successfully   negotiating  attractive  terms  with  a  partner  who  has  these
capabilities.  No guarantee can be made that we can do this on attractive terms.
If we are unable to find strategic partners for our pharmaceutical  opportunity,
our revenues  may not grow as quickly as we desire,  which could lower our stock
price.                                                                          

7 

SB-2
12th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 12th
IN  THE  EVENT  THAT  WE  PURSUE  OUR  PHARMACEUTICAL  OPPORTUNITIES,  WE OR ANY
DEVELOPMENT  PARTNERS THAT WE PARTNER WITH WILL LIKELY NEED TO CONDUCT  CLINICAL
TRIALS.  IF SUCH CLINICAL TRIALS ARE DELAYED OR  UNSUCCESSFUL,  IT COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS.                                                 

         We  have  no  experience  conducting  clinical  trials  of  psychiatric
medications and in the event we conduct clinical trials, we will rely on outside
parties,  including  academic  investigators,  outside  consultants and contract
research  organizations  to conduct these trials on our behalf.  We will rely on
these  parties  to  assist in the  recruitment  of sites  for  participation  in
clinical trials, to maintain positive  relations with these sites, and to ensure
that these sites  conduct the trials in  accordance  with the  protocol  and our
instructions.  If these parties renege on their  obligations to us, our clinical
trials may be delayed or unsuccessful.                                          

         In the event we conduct clinical  trials,  we cannot predict whether we
will encounter problems that will cause us or regulatory authorities to delay or
suspend our clinical  trials or delay the analysis of data from our completed or
ongoing  clinical  trials.  In  addition,  we cannot  assure you that we will be
successful in reaching the endpoints in these trials,  or if we do, that the FDA
or other regulatory agencies will accept the results.                           

         Any of the following could delay the completion of clinical trials,  or
result in a failure of these trials to support our business, which would have an
adverse effect on our business:                                                 

         o        delays or the  inability  to obtain  required  approvals  from
                  institutional  review  boards or other  governing  entities at
                  clinical  sites  selected  for  participation  in our clinical
trials,                                     

o        delays in enrolling patients into clinical trials,   

         o        lower than anticipated retention rates of patients in clinical
trials,                                     

         o        negative results from clinical trials for any of our potential
products, and                               

         o        failure of our clinical  trials to demonstrate the efficacy or
clinical utility of our potential products. 

         If we determine that the costs  associated  with  attaining  regulatory
approval  of a  product  exceed  the  potential  financial  benefits  or if  the
projected development timeline is inconsistent with our determination of when we
need to get the product to market,  we may chose to stop a clinical trial and/or
development of a product.                                                       

IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY, WE
MAY NOT EXPAND OUR BUSINESS SUFFICIENTLY TO COVER OUR EXPENSES.                 

         We  currently  rely on our  employees  to market and  promote  our rEEG
Analytical  Reports.  In the event that we experience  high  turnover  among our
employees,  and new  employees  do not  acquire  the  skills  to sell  our  rEEG
Analytical  Reports in a timely  and  successful  manner,  we may not be able to
sustain and grow our revenue.                                                   

         In addition, in order to grow our business, we will need to develop and
introduce new sales and marketing  programs and clinical  education  programs to
promote the use of our rEEG Analytical  Reports by psychiatrists and physicians.
If we do not implement these new sales and marketing and education programs in a
timely and successful  manner, we may not be able to achieve the level of market
awareness and sales required to expand our business.                            

8 

SB-2
13th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 13th
WE MAY FAIL TO  SUCCESSFULLY  MANAGE AND  MAINTAIN  THE GROWTH OF OUR  BUSINESS,
WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.                         

         As we continue  expanding our  commercial  operations,  this  expansion
could place  significant  strain on our management,  operational,  and financial
resources. To manage future growth, we will need to continue to hire, train, and
manage  additional  employees,  particularly a specially  trained sales force to
market our rEEG Analytical Reports.                                             

         In addition, we have maintained a small financial and accounting staff,
and our reporting obligations as a public company, as well as our need to comply
with the  requirements  of the  Sarbanes-Oxley  Act of 2002,  and the  rules and
regulations  of the SEC  will  continue  to  place  significant  demands  on our
financial and accounting  staff,  on our financial,  accounting and  information
systems and on our internal controls. As we grow, we will need to add additional
accounting  staff  and  continue  to  improve  our  financial,   accounting  and
information  systems and  internal  controls  in order to fulfill our  reporting
responsibilities and to support expected growth in our business. Our current and
planned  personnel,  systems,  procedures  and  controls  may not be adequate to
support our  anticipated  growth or  management  may not be able to  effectively
hire,  train,  retain,  motivate and manage required  personnel.  Our failure to
manage growth  effectively  could limit our ability to achieve our marketing and
commercialization  goals or to satisfy our reporting and other  obligations as a
public company.                                                                 

WE MAY INCUR  SIGNIFICANT  EXPENSES  OR BE  PREVENTED  FROM  COMMERCIALIZING  OR
DEVELOPING PRODUCTS AS A RESULT OF AN INTELLECTUAL PROPERTY INFRINGEMENT CLAIM. 

         Our  commercial  success  depends,  in part,  on our ability to operate
without  infringing  the  patents  and  proprietary  rights  of  third  parties.
Infringement  proceedings are long, costly and  time-consuming and their outcome
is uncertain.                                                                   

         If  we  become   involved  in  any  patent   infringement   litigation,
interference or other  administrative  proceedings  related to our  intellectual
property,  we will  incur  substantial  expenses  and the time and effort of our
management and scientific personnel, will be significantly diverted. As a result
of such litigation or proceedings,  we could lose our proprietary position,  and
be  restricted  from  selling,   manufacturing   or  distributing  the  affected
product(s),  incur substantial damage awards,  including punitive damages, or be
required to seek third party licenses at terms that may be  unattractive,  or we
may fail to acquire the license.                                                

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WHICH IS THE
CORE OF OUR BUSINESS.                                                           

         We consider the protection of our intellectual  property to be critical
to our business  prospects.  We currently have two issued U.S.  patents,  and we
have filed separate patent applications in multiple foreign jurisdictions.      

         In the  future,  if we fail to file  patent  applications  in a  timely
manner, or in the event we elect not to file a patent application because of the
costs associated with patent prosecution,  we may lose patent protection that we
may have  otherwise  obtained.  The loss of any  proprietary  rights  which  are
obtainable  under patent laws may result in the loss of a competitive  advantage
over present or potential competitors, with a resulting decrease in revenues and
profitability for us.                                                           

         With respect to the  applications we have filed,  there is no guarantee
that the applications  will result in issued patents,  and further,  any patents
that do issue may be too narrow in scope to adequately  protect our intellectual
property and provide us with a competitive advantage. Competitors and others    

9 

SB-2
14th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 14th
may design around aspects of our technology,  or alternatively may independently
develop similar or more advanced  technologies that can be used in the treatment
of  behavioral  health  disorders  that fall  outside  the scope of our  claimed
subject matter.                                                                 

         In  addition,  even if we are issued  additional  patents  covering our
products,  we cannot  predict with  certainty  whether or not we will be able to
enforce our  proprietary  rights,  and whether our patents  will provide us with
adequate  protection against  competitors.  We may be forced to engage in costly
and time  consuming  litigation  or  reexamination  proceedings  to protect  our
intellectual  property  rights,  and our opponents in such proceedings may have,
and be willing to expend,  substantially  greater resources than we are able to.
In addition,  the results of such  proceedings  may result in our patents  being
invalidated or reduced in scope.  These  developments  could cause a decrease in
our operating  income and reduce our available  cash flow,  which could harm our
business and cause our stock price to decline.                                  

         We also utilize processes and technology that constitute trade secrets,
such as our  outcomes  database,  and we must  implement  appropriate  levels of
security for those trade secrets to secure the  protection  of applicable  laws,
which we may not do effectively. In addition, the laws of many foreign countries
do not protect proprietary rights as fully as the laws of the United States.    

         While we have not had any  significant  issues to date, the loss of any
of our trade  secrets or  proprietary  rights which may be  protected  under the
foregoing  intellectual  property  safeguards  may  result  in the  loss  of our
competitive advantage over present and potential competitors.                   

CONFIDENTIALITY  AGREEMENTS  WITH  EMPLOYEES,   LICENSEES  AND  OTHERS  MAY  NOT
ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION

         In order to protect our proprietary  technology and processes,  we rely
in  part  on  confidentiality  provisions  in  our  agreements  with  employees,
licensees,  treating  physicians and psychiatrists and others.  These agreements
may not effectively  prevent disclosure of confidential  information and may not
provide  an  adequate  remedy  in  the  event  of  unauthorized   disclosure  of
confidential information. Moreover, policing compliance with our confidentiality
agreements and non-disclosure  agreements, and detecting unauthorized use of our
technology is difficult, and we may be unable to determine whether piracy of our
technology has occurred.  In addition,  others may independently  discover trade
secrets and proprietary information.  Costly and time-consuming litigation could
be necessary to enforce and determine the scope of our proprietary  rights,  and
failure to obtain or maintain trade secret protection could adversely affect our
competitive business position.                                                  

ALTHOUGH WE BELIEVE WE ARE NOT CURRENTLY SUBJECT TO REGULATORY  APPROVAL FOR THE
SALE OF OUR rEEG ANALYTICAL REPORTS, REGULATIONS ARE CONSTANTLY CHANGING, AND IN
THE FUTURE OUR BUSINESS MAY BE SUBJECT TO REGULATION.                           

         Currently,  we do not believe that sales of our rEEG Analytical Reports
are subject to regulatory approval. However, federal, state and foreign laws and
regulations  relating to the sale of our rEEG Analytical  Reports are subject to
future changes, as are administrative interpretations of regulatory agencies. If
we fail to comply with applicable federal, state or foreign laws or regulations,
we could be subject to enforcement actions,  including injunctions preventing us
from  conducting  our business,  withdrawal of clearances or approvals and civil
and criminal penalties.  In the event that federal,  state, and foreign laws and
regulations  change,  we may need to incur  additional  costs to seek government
approvals in order to sell our rEEG  Analytical  Reports.  There is no guarantee
that we will be able to obtain such  approvals in a timely manner or at all, and
as a result,  our revenues from our rEEG Analytical  Reports may be reduced,  or
potentially eliminated.                                                         

10

SB-2
15th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 15th
IN THE  FUTURE,  WE  INTEND  TO SEEK  REGULATORY  APPROVAL  FOR  MEDICATIONS  OR
COMBINATIONS OF MEDICATIONS FOR NEW INDICATIONS,  AND THERE IS NO GUARANTEE THAT
WE WILL RECEIVE SUCH APPROVALS.                                                 

         We  intend  to  seek  approval  for   medications  or  combinations  of
medications for new indications, either with corporate partners, or potentially,
on our own. We are currently not  authorized to market such  medications  in any
jurisdiction,  and we may never receive such authorization.  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. We have no prior experience, as
a company, in conducting clinical trials.  Clinical trials are expensive and can
take years to complete, and have uncertain outcomes. In addition, the regulatory
and approval procedures vary from country to country, and additional testing may
be required in some  jurisdictions.  It may take  several  years to complete the
clinical  trials,  and a product may fail at any stage of testing.  Difficulties
and risks  associated  with clinical  trials may result in our, or our partners'
inability  to achieve  regulatory  approval  to market  medications  for central
nervous system disorders. The FDA, other regulatory agencies, our collaborators,
or we may suspend or terminate clinical trials at any time.                     

         Delays  or  failures  in  obtaining  regulatory  approval  may delay or
prevent  the  commercialization  of any  product  that  we may  develop  for new
indications,  diminish any competitive advantage,  reduce or eliminate revenues,
milestone  payments or royalties from  collaborators,  and adversely  affect our
ability to attract new collaborators.  The results of earlier clinical trials do
not  necessarily  predict the results of later clinical  trials.  Medications in
later clinical trials may fail to show desired safety and efficacy traits in the
indication we are seeking approval for, despite prior success in clinical trials
for other indications.  Even if we and/or our collaborators and partners believe
the data  collected from such clinical  trials are promising,  such data may not
support  approval by the FDA or any other regulatory  authorities.  In addition,
the FDA or other regulatory authority may interpret the data differently than we
do, which could delay, limit or prevent regulatory approval.  We expect to rely,
in part, on clinical trials that were performed by third-party physicians. These
trial results may not be predictive of the results of clinical  trials we intend
to perform for new  indications.  In  addition,  the  results of prior  clinical
trials  may not now be  acceptable  to the FDA or other  regulatory  authorities
because the data may be  incomplete,  outdated,  or otherwise  unacceptable  for
inclusions  in ours or our  partners'  regulatory  submissions  for  approval of
medications for new indications.                                                

IN THE EVENT WE OBTAIN  REGULATORY  APPROVAL  FOR NEW  INDICATIONS  FOR EXISTING
MEDICATIONS,  WE WILL STILL BE SUBJECT TO  EXTENSIVE  REGULATION  BY THE FDA AND
OTHER AGENCIES, AND IF WE FAIL TO COMPLY WITH SUCH REGULATIONS,  THE SALE OF OUR
PRODUCTS MAY BE RESTRICTED.                                                     

         If  we,  or our  collaborators,  obtain  regulatory  approval  for  new
indications  for  existing  medications,  we will still be subject to  extensive
regulation by the FDA and/or other regulatory agencies. We and our collaborators
will be required to conduct extensive post-market surveillance of products. Our,
or  our  collaborators',  failure  to  comply  with  applicable  FDA  and  other
regulatory requirements,  or the later discovery of unknown problems, may result
in  restrictions  on the marketing or sale of such products that will negatively
impact sales and/or collaboration revenue, and may result in denial of authority
to market the medication product(s).                                            

11

SB-2
16th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 16th
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.                           

         Our  future  success  depends  on the on the  ability,  experience  and
performance of our senior  management and our key  professional  personnel.  Our
success therefore  depends to a significant  extent on retaining the services of
Leonard Brandt, our President,  Chief Executive Officer,  and Secretary,  Horace
Hertz,  our Chief Financial  Officer,  and others.  Because of their ability and
experience,  if we lose one or more of the members of our senior  management  or
other key employees, our ability to successfully implement our business strategy
could be seriously harmed.                                                      

         We do not carry key man life insurance on any of our key employees.  We
do not  have  employment  agreements  in  place  with  our  executives  and  key
employees, and each may terminate their employment upon notice and without cause
or good reason.  While we believe our relationships with our executives are good
and do not  anticipate  any of them leaving in the near future,  the loss of the
services of Leonard  Brandt or any other key member of  management  could have a
material adverse effect on our ability to manage our business.                  

IF WE DO NOT ATTRACT AND RETAIN SKILLED  PERSONNEL OR IF WE DO NOT MAINTAIN GOOD
RELATIONSHIPS WITH OUR EMPLOYEES, WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS.    

         Our  products  and  services  are  based  on  a  complex   database  of
information.   Accordingly,   we  require   skilled   medical,   scientific  and
administrative  personnel  to sell and support our products  and  services.  Our
future  success will depend  largely on our ability to continue to hire,  train,
retain  and  motivate   additional   skilled   personnel,   particularly   sales
representatives  who are  responsible  for customer  education  and training and
customer  support,  as well as personnel with experience in clinical testing and
matters  relating  to  obtaining  regulatory  approvals.  If we are not  able to
attract  and  retain  skilled  personnel,  we will not be able to  continue  our
development and commercialization activities.                                   

         In   addition,   we  may  be  subject  to  claims  that  we  engage  in
discriminatory   or   inappropriate   practices  with  respect  to  our  hiring,
termination,  promotion  and  compensation  processes  for our  employees.  Such
claims,  with or  without  merit,  could  be  time  consuming,  distracting  and
expensive to defend,  could divert  attention of our management from other tasks
important  to the  success  of our  business  and  could  adversely  affect  our
reputation as an employer.                                                      

IN THE FUTURE WE COULD BE SUBJECT TO PERSONAL INJURY CLAIMS,  WHICH COULD RESULT
IN SUBSTANTIAL LIABILITIES THAT MAY EXCEED OUR INSURANCE COVERAGE.              

         All significant medical treatments and procedures,  including treatment
that is facilitated through the use of our rEEG Analytical Reports,  involve the
risk of serious  injury or death.  While we do not treat  patients or  determine
whether  treatment that is guided by rEEG Analytical  Reports that we provide is
appropriate  for any  particular  patient,  and have not been the subject of any
personal  injury  claims  for  patients  treated  by  providers  using  our rEEG
Analytical Reports, our business entails an inherent risk of claims for personal
injuries,  which are subject to the attendant risk of substantial damage awards.
We cannot control whether individual  physicians and psychiatrists will properly
select  patients,  apply the  appropriate  standard  of care,  or conform to our
procedures in determining how to treat their patients.  A significant  source of
potential  liability is negligence or alleged negligence by physicians  treating
patients with the aid of the rEEG Analytical Reports that we provide.  There can
be no  assurance  that a future  claim or  claims  will  not be  successful  or,
including  the cost of legal  defense,  will not exceed the limits of  available
insurance coverage.                                                             

12

SB-2
17th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 17th
         We currently have general liability and medical professional  liability
insurance  coverage for up to $5 million per year for personal injury claims. We
may not be able to maintain  adequate  liability  insurance,  in accordance with
standard industry  practice,  with appropriate  coverage based on the nature and
risks of our business,  at acceptable  costs and on favorable  terms.  Insurance
carriers are often reluctant to provide  liability  insurance for new healthcare
services  companies  and  products  due to the limited  claims  history for such
companies and products.  In addition,  based on current  insurance  markets,  we
expect  that  liability  insurance  will be more  difficult  to obtain  and that
premiums  will  increase  over time and as the  volume of  patients  treated  by
physicians  that are guided by our rEEG  Analytical  Reports  increases.  In the
event of litigation,  regardless of its merit or eventual  outcome,  or an award
against us during a time when we have no  available  insurance  or  insufficient
insurance,  we may sustain significant losses of our operating capital which may
substantially reduce stockholder equity in the company.                         

IF  GOVERNMENT  AND  THIRD-PARTY  PAYERS FAIL TO PROVIDE  COVERAGE  AND ADEQUATE
PAYMENT RATES FOR TREATMENTS THAT ARE GUIDED BY OUR rEEG ANALYTICAL REPORTS, OUR
REVENUE AND PROSPECTS FOR PROFITABILITY MAY BE HARMED.                          

         Our future revenue growth will depend in part upon the  availability of
reimbursement  from third-party  payers for psychiatrists and physicians who use
our rEEG  Analytical  Reports to guide the  treatment  of their  patients.  Such
third-party  payers  include  government  health  programs  such as Medicare and
Medicaid,   managed  care   providers,   private   health   insurers  and  other
organizations.  These third-party payers are increasingly  attempting to contain
healthcare  costs by demanding  price  discounts  or rebates and  limiting  both
coverage on which  procedures  they will pay for and the amounts  that they will
pay for new  procedures.  As a result,  they may not cover or  provide  adequate
payment for treatments  that are guided by our rEEG  Analytical  Reports,  which
will  discourage  psychiatrists  and physicians  from utilizing the  information
services  we  provide.  We may  need  to  conduct  studies  to  demonstrate  the
cost-effectiveness of treatments that are guided by our products and services to
such payers' satisfaction. Such studies might require us to commit a significant
amount  of  management  time  and  financial  and  other   resources.   Adequate
third-party  reimbursement  might not be  available  to enable us to  realize an
appropriate  return on investment in research and product  development,  and the
lack  of  such  reimbursement  could  have  a  material  adverse  effect  on our
operations and could adversely affect our revenues and earnings.                

OUR BUSINESS PROSPECTS AND PROFITABILITY COULD BE NEGATIVELY IMPACTED IF WE HAVE
OVER-ESTIMATED THE DEMAND FOR OUR rEEG ANALYTICAL REPORTS.                      

         We are  focused on the  market for  behavioral  health  disorders.  The
projected demand for our rEEG Analytical  Reports could  materially  differ from
actual  demand if our  assumptions  regarding  this  market  and its  trends and
acceptance of our rEEG Analytical Reports by the psychiatric  community prove to
be incorrect or do not  materialize  or if other  products or services gain more
widespread  acceptance,  which in each case would adversely  affect our business
prospects and profitability.                                                    

WE ARE SUBJECT TO EVOLVING AND EXPENSIVE  CORPORATE  GOVERNANCE  REGULATIONS AND
REQUIREMENTS.  OUR FAILURE TO  ADEQUATELY  ADHERE TO THESE  REQUIREMENTS  OR THE
FAILURE OR CIRCUMVENTION OF OUR CONTROLS AND PROCEDURES COULD SERIOUSLY HARM OUR
BUSINESS.                                                                       

         Because we are a  publicly  traded  company  we are  subject to certain
federal,   state  and  other  rules  and   regulations,   including   applicable
requirements of the Sarbanes-Oxley  Act of 2002.  Compliance with these evolving
regulations  is costly and requires a significant  diversion of management  time
and  attention,   particularly  with  regard  to  our  disclosure  controls  and
procedures and our internal control over financial  reporting.  Although we have
reviewed  our  disclosure  and  internal  controls  and  procedures  in order to
determine  whether they are  effective,  our controls and  procedures may not be
able to prevent errors or                                                       

13

SB-2
18th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 18th
frauds in the  future.  Faulty  judgments,  simple  errors or  mistakes,  or the
failure of our personnel to adhere to  established  controls and  procedures may
make it difficult for us to ensure that the objectives of the control system are
met.  A  failure  of  our   controls  and   procedures   to  detect  other  than
inconsequential errors or fraud could seriously harm our business and results of
operations.                                                                     

OUR SENIOR  MANAGEMENT'S  LIMITED RECENT  EXPERIENCE  MANAGING A PUBLICLY TRADED
COMPANY MAY DIVERT MANAGEMENT'S ATTENTION FROM OPERATIONS AND HARM OUR BUSINESS.

         Our management team has relatively limited recent experience managing a
publicly traded company and complying with federal  securities  laws,  including
compliance with recently adopted disclosure  requirements on a timely basis. Our
management  will be required to design and  implement  appropriate  programs and
policies in responding to increased legal,  regulatory  compliance and reporting
requirements, and any failure to do so could lead to the imposition of fines and
penalties and harm our business.                                                

RISKS RELATED TO OUR INDUSTRY                                                   

THE HEALTHCARE INDUSTRY IN WHICH WE OPERATE IS SUBJECT TO SUBSTANTIAL REGULATION
BY STATE AND FEDERAL  AUTHORITIES,  WHICH COULD HINDER, DELAY OR PREVENT US FROM
COMMERCIALIZING OUR PRODUCTS AND SERVICES.                                      

         Healthcare  companies  are subject to  extensive  and complex  federal,
state and local laws,  regulations  and  judicial  decisions  governing  various
matters such as the licensing and certification of facilities and personnel, the
conduct of operations,  billing  policies and practices,  policies and practices
with regard to patient privacy and confidentiality, and prohibitions on payments
for the  referral of business  and  self-referrals.  There are federal and state
laws,   regulations  and  judicial  decisions  that  govern  patient  referrals,
physician   financial   relationships,   submission  of  healthcare  claims  and
inducement to beneficiaries of federal healthcare programs. Many states prohibit
business corporations from practicing medicine, employing or maintaining control
over  physicians  who  practice  medicine,   or  engaging  in  certain  business
practices,  such as splitting fees with  healthcare  providers.  Many healthcare
laws and regulations applicable to our business are complex, applied broadly and
subject to interpretation by courts and government agencies. Our failure, or the
failure of  physicians  and  psychiatrists  to whom we sell our rEEG  Analytical
Reports,  to comply with these  healthcare  laws and  regulations  could  create
liability for us and negatively impact our business.                            

         In  addition,  the  FDA,  regulates  development,   testing,  labeling,
manufacturing, marketing, promotion, distribution,  record-keeping and reporting
requirements  for  prescription  drugs.  Compliance  with  laws and  regulations
enforced by the FDA and other regulatory agencies may be required in relation to
future  products or  services  developed  or used by us.  Failure to comply with
applicable  laws and  regulations  may result in various  adverse  consequences,
including  withdrawal  of our  products  and  services  from the market,  or the
imposition of civil or criminal sanctions.                                      

         We believe that this industry will continue to be subject to increasing
regulation,  political  and legal  action and pricing  pressures,  the scope and
effect of which we cannot predict.  Legislation is continuously  being proposed,
enacted  and  interpreted  at the  federal,  state and local  levels to regulate
healthcare  delivery and  relationships  between and among  participants  in the
healthcare  industry.  Any such changes could prevent us from  marketing some or
all of our products and services for a period of time or permanently.           

14

SB-2
19th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 19th
WE MAY BE SUBJECT TO REGULATORY AND  INVESTIGATIVE  PROCEEDINGS,  WHICH MAY FIND
THAT OUR POLICIES AND  PROCEDURES  DO NOT FULLY COMPLY WITH COMPLEX AND CHANGING
HEALTHCARE REGULATIONS.                                                         

         While we have established  policies and procedures that we believe will
be  sufficient  to  ensure  that  we  operate  in  substantial  compliance  with
applicable laws, regulations and requirements,  the criteria are often vague and
subject to change and interpretation. We may become the subject of regulatory or
other investigations or proceedings,  and our interpretations of applicable laws
and  regulations  may be  challenged.  The defense of any such  challenge  could
result in substantial  cost and a diversion of management's  time and attention.
Thus, any such challenge  could have a material  adverse effect on our business,
regardless of whether it ultimately is successful. If we fail to comply with any
applicable  laws, or a determination  is made that we have failed to comply with
these laws, our financial condition and results of operations could be adversely
affected.                                                                       

FAILURE TO COMPLY WITH THE FEDERAL  TRADE  COMMISSION  ACT OR SIMILAR STATE LAWS
COULD RESULT IN SANCTIONS OR LIMIT THE CLAIMS WE CAN MAKE.                      

         The  Company's   promotional   activities  and   materials,   including
advertising to consumers and physicians, and materials provided to third parties
for their use in  promoting  our  products and  services,  are  regulated by the
Federal Trade  Commission  (FTC) under the FTC Act, which  prohibits  unfair and
deceptive acts and practices,  including  claims which are false,  misleading or
inadequately  substantiated.  The FTC typically  requires competent and reliable
scientific  tests or studies to  substantiate  express or implied  claims that a
product or service is effective.  If the FTC were to interpret  our  promotional
materials as making express or implied claims that our products and services are
effective for the treatment of mental  illness,  it may find that we do not have
adequate  substantiation for such claims.  Failure to comply with the FTC Act or
similar  laws  enforced  by state  attorneys  general  and other state and local
officials  could  result  in  administrative  or  judicial  orders  limiting  or
eliminating  the claims we can make about our products and  services,  and other
sanctions including fines.                                                      

OUR BUSINESS  PRACTICES  MAY BE FOUND TO  CONSTITUTE  ILLEGAL  FEE-SPLITTING  OR
CORPORATE PRACTICE OF MEDICINE, WHICH MAY LEAD TO PENALTIES AND ADVERSELY AFFECT
OUR BUSINESS.                                                                   

         Many states,  including  California,  in which our principal  executive
offices are located, have laws that prohibit business corporations,  such as us,
from practicing medicine, exercising control over medical judgments or decisions
of  physicians,  or  engaging in certain  arrangements,  such as  employment  or
fee-splitting, with physicians. Courts, regulatory authorities or other parties,
including  physicians,  may assert that we are engaged in the unlawful corporate
practice of medicine  by  providing  administrative  and  ancillary  services in
connection with our rEEG Analytical Reports, or that selling our rEEG Analytical
Reports for a portion of the patient fees constitutes improper fee-splitting, in
which case we could be subject to civil and criminal  penalties,  our  contracts
could be found  legally  invalid and  unenforceable,  in whole or in part, or we
could be required to restructure our contractual  arrangements.  There can be no
assurance  that this  will not  occur  or, if it does,  that we would be able to
restructure our contractual arrangements on favorable terms.                    

OUR BUSINESS PRACTICES MAY BE FOUND TO VIOLATE  ANTI-KICKBACK,  SELF-REFERRAL OR
FALSE  CLAIMS  LAWS,  WHICH  MAY LEAD TO  PENALTIES  AND  ADVERSELY  AFFECT  OUR
BUSINESS.                                                                       

         The  healthcare  industry  is subject to  extensive  federal  and state
regulation with respect to financial  relationships  and  "kickbacks"  involving
healthcare  providers,  physician  self-referral  arrangements,  filing of false
claims  and  other  fraud  and  abuse  issues.  Federal  anti-kickback  laws and
regulations  prohibit  certain  offers,  payments or receipts of remuneration in
return for (i) referring patients covered by Medicare, Medicaid or other federal
health care program, or (ii) purchasing, leasing, ordering                      

15

SB-2
20th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 20th
or arranging for or recommending  any service,  good, item or facility for which
payment  may be made by a federal  health care  program.  In  addition,  federal
physician self-referral legislation,  commonly known as the Stark law, generally
prohibits a physician from ordering certain  services  reimbursable by Medicare,
Medicaid  or other  federal  healthcare  program  from any entity with which the
physician has a financial  relationship.  In addition,  many states have similar
laws, some of which are not limited to services reimbursed by federal healthcare
programs.  Other  federal  and state laws  govern the  submission  of claims for
reimbursement,  or false claims laws. One of the most prominent of these laws is
the  federal  False  Claims  Act,  and  violations  of other  laws,  such as the
anti-kickback  laws or the FDA prohibitions  against promotion of off-label uses
of medications, may also be prosecuted as violations of the False Claims Act.   

         While we believe we have  structured our  relationships  to comply with
all applicable requirements, federal or state authorities may claim that our fee
arrangements,  agreements  and  relationships  with  contractors  and physicians
violate these anti-kickback, self-referral or false claims laws and regulations.
These laws are broadly worded and have been broadly interpreted by courts. It is
often difficult to predict how these laws will be applied,  and they potentially
subject many typical  business  arrangements  to  government  investigation  and
prosecution,  which can be costly and time  consuming.  Violations of these laws
are punishable by monetary fines, civil and criminal  penalties,  exclusion from
participation  in  government-sponsored  health care programs and  forfeiture of
amounts  collected  in  violation  of such laws.  Some states also have  similar
anti-kickback  and  self-referral  laws,  imposing  substantial   penalties  for
violations.  If our  business  practices  are  found  to  violate  any of  these
provisions, we may be unable to continue with our relationships or implement our
business  plans,  which would have an adverse effect on our business and results
of operations.                                                                  

WE MAY BE  SUBJECT  TO  HEALTHCARE  ANTI-FRAUD  INITIATIVES,  WHICH  MAY LEAD TO
PENALTIES AND ADVERSELY AFFECT OUR BUSINESS.                                    

         State and federal  governments  are devoting  increased  attention  and
resources to anti-fraud  initiatives  against  healthcare  providers,  taking an
expansive  definition of fraud that includes receiving fees in connection with a
healthcare  business  that is found to violate  any of the  complex  regulations
described  above.  While to our  knowledge  we have not been the  subject of any
anti-fraud  investigations,  if such a claim were made  defending  our  business
practices  could be time consuming and expensive,  and an adverse  finding could
result in  substantial  penalties or require us to restructure  our  operations,
which we may not be able to do successfully.                                    

OUR USE AND DISCLOSURE OF PATIENT INFORMATION IS SUBJECT TO PRIVACY AND SECURITY
REGULATIONS, WHICH MAY RESULT IN INCREASED COSTS                                

         In  conducting  research  or  providing   administrative   services  to
healthcare  providers in connection with the use of our rEEG Analytical Reports,
we may collect, use, maintain and transmit patient information in ways that will
be subject to many of the numerous  state,  federal and  international  laws and
regulations governing the collection,  dissemination, use and confidentiality of
patient-identifiable health information,  including the federal Health Insurance
Portability and  Accountability  Act (HIPAA) and related rules.  The three rules
that were promulgated pursuant to HIPAA that could most significantly affect our
business are the Standards for Electronic  Transactions,  or Transactions  Rule;
the Standards for Privacy of Individually  Identifiable Health  Information,  or
Privacy Rule; and the Health Insurance Reform:  Security Standards,  or Security
Rule.  HIPAA  applies  to  covered  entities,   which  include  most  healthcare
facilities  and health plans that may contract for the use of our services.  The
HIPAA rules require covered  entities to bind  contractors like us to compliance
with certain burdensome HIPAA rule requirements.                                

16

SB-2
21st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 21st
         The  HIPAA  Transactions  Rule  establishes  format  and  data  content
standards for eight of the most common  healthcare  transactions.  If we perform
billing and collection  services on behalf of psychiatrists  and physicians,  we
may be  engaging  in one of more of  these  standard  transactions  and  will be
required  to  conduct  those   transactions  in  compliance  with  the  required
standards.  The HIPAA Privacy Rule  restricts the use and  disclosure of patient
information,  requires  entities to safeguard  that  information  and to provide
certain  rights to  individuals  with  respect  to that  information.  The HIPAA
Security  Rule  establishes  elaborate  requirements  for  safeguarding  patient
information  transmitted  or stored  electronically.  We may be required to make
costly  system  purchases  and  modifications  to  comply  with the  HIPAA  rule
requirements  that are  imposed  on us and our  failure  to comply may result in
liability and adversely affect our business.                                    

         Numerous  other federal and state laws protect the  confidentiality  of
personal and patient information.  These laws in many cases are not preempted by
the HIPAA  rules and may be  subject to  varying  interpretations  by courts and
government  agencies,   creating  complex  compliance  issues  for  us  and  the
psychiatrists and physicians who purchase our services, and potentially exposing
us to additional expense, adverse publicity and liability.  Other countries also
have, or are developing,  laws governing the collection, use and transmission of
personal or patient  information and these laws could create liability for us or
increase our cost of doing business.                                            

RISKS RELATING TO INVESTMENT IN OUR COMMON STOCK                                

WE HAVE A LIMITED  TRADING  VOLUME AND SHARES  ELIGIBLE  FOR FUTURE  SALE BY OUR
CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE.                      

         Bid and ask prices for shares of our Common  Stock are quoted on NASD's
OTC  Bulletin  Board under the symbol  CNSO.OB.  There is  currently  no broadly
followed,  established trading market for our Common Stock. While we are hopeful
that the Company will command the interest of a greater number of investors,  an
established  trading  market for our shares of Common Stock may never develop or
be maintained. Active trading markets generally result in lower price volatility
and more  efficient  execution of buy and sell orders.  The absence of an active
trading market reduces the liquidity of our Common Stock.  We have had little or
no  trading  volume in our  Common  Stock.  As a result of this lack of  trading
activity,  the quoted price for our Common Stock on NASD's OTC Bulletin Board is
not necessarily a reliable  indicator of its fair market value.  Further,  if we
cease to be quoted,  holders  would find it more  difficult to dispose of, or to
obtain accurate  quotations as to the market value of, our Common Stock, and the
market value of our Common Stock would likely decline.                          

IF AND WHEN A TRADING MARKET FOR OUR COMMON STOCK DEVELOPS,  THE MARKET PRICE OF
OUR  COMMON  STOCK  IS  LIKELY  TO  BE  HIGHLY  VOLATILE  AND  SUBJECT  TO  WIDE
FLUCTUATIONS,  AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE
AT WHICH YOU ACQUIRED THEM.                                                     

         The market  price of our Common  Stock is likely to be highly  volatile
and could be subject to wide  fluctuations  in  response  to a number of factors
that are beyond our control, including announcements of new products or services
by our competitors.  In addition,  the market price of the Common Stock could be
subject to wide fluctuations in response to a variety of factors, including:    

       o        quarterly variations in our revenues and operating expenses;

         o        developments  in  the  financial   markets  and  worldwide  or
regional economies;                         

         o        announcements of innovations or new products or services by us
or our competitors;                         

         o        announcements  by the government  relating to regulations that
govern our industry;                        

         o        significant  sales of our Common Stock or other  securities in
the open market;                            

17

SB-2
22nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 22nd
o        variations in interest rates;                        

         o        changes  in  the  market   valuations   of  other   comparable
companies; and                              

o        changes in accounting principles.                    

         In the past, stockholders have often instituted securities class action
litigation  after  periods  of  volatility  in the market  price of a  company's
securities. If a stockholder were to file any such class action suit against us,
we would  incur  substantial  legal  fees  and our  management's  attention  and
resources  would be  diverted  from  operating  our  business  to respond to the
litigation, which could harm our business.                                      

SUBSTANTIAL  FUTURE SALES OF OUR COMMON  STOCK IN THE PUBLIC  MARKET COULD CAUSE
OUR STOCK PRICE TO FALL.                                                        

         Upon the  effectiveness  of the Registration  Statement,  a significant
number of our shares of Common Stock will become eligible for sale, including up
to 6,504,765 shares sold in the Private Placement, up to 2,627,939 shares of our
Common  Stock  underlying  warrants  that were issued in our Private  Placement,
83,333 shares issued to the placement  agent of the Private  Placement and up to
767,101  shares  held by  certain  of our  stockholders  that  were  issued  and
outstanding  immediately  prior to the Merger.  The sale of these  shares  could
depress the market  price of our Common  Stock.  A reduced  market price for our
shares could make it more  difficult to raise funds through  future  offering of
Common Stock.                                                                   

         The  holders  of  these  shares,  to the  extent  such  shares  are not
registered on the Registration Statement, as well as holders of our Common Stock
issued to holders of CNSR  California  Series A  Preferred  Stock and holders of
CNSR California Series B Preferred Stock, and certain holders of CNSR California
Common Stock in the Merger, and shares of our Common Stock held by the Placement
Agent or issuable to the Placement  Agent upon  exercise of the Placement  Agent
Warrants,  shall have piggy-back registration rights with respect to such Shares
effective September 7, 2007, and demand registration rights with respect to such
Shares  effective  twelve  (12)  months  following  the  closing of the  Private
Placement.                                                                      

         Moreover,  as  additional  shares of Common Stock become  available for
resale in the open market  (including  Shares  issuable upon the exercise of the
Company's  outstanding options and warrants),  the supply of our publicly traded
shares will increase, which could decrease its price.                           

         Some of our shares  may also be  offered  from time to time in the open
market pursuant to Rule 144, and these sales may have a depressive effect on the
market for our shares. In general, a person who has held restricted shares for a
period of one year may,  upon filing with the  Securities & Exchange  Commission
(the "SEC") a  notification  on Form 144,  sell into the market  shares up to an
amount equal to 1% of the outstanding shares.                                   

THE SALE OF  SECURITIES  BY US IN ANY EQUITY OR DEBT  FINANCING  COULD RESULT IN
DILUTION TO OUR EXISTING  STOCKHOLDERS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR
EARNINGS.                                                                       

         Any sale of  Common  Stock by us in a future  private  placement  could
result  in  dilution  to our  existing  stockholders  as a direct  result of our
issuance of additional  shares of our capital stock.  In addition,  our business
strategy  may  include   expansion   through  internal   growth,   by  acquiring
complementary  businesses,  by acquiring or  licensing  additional  products and
services, or by establishing strategic relationships with targeted customers and
suppliers. In order to do so, or to finance the cost of our other activities, we
may issue additional equity securities that could dilute our stockholders' stock
ownership.  We may also  assume  additional  debt and  incur  impairment  losses
related to goodwill and other tangible  assets if we acquire another company and
this could negatively impact our earnings and results of operations.            

18

SB-2
23rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 23rd
THE TRADING OF OUR COMMON STOCK ON THE  OVER-THE-COUNTER  BULLETIN BOARD AND THE
POTENTIAL  DESIGNATION  OF OUR COMMON STOCK AS A "PENNY  STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.                                            

         Our securities,  as traded on the Over-the-Counter  Bulletin Board, may
be subject to SEC rules that  impose  special  sales  practice  requirements  on
broker-dealers  who sell  these  securities  to persons  other than  established
customers or  accredited  investors.  For the  purposes of the rule,  the phrase
"accredited  investors"  means,  in general terms,  institutions  with assets in
excess of $5,000,000,  or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds  $200,000 (or that, when combined with a
spouse's income,  exceeds $300,000).  For transactions  covered by the rule, the
broker-dealer  must make a special  suitability  determination for the purchaser
and receive the  purchaser's  written  agreement to the  transaction  before the
sale.  Consequently,  the rule may affect the ability of  broker-dealers to sell
our  securities  and also may affect the  ability  of  purchasers  to sell their
securities in any market that might develop therefore.                          

         In addition,  the SEC has adopted a number of rules to regulate  "penny
stock" that restrict transactions involving these securities. Such rules include
Rules 3a51-1,  15g-1,  15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the  Securities  and Exchange Act of 1934, as amended.  These rules may have the
effect of reducing the liquidity of penny stocks.  "Penny stocks"  generally are
equity  securities  with a price  of less  than  $5.00  per  share  (other  than
securities  registered on certain national securities exchanges or quoted on the
NASDAQ  Stock  Market if current  price and volume  information  with respect to
transactions in such securities is provided by the exchange or system).  Because
our securities may constitute "penny stock" within the meaning of the rules, the
rules would apply to us and to our securities.  If our securities become subject
to the penny stock rules,  our  stockholders  may find it more difficult to sell
their securities.                                                               

         Stockholders  should be aware that,  according  to SEC,  the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns  include  (i)  control of the market for the  security  by one or a few
broker-dealers   that  are  often  related  to  the  promoter  or  issuer;  (ii)
manipulation of prices through  prearranged  matching of purchases and sales and
false and misleading  press releases;  (iii) "boiler room"  practices  involving
high-pressure  sales tactics and unrealistic  price projections by inexperienced
sales persons;  (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers;  and (v) the wholesale dumping of the same securities
by promoters and broker-dealers  after prices have been manipulated to a desired
level,  resulting in investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market.  Although we do not expect
to be in a position to dictate the  behavior of the market or of  broker-dealers
who  participate  in the market,  management  will strive within the confines of
practical  limitations to prevent the described  patterns from being established
with respect to our securities.                                                 

WE HAVE NOT PAID  DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY  DIVIDENDS  FOR
THE FORESEEABLE FUTURE, AND ANY RETURN ON INVESTMENT MAY BE LIMITED TO POTENTIAL
FUTURE APPRECIATION ON THE VALUE OF OUR COMMON STOCK.                           

         We  currently  intend to retain any  future  earnings  to  support  the
development  and  expansion of our business  and do not  anticipate  paying cash
dividends in the foreseeable future. Our payment of any future dividends will be
at the  discretion of our Board of Directors  after taking into account  various
factors,  including  without  limitation,  our  financial  condition,  operating
results, cash needs, growth plans and the terms of any credit agreements that we
may be a party to at the time. To the extent we do not pay dividends,  our stock
may be less valuable  because a return on  investment  will only occur if and to
the extent our stock price  appreciates,  which may never  occur.  In  addition,
investors must rely on sales of their Common Stock after price  appreciation  as
the only way to realize their investment, and if the price                      

19

SB-2
24th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 24th
of our stock does not  appreciate,  then there will be no return on  investment.
Investors seeking cash dividends should not purchase our Common Stock.          

OUR  OFFICERS,  DIRECTORS  AND  PRINCIPAL  STOCKHOLDERS  CAN  EXERT  SIGNIFICANT
INFLUENCE  OVER US AND MAY MAKE  DECISIONS THAT ARE NOT IN THE BEST INTERESTS OF
ALL STOCKHOLDERS.                                                               

         After the closing of the Merger and Private  Placement,  our  officers,
directors and principal stockholders (greater than 5% stockholders) collectively
control  approximately  83% of our issued and  outstanding  Common  Stock.  As a
result,  these  stockholders  are  able to  affect  the  outcome  of,  or  exert
significant   influence  over,  all  matters  requiring   stockholder  approval,
including  the election and removal of directors  and any change in control.  In
particular,  this  concentration of ownership of our Common Stock could have the
effect  of  delaying  or  preventing  a change  of  control  of us or  otherwise
discouraging  or  preventing  a potential  acquirer  from  attempting  to obtain
control of us. This, in turn,  could have a negative  effect on the market price
of our Common Stock.  It could also prevent our  stockholders  from  realizing a
premium over the market prices for their shares of Common Stock.  Moreover,  the
interests of this  concentration  of ownership may not always  coincide with our
interests or the interests of other  stockholders,  and accordingly,  they could
cause us to enter into  transactions  or agreements  that we would not otherwise
consider.                                                                       

TRANSACTIONS ENGAGED IN BY OUR LARGEST STOCKHOLDERS, OUR DIRECTORS OR EXECUTIVES
INVOLVING OUR COMMON STOCK MAY HAVE AN ADVERSE EFFECT ON THE PRICE OF OUR STOCK.

         After the closing of the Merger and Private  Placement,  our  officers,
directors and principal stockholders (greater than 5% stockholders) collectively
control approximately 83% of our issued and outstanding Common Stock. Subsequent
sales of our shares by these  stockholders could have the effect of lowering our
stock price.  The perceived  risk  associated  with the possible sale of a large
number of shares by these  stockholders,  or the adoption of  significant  short
positions by hedge funds or other significant investors, could cause some of our
stockholders  to sell  their  stock,  thus  causing  the  price of our  stock to
decline. In addition, actual or anticipated downward pressure on our stock price
due to actual or  anticipated  sales of stock by our directors or officers could
cause other  institutions  or individuals to engage in short sales of our Common
Stock, which may further cause the price of our stock to decline.               

         From time to time our directors and executive  officers may sell shares
of our common stock on the open market.  These sales will be publicly  disclosed
in  filings  made with the SEC.  In the  future,  our  directors  and  executive
officers  may sell a  significant  number of shares  for a  variety  of  reasons
unrelated to the  performance  of our business.  Our  stockholders  may perceive
these sales as a reflection on  management's  view of the business and result in
some  stockholders  selling their shares of our common stock.  These sales could
cause the price of our stock to drop.                                           

ANTI-TAKEOVER  PROVISIONS  MAY LIMIT THE ABILITY OF ANOTHER PARTY TO ACQUIRE US,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.                                   

         Delaware  law  contains  provisions  that  could  discourage,  delay or
prevent a third party from  acquiring  us, even if doing so may be beneficial to
our stockholders.  In addition, these provisions could limit the price investors
would be willing to pay in the future for shares of our Common Stock.           

20

SB-2
25th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 25th
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This  prospectus,  including  the  sections  entitled  "Risk  Factors,"
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and "Business," contains  "forward-looking  statements" that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These  forward-looking   statements  include,  without  limitation,   statements
regarding:   proposed  new  products  or  services;  our  statements  concerning
litigation or other matters;  statements  concerning  projections,  predictions,
expectations,  estimates or forecasts for our business,  financial and operating
results and future economic  performance;  statements of management's  goals and
objectives;  trends affecting our financial condition,  results of operations or
future prospects;  our financing plans or growth  strategies;  and other similar
expressions  concerning  matters that are not  historical  facts.  Words such as
"may," "will," "should," "could," "would," "predicts,"  "potential," "continue,"
"expects,"   "anticipates,"   "future,"   "intends,"   "plans,"  "believes"  and
"estimates,"  and similar  expressions,  as well as  statements in future tense,
identify forward-looking statements.                                            

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

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

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

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

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

         o        our inability to protect our intellectual property rights; and

         o        other factors  discussed  under the headings  "Risk  Factors,"
                  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and "Business."  

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

21

SB-2
26th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 26th
 CORPORATE BACKGROUND AND MERGER TRANSACTION

CORPORATE HISTORY                                                               

         CNS Response, Inc., a Delaware corporation, was originally incorporated
on July 10, 1984, under the name Mammon Oil & Gas, Inc. in the state of Utah. In
February  1986,  our  shareholders  approved  proposals  to change our  business
direction to the business of health care  including  research,  development  and
marketing,  and a name change to Volt Research,  Inc. From August 1986 to August
1988,  we engaged in operating  clinics  dedicated to Retin-A skin  therapy.  In
August  1988,  our  management  decided to phase out our clinic  operations  and
concentrate  on  selling  our  expertise  and skin  care  products  directly  to
physicians.  On January 1, 2004, we  discontinued  our business  activities  and
operations  and, since that date until our  acquisition of NBD Marketing,  Inc.,
ProspectWorks,  Inc., SalesWare, Inc. and xSellsys, Inc. (collectively "Acquired
Companies") in June 2004, we had no revenues or earnings from operations.       

         In a series of  transactions  consummated in June 2004, we acquired all
of  the  outstanding  capital  stock  of  NBD  Marketing,   Inc.,  a  California
corporation, or NBD, and SalesWare Inc., a Nevada corporation, or SalesWare, and
formed an acquisition  subsidiary,  xSellsys,  Inc., a California corporation to
acquire substantially all of the assets and liabilities of CRM SalesWare,  Inc.,
a  California  corporation.  As a  result  of  the  consummation  of  the  above
transactions,  SalesWare, NBD, and xSellsys became our wholly-owned subsidiaries
and  ProspectWorks,  Inc.,  a  Nevada  corporation  and  a  subsidiary  of  NBD,
ProspectWorks,  became an indirect,  wholly-owned  subsidiary of the Company. In
connection  with the  acquisition  of  SalesWare,  Inc.,  on August 2, 2004,  we
changed our corporate name to "SalesTactix, Inc."                               

         On October 6, 2004, the Acquired  Companies,  William  Noonan,  Vincent
Michael  Keyes III,  and  Thomas  Ketchum  filed a  complaint  in Orange  County
Superior Court, Case No. 04CC00669 against us, Scott Absher,  George LeFevre and
Mark Absher.  On November 15, 2004, we entered into a settlement  agreement with
the plaintiffs  whereby (i) the acquisition  agreements by and among the parties
were rescinded  including an asset purchase agreement and certain stock purchase
agreements;  (ii) certain  assets owned by  SalesTaxtix,  Inc. and xSellsys were
transferred to certain plaintiffs;  (iii) certain trademarks and tradenames were
transferred  to CRM  SalesWare;  and (iv) our  outstanding  shares  owned by the
plaintiffs  were canceled.  The  Settlement  Agreement  essentially  unwound the
acquisition  and  restored  the  parties  to their  prior  positions,  as if the
acquisitions  had never occurred.  The claim was dismissed in the fourth quarter
of 2004 pursuant to the terms of the settlement  agreement.  In connection  with
the settlement agreement, we changed our name to Strativation, Inc. in September
2005. After this time, we 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 July 18,  2006,  we entered  into a stock  purchase  agreement  with
seventeen  accredited  investors pursuant to which we issued 3,800,000 shares of
our common stock (76,000 shares after accounting for our  one-for-fifty  reverse
stock split which became effective on January 10, 2007) in consideration  for an
aggregate of $237,669.00 in cash. In addition,  these investors  acquired shares
in  private  transactions  with  certain  of our  stockholders,  and  acquired a
majority stake in our issued and  outstanding  shares.  In connection with these
transactions,  effective  July 18, 2006, Mr. Scott Absher and Mr. George LeFevre
resigned  as  officers  and  members of the board of  directors,  and Mr.  Silas
Philips was appointed our Chief  Executive  Officer,  Chief  Financial  Officer,
Secretary, and sole director.                                                   

         On January 11, 2007, we entered into a Shares For Debt  Agreement  (the
"Shares For Debt  Agreement")  with Richardson & Patel LLP ("R&P"),  pursuant to
which we agreed to issue and R&P agreed to accept 645,846  restricted  shares of
our common stock (the "Shares") as full and complete  settlement of a portion of
the total  outstanding debt in the amount of $261,201.84 that we owed to R&P for
legal  services (the "Partial  Debt").  On January 15, 2007, the company and R&P
agreed to amend and                                                             

22

SB-2
27th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 27th
restate the Shares for Debt Agreement (the "Amended and Restated Shares for Debt
Agreement")  to increase the number of Shares to be issued in settlement of such
Partial Debt to 656,103 restricted shares of our common stock.                  

MERGER WITH CNS RESPONSE, INC.                                                  

         On January 16, 2007,  we entered  into an Agreement  and Plan of Merger
with CNS Response, Inc., a California corporation (or CNSR California),  and CNS
Merger  Corporation,  a California  corporation and our wholly-owned  subsidiary
that was formed to facilitate the  acquisition of CNSR  California.  On March 7,
2007,  the  merger  with CNSR  California  closed,  CNSR  California  became our
wholly-owned subsidiary, and we changed our name from Strativation,  Inc. to CNS
Response, Inc..                                                                 

PRINCIPAL TERMS OF THE MERGER                                                   

         At the  Effective  Time  of  the  Merger  (as  defined  in  the  Merger
Agreement,  as amended on February 23, 2007),  MergerCo was merged with and into
CNSR California,  the separate existence of MergerCo ceased, and CNSR California
continued as the surviving  corporation  at the subsidiary  level.  We issued an
aggregate of 17,744,625  shares of our common stock to the  stockholders of CNSR
California in exchange for 100% ownership of CNSR California.  Additionally,  we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase  shares of common stock on the same terms and conditions as
previously  issued by CNSR  California.  Pursuant to the merger  agreement,  our
former sole  director  and  executive  officer,  Silas  Phillips,  resigned as a
director and executive officer of our company effective as of the closing of the
Merger,  and the directors  and officers of CNSR  California  were  appointed to
serve as directors and officer of our company.  Except for the Merger Agreement,
as amended,  and the transactions  contemplated by that agreement,  neither CNSR
California,  nor the directors and officers of CNSR California  serving prior to
the consummation of the Merger,  nor any of their  associates,  had any material
relationship  with  us,  or any of our  directors  and  officers,  or any of our
associates prior to the merger.  Following the Merger, the business conducted by
the company is the business conducted by CNSR California.                       

         Immediately  prior to the  closing of the  Merger,  we had  outstanding
868,823 shares of common stock. Immediately after the closing of the Merger, and
without  taking into  consideration  the Private  Placement  offering  described
below,  we had 18,613,448  outstanding  shares of common stock,  and options and
warrants to purchase 8,407,517 shares of common stock.                          

PRIVATE PLACEMENT FINANCING                                                     

            On March 7, 2007,  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 (the "Private  Placement") with  institutional
investors  and  other  high net worth  individuals  ("Investors").  Pursuant  to
Subscription  Agreements  entered into with these  Investors,  we sold 5,840,375
Investment  Units, at $1.20 per Investment Unit. Each "Investment Unit" consists
of one share of our  common  stock,  and a five  year  non-callable  warrant  to
purchase  three-tenths of one share of our common Stock, at an exercise price of
$1.80 per share (the "Investor Warrant"). On May 16, 2007, we completed a second
closing of the Private Placement for an additional 664,390 Investment Units. The
additional gross proceeds to us amounted to $797,300.                           

         We agreed to file a registration  statement  covering the resale of the
common stock and the common stock  underlying  the warrants  sold in the Private
Placement  within  75  days  of  the  closing  of  the  Merger  pursuant  to the
Subscription Agreement entered into with each Investor.                         

23

SB-2
28th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 28th
         After   commissions   and   expenses,   we  received  net  proceeds  of
approximately $6.9 million in the Private Placement.                            

         Brean Murray Carret & Co. ("Brean Murray") acted as placement agent and
corporate  finance advisor in connection with the Private  Placement.  For their
services as placement agent and financial  advisor,  pursuant to the terms of an
Engagement  Agreement  between CNSR  California  and Brean Murray,  Brean Murray
received a retainer in the form of 83,333  shares of our common stock  (having a
deemed value of  $100,000)  upon the closing of the Private  Placement.  We also
paid  Brean  Murray  a fee  equal  to 8% of the  funds  raised  in  the  Private
Placement,  or approximately  $624,500 of the gross proceeds from the financing.
In addition,  Brean Murray received warrants (the "Placement Agent Warrants") to
purchase  shares of our common stock in amounts equal to (i) 8% of the shares of
common stock sold by Brean Murray in the Private Placement  (520,381 warrants at
an exercise price of $1.44 per share),  and (ii) 8% of the shares underlying the
Investor  Warrants  sold by  Brean  Murray  in the  Private  Placement  (156,114
warrants at an exercise price of $1.80 per share).  The Placement Agent Warrants
are fully vested and have a term of 5 years. We also paid $87,700 in costs, fees
and expenses incurred by Brean Murray in connection with the Private  Placement.
We expressly  assumed  CNSR  California's  agreement  with Brean Murray upon the
closing of the Merger.  Pursuant to this agreement,  Brean Murray has a right of
first refusal to represent us in certain  corporate  finance  transactions for a
period of one year following the closing of the Private Placement.              

REGISTRATION RIGHTS AGREEMENTS                                                  

         Under  the  terms of the  Subscription  Agreements  between  us and the
Investors in the Private  Placement,  we are  obligated  to file a  Registration
Statement on Form SB-2 with the Securities and Exchange  Commission  (the "SEC")
within 75 days  following the closing (the  "Registration  Statement") to permit
the  resale of the  shares of common  stock sold in the  Private  Placement  and
purchasable under the warrants sold in the Private  Placement.  The Subscription
Agreements  also  require us to use our  reasonable  best  efforts to obtain the
effectiveness  of the  Registration  Statement not later than 150 days after the
closing of the Private Placement, subject to certain exceptions. After obtaining
the effectiveness of the Registration Statement, we are further obligated to use
our reasonable best efforts to maintain the  effectiveness  of the  Registration
Statement  until  all  such  shares  registered  thereby  may  be  sold  without
restriction  pursuant to Rule 144(k)  promulgated  under the  Securities  Act of
1933,  except  that  investors  may not be able to sell their  shares  under the
Registration  Statement  during  periods  when we may be  required to update the
information contained in that Registration Statement under applicable securities
laws. If we fail to satisfy our obligations for obtaining  effectiveness  of the
Registration  Statement  within  150  days  after  the  closing  of the  Private
Placement we must pay  liquidated  cash damages to the investors in the offering
in an aggregate  amount equal to 1% of the  Investment  Unit purchase  price for
each share  registered,  per month that  elapses  after such  failure  until the
earlier  of (a)  the  date  the  Registration  Statement  is  filed  or  becomes
effective,  as applicable,  or (b) the date that is one year from the closing of
the Private Placement.                                                          

         Under the terms of a Registration Rights Agreement entered into between
us and the majority  stockholders of our common stock  immediately  prior to the
Merger,  we are also  obligated  to include  up to 767,101  shares of our common
stock on the Registration  Statement described above. Our majority  stockholders
have identical  registration  rights to those provided to the investors,  except
they do not have the right to liquidated damages as provided in the Subscription
Agreements.                                                                     

         In addition to the registration  rights described above, the holders of
the shares (i) sold in the Private Placement, (ii) issuable upon exercise of the
Investor  Warrants,  (iii) held by the our  majority  stockholders  prior to the
Merger, (iv) issuable upon exercise of the Placement Agent Warrants or otherwise
under the  Engagement  Agreement with the Placement  Agent,  and (v) issued upon
conversion of                                                                   

24

SB-2
29th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 29th
CNSR California  Series A Preferred  Stock,  CNSR California  Series B Preferred
Stock and certain shares of CNSR California  Common Stock under the terms of the
Merger Agreement,  each have piggy-back registration rights with respect to such
shares effective  September 7, 2007, and demand registration rights with respect
to such shares effective March 7, 2008.                                         

         This prospectus  relates to the resale of common stock and common stock
underlying  warrants issued in connection with the Private  Placement  financing
that closed  concurrently with the merger, as well as shares of our common stock
(i) held by our majority stockholders prior to the Merger and (ii) issuable upon
exercise of the  Placement  Agent  Warrants or  otherwise  under the  Engagement
Agreement  with the  Placement  Agent.  Pursuant  to our  obligations  under the
subscription  agreements  between us and the investors in the private  placement
financing,  we filed  with the SEC a  registration  statement  on Form SB-2 with
respect to the common stock offered by this prospectus.                         

CNSR CALIFORNIA FUNDINGS PRIOR TO THE MERGER                                    

         Since its  inception,  CNSR  California has raised  approximately  $8.2
million in equity  financing.  This  amount  includes  the Senior  Secured  Debt
Financings,  Settlement Agreement Financing,  Mezzanine Financing,  and the Note
Conversion Transaction discussed below.                                         

SENIOR SECURED DEBT FINANCING                                 

         From  January  2000 through  July 2006 CNSR  California  was  primarily
financed through the sale of promissory  notes secured by  substantially  all of
the assets of CNSR  California and warrants to purchase CNSR  California  common
stock  pursuant to the terms of Note  Warrant and  Purchase  Agreements  between
investors and CNSR California.  Through 2006, CNSR California  received proceeds
of  approximately  $3,120,000  from  the  sale  of  these  notes  and  warrants.
Substantially  all of these notes were  converted  into CNSR  California  common
stock  in  October  2006.  See the  section  below  captioned  "NOTE  CONVERSION
TRANSACTION."                                                                   

NOTE CONVERSION TRANSACTION                                   

         In October 2006, CNSR California and the holders of certain  promissory
notes  agreed to convert  such notes with an  aggregate  outstanding  balance of
$3,061,700  and related  accrued and unpaid  interest of $1,005,300 at September
30, 2006, into 5,189,294 shares of CNSR California's Series A-1 Preferred Stock,
and 804,221  shares of CNSR  California's  Series A-2  Preferred  Stock.  At the
closing of the Merger, the aforementioned  shares converted into an aggregate of
5,993,515 shares of our common stock.                                           

SETTLEMENT AGREEMENT FINANCING                                

         In August and September 2006, certain employees and consultants to whom
CNSR California owed an aggregate of $3,199,400 forgave approximately 80% of the
debt and  accepted  5,834,117  shares of CNSR  California's  common  stock,  and
warrants  and  options  to  purchase  an  aggregate  of  270,638  shares of CNSR
California's  common  stock  at  $0.59  per  share  in full  settlement  of CNSR
California's  remaining   obligations.   At  the  closing  of  the  Merger,  the
aforementioned  shares and warrants were converted into 5,834,117  shares of our
common stock and warrants and options to purchase an aggregate of 270,638 shares
of our common stock at $0.59 per share.                                         

MEZZANINE FINANCING                                           

         In  October  2006,  CNSR  California  sold  1,905,978  units  (each,  a
"Mezzanine  Unit")  in  a  private  financing   resulting  in  net  proceeds  of
$1,925,000.  Each  Mezzanine  Unit  consisted of one share of CNSR  California's
Series B Preferred  Stock and a 5-year  warrant to  purchase  0.6 shares of CNSR
California's                                                                    

25

SB-2
30th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 30th
common  stock  at  $1.51  per  share.   At  the  closing  of  the  Merger,   the
aforementioned  shares and warrants were converted into 1,905,978  shares of our
common stock and a warrant to purchase an  aggregate of 1,143,587  shares of our
common stock at $1.51 per share on or before October 6, 2011.                   

TRANSACTIONS SURROUNDING THE MERGER                                             

REVERSE MERGER TRANSACTION FEE                                

         Pursuant to the terms of the Merger Agreement,  we paid an advisory fee
of $475,000 to Richardson & Patel,  LLP,  former counsel to  Strativation,  Inc.
(now CNS Response,  Inc.) and our largest  shareholder  immediately prior to the
Merger,  in  connection  with the Merger  upon the first  closing of the Private
Placement.                                                                      

CNS RESPONSE, INC. STOCKHOLDER INDEMNIFICATION                

         Under the terms of the Merger  Agreement  and an  arrangement  with our
majority  shareholders  immediately prior to the Merger, these stockholders have
agreed to  indemnify  us against  certain  third party  claims  made  against us
related to our  operation  from the time they  became  stockholders  through the
consummation of the Merger.                                                     

CONVERSION OF NUPHARM DATABASE, LLC PROMISSORY NOTE           

         In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm  Database,  LLC a certain  Promissory  Note dated  January 11, 2000 (the
"Original  NuPharm  Note")  pursuant  to which  Mill City was  obligated  to pay
NuPharm  an  aggregate  principal  amount of  $299,900  together  with  interest
pursuant to the payment  schedule set forth in the  Original  NuPharm  Note.  In
January 2000, Mill City contributed  substantially all of its assets,  including
those  securing the  Original  Note,  to CNSR  California,  and CNSR  California
assumed  certain  debts and  obligations  of Mill City,  including  Mill  City's
obligations under the Original NuPharm Note.                                    

         In October 2006, CNSR California entered into an agreement with NuPharm
to cancel the Original  NuPharm Note in  consideration  for the extension of the
expiration  date of a Warrant to purchase CNSR  California  Common Stock held by
NuPharm and a new promissory note in the principal  amount of $287,400 (the "New
NuPharm  Note").  Upon the closing of the  Private  Placement  and  Merger,  the
principal and accrued interest through December 31, 2006 on the New NuPharm Note
automatically converted into 244,509 shares of our Common Stock.                

         Immediately  upon  extension  of the of the  NuPharm  Warrant,  NuPharm
exercised the NuPharm  Warrant to purchase  2,800,000  shares of CNSR California
common stock for total cash proceeds of $147,700.  At the closing of the Merger,
the aforementioned shares converted into an aggregate of 2,800,000 shares of our
common stock.  Subsequently,  NuPharm distributed its shares of our common stock
to the following  stockholders:  Stephen C. Suffin,  Meyer L. Proler,  W. Hamlin
Emory, Masco, a California corporation, Carlton M. Cadwell and John Cadwell.    

RESULT OF THE MERGER AND PRIVATE PLACEMENT TRANSACTIONS                         

         After the completion of the Private  Placement and the Merger,  we have
an aggregate of 25,303,302 shares of common stock  outstanding,  with the former
CNSR California  shareholders and the investors in the Private  Placement owning
in the  aggregate  24,434,479  shares  of our  common  stock,  which  represents
approximately  96.6% of our issued and outstanding  shares of common stock.  Our

26

SB-2
31st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 31st
stockholders  immediately  prior  to the  Merger  and  Private  Placement  owned
approximately  3.4% of our outstanding  common stock (or,  868,823 shares of our
common stock) immediately after completion of these transactions.               

         The  issuance  of our  shares of common  stock in the Merger was exempt
from registration  under the Securities Act of 1933, as amended (the "Securities
Act"),  pursuant to Section  4(2)  thereof and an  exemption  from  registration
contained  in  Regulation  D. The  issuance  of shares  of common  stock and the
warrants to the  Investors  in the Private  Placement,  and the  issuance of the
Placement   Agent  Warrants  were  completed   pursuant  to  an  exemption  from
registration  contained  in  Regulation  D. The shares of our  common  stock and
shares of common  stock  issuable  pursuant  to the issued  warrants  may not be
offered  or sold in the  United  States  unless  they are  registered  under the
Securities  Act,  or an  exemption  from the  registration  requirements  of the
Securities Act is available.                                                    

27

SB-2
32nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 32nd
 USE OF PROCEEDS

         We will not receive any proceeds  from the sale of shares to be offered
by the  selling  stockholders.  The  proceeds  from  the  sale of  each  selling
stockholder's common stock will belong to that selling stockholder.             

MARKET FOR COMMON EQUITY
 AND RELATED STOCKHOLDER MATTERS

COMMON STOCK                                                                    

         Our common stock is currently listed for trading on the OTCBB under the
symbol CNSO.OB.  The following table sets forth, for the periods indicated,  the
high and low bid  information  for  Common  Stock as  determined  from  sporadic
quotations  on  the  OTC  Bulletin  Board.  The  following   quotations  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.                                                  
                                          HIGH                 LOW
FISCAL YEAR 2005                            ---------------      ---------------
     January 1 to March 31 ...........      $ 0.10 ($5.00*)      $0.045 ($2.25*)
     April 1 to June 30 ..............      $ 0.10 ($5.00*)      $0.035 ($1.75*)
     July 1 to September 30 ..........      $0.065 ($3.25*)      $ 0.03 ($1.50*)

                                          HIGH                 LOW
FISCAL YEAR 2006                            ---------------      ---------------
    October 1 to December 31 ........      $ 0.09 ($4.50*)      $0.036 (1.80*)
     January 1 to March 31 ...........      $ 0.07 ($3.50*)      $ 0.06 ($3.00*)
     April 1 to June 30 ..............      $ 0.08 ($4.00*)      $ 0.06 ($3.00*)
     July 1 to September 30 ..........      $ 0.17 ($8.50*)      $ 0.07 ($3.50*)

                                          HIGH                 LOW
FISCAL YEAR 2007                            ---------------      ---------------
     October 1 to December 31......         $ 0.17 ($8.50*)      $  0.01 (0.50*)
January 1 to March 31.........         $ 4.50*              $  0.101* 

*        Adjusted  price  reflecting  the 1:50  reverse  stock split that became
effective January 10, 2007                                    

         On May 17, 2007, the closing sales price of Common Stock as reported on
the OTC  Bulletin  Board was $1.65 per  share.  As of May 17,  2007,  there were
approximately  375 holders of record of our Common Stock.  Our transfer agent is
American Stock Transfer and Trust Company.                                      

DIVIDENDS                                                                       

         We have not paid or declared  cash  distributions  or  dividends on our
common stock.  CNSR  California has never paid dividends on its common stock. We
do not  intend to pay cash  dividends  on our  common  stock in the  foreseeable
future.  We currently intend to retain all earnings,  if and when generated,  to
finance our operations.  The declaration of cash dividends in the future will be
determined  by the  board  of  directors  based  upon  our  earnings,  financial
condition, capital requirements and other relevant factors.                     

28

SB-2
33rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 33rd
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 

            THIS  DISCUSSION  SUMMARIZES THE SIGNIFICANT  FACTORS  AFFECTING THE
OPERATING  RESULTS,  FINANCIAL  CONDITION  AND  LIQUIDITY  AND CASH FLOWS OF CNS
RESPONSE,  INC.  FOR THE SIX MONTHS  ENDED MARCH 31, 2007 AND 2006,  AND FOR THE
FISCAL YEARS ENDED SEPTEMBER 30, 2006 AND 2005. THE FOLLOWING  DISCUSSION OF OUR
RESULTS OF OPERATIONS AND FINANCIAL  CONDITION  SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED  FINANCIAL  STATEMENTS AND THE NOTES TO THOSE  STATEMENTS  INCLUDED
ELSEWHERE IN THIS PROSPECTUS AND OTHER INFORMATION  INCORPORATED BY REFERENCE IN
THIS  PROSPECTUS,  IF  ANY.  EXCEPT  FOR  HISTORICAL  INFORMATION,  THE  MATTERS
DISCUSSED IN THIS  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION
AND RESULTS OF OPERATIONS ARE FORWARD LOOKING  STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS  CONCERNING  VARIOUS FACTORS THAT ARE
BEYOND OUR CONTROL.  OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
ANTICIPATED  IN ANY  FORWARD-LOOKING  STATEMENTS  AS A RESULT  OF A  VARIETY  OF
FACTORS,  INCLUDING  THOSE  DISCUSSED IN "RISK  FACTORS,"  AND ELSEWHERE IN THIS
PROSPECTUS.                                                                     

OVERVIEW                                                                        

         We are a life sciences  company focused on the  commercialization  of a
patented system that guides  psychiatrists  and other  physicians to determine a
proper treatment for patients with behavioral  (psychiatric,  and/or  addictive)
disorders. We also intend to identify, develop and commercialize new indications
of approved drugs and drug candidates for this patient population.              

         We  have  developed  an  extensive   proprietary   database  (the  "CNS
Database")  consisting of  approximately  13,000 clinical  outcomes across 2,000
patients who had psychiatric or addictive  problems.  For each patient,  we have
compiled  electrocephalographic ("EEG") scans, symptoms, course of treatment and
outcomes  often across  multiple  treatments  from  multiple  psychiatrists  and
physicians. Using this database, our technology compares a patient's EEG scan to
the  outcomes in the  database and ranks  treatment  options  based on treatment
success of patients having similar neurophysiology.                             

         Trademarked as Referenced-EEG ("rEEG"), this patented technology allows
CNS to create and provide simple reports that  specifically  guide physicians to
treatment strategies based on the patient's own physiology. The vast majority of
these  patients  were  considered  long-term  "treatment-resistant",   the  most
challenging, high-risk and expensive category to treat.                         

         rEEG identifies relevant  neurophysiology that is variant from the norm
and identifies  medications that have  successfully  treated  database  patients
having  similar  aberrant  physiology.  It does this by  comparing  a  patient's
standard  digital EEG to a normative  database.  This identifies the presence of
any  pathophysiology.  The rEEG process  then  compares  the  stratified  set of
patients  with  similar  pathophysiology  to our CNS  Database  and  reports  on
relative  medication  success for this stratified  group.  Upon completion,  the
physician is provided the  analysis in a report (our "rEEG  Analytical  Report")
detailing and ranking  classes of agents (and specific  agents within the class)
by treatment success.                                                           

         We believe the key  factors  that will drive  broader  adoption of rEEG
will  be  acceptance  by   healthcare   providers  of  its  clinical   benefits,
demonstration  of the  cost-effectiveness  of using our test,  reimbursement  by
third-party  payors,  expansion  of our  sales  force  and  increased  marketing
efforts.                                                                        

29

SB-2
34th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 34th
         Since our inception,  we have generated  significant net losses.  As of
March 31,  2007,  we had an  accumulated  deficit of $9.5  million.  We incurred
operating  losses of  $1,470,000  for the six months  ended March 31,  2007.  We
expect  our net  losses to  continue  for at least the next  several  years.  We
anticipate that a substantial  portion of our capital resources and efforts will
be focused on research and  development,  scale up our commercial  organization,
and other general corporate purposes.  Research and development projects include
the  completion  of clinical  trials,  the  enhancement  of our database and the
identification of new medication that are often combinations of approved drugs. 

            Our  historical  operations  before  March 7, 2007  reflect only the
operations of CNS Response, Inc., a California corporation (or CNSR California).
Before March 7, 2007, we 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 merger.  On March 7,  2007,  we  consummated  a merger
transaction  in  which  we  acquired  all  of the  shares  of  CNSR  California.
Concurrently  with the closing of the merger we  completed  a private  placement
financing and certain other transactions  related to the merger. Upon completion
of the merger and the private  placement  financing,  CNSR California became our
wholly-owned subsidiary,  and the former stockholders of CNSR California and the
investors  in  the  private  placement   financing  received  in  the  aggregate
24,434,479  shares of our common stock, or  approximately  96% of our issued and
outstanding shares of common stock. CNSR California was formed and commenced its
business in 2000. Our merger with CNSR California was accounted for as a reverse
merger with CNSR  California  deemed to be the  accounting  acquirer  and us the
legal acquirer.                                                                 

FINANCIAL OPERATIONS OVERVIEW                                                   

REVENUES                                                      

         We derive  our  revenues  from the sale of rEEG  Analytical  Reports to
physicians and operate in one industry segment.  Physicians are generally billed
upon  delivery  of an rEEG  Analytical  Report.  The  list  prices  of our  rEEG
Analytical  Reports  to  physicians  range from $200 to $800 with $400 being the
most frequent charge.                                                           

COST OF REVENUES                                              

         Cost of revenues  represents the cost of direct labor, the amortization
of the  purchased  database  and  costs  associated  with  external  processing,
analysis  and  consulting  review  necessary  to render an  individualized  test
result. Costs associated with performing our tests are expensed as the tests are
performed.  We are  currently  evaluating  the  feasibility  of  hiring  our own
personnel to perform most of the processing  and analysis  necessary to render a
report.                                                                         

RESEARCH AND DEVELOPMENT                                      

         Research and development expenses primarily represent costs incurred to
design and conduct clinical  studies,  improve rEEG processing,  add data to our
database,   improve  analytical   techniques  and  advance  application  of  the
methodology  to  additional  clinical  diagnosis.  We charge  all  research  and
development expenses to operations as they are incurred.                        

SALES AND MARKETING                                           

         Our selling and marketing expenses consist primarily of personnel costs
and the costs of educating physicians, laboratory personnel and other healthcare
professionals regarding our product.                                            

GENERAL AND ADMINISTRATIVE                                    

         Our general and administrative  expenses consist primarily of personnel
related  costs,  legal  costs,  accounting  costs  and  other  professional  and
administrative costs.                                                           

30

SB-2
35th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 35th
      CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

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

         Our significant  accounting  policies are described in the notes to our
financial  statements  included  elsewhere  in this  prospectus.  We believe the
following critical  accounting  policies reflect our more significant  estimates
and assumptions used in the preparation of our financial statements.            

Revenue Recognition                                           

         We have generated  limited  revenues since our inception.  Revenues for
our product are  recognized  when an rEEG  Analytical  Report is  delivered to a
Client-Physician.                                                               

Stock-based Compensation Expense                              

         Stock-based  compensation expense,  which is a non-cash charge, results
from stock option  grants.  Pursuant to SFAS No.  123(R),  compensation  cost is
measured at the grant date based on the calculated  fair value of the award.  We
recognize  stock-based  compensation  expense on a straight-line  basis over the
vesting period of the underlying option. The amount of stock-based  compensation
expense  expected to be  amortized  in future  periods may  decrease if unvested
options are  subsequently  cancelled or may increase if future option grants are
made.                                                                           

 COMPARISON OF SIX MONTHS ENDED MARCH 31, 2007 AND
SIX MONTHS ENDED MARCH 31, 2006 

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

                                               SIX MONTHS       SIX MONTHS
                                              ENDED            ENDED
                                                MARCH 31,        MARCH 31,
                                               2007             2006
                                               ------------     ------------
Revenues .....................................          100 %            100 %  
Cost of revenues .............................             68               88  
                                               ------------     ------------
Gross profit .................................             32               12  
Research and development .....................            400              238  
Sales and marketing ..........................             42               83  
General and administrative expenses ..........            776              310  
Operating loss ...............................          (1286)            (719) 
Other expense, net ...........................           1187              619  
                                               ------------     ------------
Net loss .....................................          (1304)%           (809)%
                                               ============     ============

31

SB-2
36th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 36th
REVENUES                                                      

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------

Revenues .........................   $    112,700   $     85,800            31% 

         The  increase  in  revenues  resulted  from the  adoption of rEEG by an
additional eleven  physicians.  The number of rEEG Analytical  Reports delivered
during the sixth month period ended March 31, 2007 increased from 215 in 2006 to
300 in 2007 while the average price per report  dropped from $400 to $375. We do
not intend to expand our sales and marketing  efforts until the  completion of a
clinical study currently being conducted by respected professionals in the field
of  psychiatry.  Accordingly,  we  anticipate  that  revenues  will not increase
materially until fiscal 2008.                                                   

COST OF REVENUES                                              

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Cost of revenues..................   $     76,600   $     75,700             1% 

         Cost of revenues consists of payroll costs,  consulting costs,  charges
relating  to the  amortization  of the CNS  Database,  and  other  miscellaneous
charges. Cost of revenues remained flat for the six month period ended March 31,
2007 as compared to the six month period ended March 31, 2006, with increases in
payroll costs and  consulting  costs being offset by a decrease in  amortization
costs  associated  with the CNS  Database.  We  expect  costs of  revenues  will
increase  as an  absolute  number as we deliver  more rEEG  Analytical  Reports.
However,  we expect cost of revenues to decrease as a percentage  of revenues as
we improve our operating efficiency.                                            

RESEARCH AND DEVELOPMENT                                      

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Research and development..........   $    451,200   $    204,200           121% 

         Research and development expenses consist of clinical studies, costs to
identify  indications  of  approved  drugs  and drug  candidates,  projects  for
training doctors in the use of rEEG,  consulting fees,  payroll costs,  expenses
related to database  enhancements,  and other miscellaneous costs.  Research and
development  costs  increased for the six month period ended March 31, 2007 from
the six month period ended March 31, 2006  primarily as a result of increases in
expenses   associated  with  clinical   studies,   costs  incurred  to  identify
indications  of  approved  drugs and drug  candidates,  expenses  in relation to
projects for training doctors in the use of rEEG technology,  and payroll costs.
The increase in expenses  relating to clinical  studies is  attributable  to our
expansion and  acceleration  of the completion of a clinical study with the goal
of driving market acceptance of our rEEG technology. Training costs increased as
the Company  undertook  projects to improve its training  capabilities.  Payroll
costs increased as we hired an additional                                       

32

SB-2
37th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 37th
employee in research and  development  and  increased  the salary of an existing
employee. We expect research and development expenses to continue to increase as
we  attempt  to  accelerate  the  identification  of  approved  drugs  and  drug
candidates,  complete  studies to validate the efficacy of our product,  acquire
new data for our database, enhance our system and hire additional employees.    

SALES AND MARKETING                                           

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Sales and marketing...............   $     47,500   $     71,300           (33%)

         For the six months ended March 31, 2007,  sales and marketing  expenses
were $47,500 consisting of payroll costs of $37,700 and other marketing costs of
$9,800.  For the six months  ended March 31, 2006 sales and  marketing  expenses
were $71,300  consisting  solely of payroll costs. The decrease in payroll costs
is  attributable  to the  termination  of a salesperson in April 2006. We expect
sales and  marketing  expenses to  increase  substantially  as we  increase  our
marketing efforts and expand our sales force.                                   

GENERAL AND ADMINISTRATIVE EXPENSES                           

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
General and administrative                                                      
 expenses........................   $    874,700   $    265,900           229%

         General and administrative  expenses for the six months ended March 31,
2007  and 2006  primarily  related  to  salaries  and  professional  fees.  As a
percentage of net sales, general and administrative expenses increased from 310%
for the six months  ended March 31, 2006 to 776% for the six months  ended March
31, 2007. The increase in general and administrative  expenses for the six month
period ended March 31, 2007 primarily related to a $475,000 advisory fee paid to
Richardson & Pattel, LLP in connection with our merger transaction, and will not
recur.  General  and  administrative  costs  were also  higher for the six month
period ended March 31, 2007 as we hired our Chief  Financial  Officer as well as
an office  manager.  Legal and accounting  costs also increased as the result of
costs incurred in connection with the merger and as a result of costs associated
with being a public  reporting  company.  Rent increased as the company moved to
larger facilities in October 2006. Insurance expenses also increased as a result
of higher  premiums on our insurance  policy for directors and officers,  as did
miscellaneous  expenses. The increase in general and administrative expenses was
offset by a decrease in consulting  fees since we outsourced  fewer tasks in the
period. We expect general and administrative costs to continue to increase as we
expand  our staff and  incur  costs  associated  with  being a public  reporting
company,  including costs associated with filing our  Registration  Statement on
Form SB-2, which we expect to occur in the third quarter.                       

33

SB-2
38th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 38th
INTEREST EXPENSE                                              

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Interest (Income) Expense.........   $    193,200   $    163,000            18% 

         For the six months ended March 31, 2007,  interest expense was $193,200
and consisted of $189,800  relating to interest  expense from the ascribed value
of a warrant issued to NuPharm  Database,  LLC, interest expense from promissory
notes and other interest  bearing  accounts of $13,300 offset by interest income
of $9,900. For the six months ended March 31, 2006 interest expense was $163,000
and  consisted of interest  expense  form  promissory  notes and other  interest
bearing accounts of $163,200 offset by interest income of $200. Interest expense
relating  to the  warrant  will not recur as the entire  balance of  unamortized
prepaid interest was expensed in connection with our merger.  We expect interest
expense  relating to  convertible  debt and other interest  bearing  accounts to
continue to decrease as  substantially  all convertible  debt and other interest
bearing  accounts have either been repaid or converted into the Company's stock.
We expect  interest  income to increase due to funds  available from the private
placement.                                                                      

OTHER INCOME                                                  

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Other Income......................   $     61,700   $          0         *      

*        Not meaningful                                                         

         Other  income for the six months  ended  March 31, 2007 was $61,700 and
consisted of gains from settlement of payables.  Other income for the six months
ended March 31, 2006 was zero. The increase in other income is  attributable  to
the settlement of accounts payable at a discount to the recorded amounts.       

NET LOSS                                                      

                      SIX MONTHS ENDED MARCH 31,
                                 ---------------------------     PERCENT
                                     2007           2006          CHANGE
                                    ------------   ------------   ------------
Net loss..........................   $ (1,469,600)  $   (694,300)          112% 

         Our  increase  in net  loss is due  primarily  to the  advisory  fee of
$475,000  paid to  Richardson  &  Pattel,  LLP in  connection  with  our  merger
transaction, increases in our research and development costs, increases in other
general and administrative  expenses, as well as our interest expenses.  Our net
loss as a  percentage  of net  sales for the six  months  ended  March 31,  2007
increased  to 1304% as  compared  to 809% of net sales for the six months  ended
March 31,  2006.  We expect  to incur  net  losses  for the next few years as we
continue  to improve our rEEG  technology  and  reaffirm  its  validity  through
clinical studies, attempt to accelerate the identification of approved drugs and
drug  candidates,  increase the penetration of our products in the  marketplace,
and hire additional personnel.                                                  

34

SB-2
39th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 39th
RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005           

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

                                                YEAR ENDED SEPTEMBER 30,
                                               -----------------------------
                                               2006             2005
                                               ------------     ------------
Revenues .....................................            100%             100% 
  Cost of revenues .........................            100              129
  Research and development .................             44               46
  Sales and marketing ......................             21               42
  General and administrative expenses ......            952              637
  Total operating expenses .................           1117              854
Operating loss ...............................          (1017)            (754) 

Other income (expense)                                                          
   Interest expense, net ....................           (223)            (260)
Gain (loss) on derivative                                               
       instruments ..........................            672             (167)
Gain on troubled debt                                                   
    restructuring ........................            615             --
Total other income                                                      
         (expense) ..........................           1064             (426)
Income (Loss) before income                                                     
 taxes ......................................             48            (1181)
Income taxes .................................              1                1  
                                               ------------     ------------
Net income (loss) ............................             47%           (1181)%
                                               ============     ============

REVENUES                                                      

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------

Revenues .........................   $    175,500   $    127,400            38% 

         Revenues  were  $175,500  for the  year  ended  September  30,  2006 as
compared to $127,400 for the comparable period in 2005. The increase in revenues
resulted  from the adoption of rEEG by additional  physicians.  To drive broader
adoption of rEEG we have undertaken a clinical study to validate the efficacy of
rEEG, and intend to increase our marketing efforts and expand our sales force.  

35

SB-2
40th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 40th
COST OF REVENUES                                              

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Cost of revenues..................   $    175,900   $    165,100             7% 

         For the year ended  September 30, 2006,  cost of revenues was $175,900,
consisting  primarily  of direct  labor  costs of  $50,200,  consulting  fees of
$41,500 and  amortization  of the  purchased  database of $79,800.  For the year
ended September 30, 2005, cost of revenues was $165,100 consisting  primarily of
direct labor costs of $50,200,  consulting  fees of $25,000 and  amortization of
the purchased database of $79,800.  We expect costs of revenues will increase as
an absolute number as the volume of rEEGs processed increases;  however, cost of
revenues will decrease as a percentage of revenues due to operating efficiencies
and as a result of the cost of the purchased  database being fully  amortized in
the first quarter of our fiscal year ending September 30, 2007.                 

RESEARCH AND DEVELOPMENT                                      

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Research and development..........   $     76,700   $     58,500            31% 

         Research  and  development  expenses  were  $76,700  for the year ended
September 30, 2006 as compared to $58,500 for the comparable period in 2005. The
increase in research and development expenses resulted from increased consulting
fees incurred in 2006 primarily  related to the design of clinical  studies.  We
expect research and development  expenses to increase as we complete  studies to
validate the efficacy of our product, acquire new data for our database, enhance
our system and hire additional employees.                                       

SALES AND MARKETING                                           

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Sales and marketing...............   $     36,000   $     52,900           (32%)

         Sales and marketing  expenses were $36,000 for the year ended September
30, 2006 as compared to $52,900 for the comparable  period in 2005. The decrease
in sales and marketing expenses resulted from a decrease in sales consultants in
2006.  We expect sales and  marketing  to increase as we increase our  marketing
efforts and expand our sales.                                                   

36

SB-2
41st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 41st
GENERAL AND ADMINISTRATIVE                                    

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
General and administrative                                                      
 expenses........................   $  1,671,100   $    811,800           106%

         General and administrative  expenses were $1,671,100 for the year ended
September  30, 2006 as compared to $811,800 for the  comparable  period in 2005.
The increase in general and administrative  resulted from an increase in payroll
costs of $420,300,  an increase in legal and accounting costs of $248,400 and an
increase in consulting  fees of $123,900.  We expect general and  administrative
costs to increase as we expand our staff and incur costs associated with being a
public company.                                                                 

INTEREST EXPENSE                                              

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Interest (Income) Expense.........   $    390,600   $    330,700            18% 

         Interest  expense was $390,600 for the year ended September 30, 2006 as
compared to $330,700 for the comparable period in 2005. The increase in interest
expense resulted from an increase in interest-bearing debt including convertible
promissory  notes,  deferred  salaries  and  unreimbursed  expenses.  We  expect
interest expenses to decrease, as substantially all of our interest-bearing debt
was repaid or converted into equity in October 2006.                            

GAIN (LOSS) ON DERIVATIVE INSTRUMENTS                         

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Gain (loss) on derivative                                                       
instruments.....................   $  1,178,500   $   (212,500)        *    

*        Not meaningful                                                         

         Gain on  derivative  instruments  was  $1,178,500  for the  year  ended
September 30, 2006 compared to a loss of $212,500 for the  comparable  period in
2005. In accordance with generally accepted  accounting  principles,  we treated
the beneficial  conversion  feature  associated with the convertible  promissory
notes and all non-employee warrants exercisable during the period the notes were
potentially convertible into an unlimited number of common shares as liabilities
at their fair value. The fair value of the beneficial conversion feature and the
warrants were estimated using the  Black-Scholes  option pricing model. The fair
value of the  beneficial  conversion  feature and the  warrants  and options was
recomputed  each  reporting  period with the change in fair value  recorded as a
gain or loss on derivative instruments.                                         

37

SB-2
42nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 42nd
GAIN ON TROUBLED DEBT RESTRUCTURING                           

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Gain on troubled debt                                                           
restructuring...................   $  1,079,700   $          0         *    

*        Not meaningful                                                         

         Gain on troubled debt  restructuring  was $1,079,700 for the year ended
September  30, 2006 as compared to zero in the  comparable  period for 2005.  At
September  30,  2005,  we  owed  certain  employees  and  consultants   deferred
compensation,  accrued consulting fees, other  compensation-related  liabilities
and  accrued  interest  thereon   aggregating   $2,480,900.   Due  to  financial
difficulties  experienced by the company,  in August and September 2006, certain
employees  and  consultants  to whom the company owed an aggregate of $3,199,400
accepted  5,834,117 shares of CNSR  California's  common stock (of which 182,952
were  restricted),  and warrants and options to purchase an aggregate of 270,638
shares of CNSR  California's  common stock at $0.59 per share in full settlement
of our  obligations.  On the date of transfer,  the amounts due to employees and
consultants  exceeded  the  aggregate  fair value of the  shares,  warrants  and
options transferred by $2,467,700. The gain attributable to employees considered
related  parties of  $1,388,000  has been treated as a capital  transaction  and
included in additional paid-in capital in the accompanying financial statements.
The  remaining  gain of  $1,079,700  has  been  included  in  operations  in the
accompanying financial statements.                                              

NET INCOME (LOSS)                                             

                      YEAR ENDED SEPTEMBER 30,
                                  ---------------------------      PERCENT
                                     2006           2005          CHANGE
                                    ------------   ------------   ------------
Net loss..........................   $     82,600   $ (1,504,900)        *      

*Not meaningful                                                                 

         The decrease in net loss is due primarily to the gains on troubled debt
restructuring and on derivative  instruments  offset by increases in general and
administrative expenses.                                                        

LIQUIDITY AND CAPITAL RESOURCES                                                 

         As of March 31, 2007, we had cash and cash equivalents of approximately
$6.4 million and a working capital balance of approximately $3.7 million.  As of
March 31, 2006, we had cash and cash equivalents of approximately $205,000 and a
working capital deficit of approximately $5.4 million. Our positive cash balance
results  primarily  from financing  activities.  Through March 31, 2007, we have
received  proceeds of  $3,116,000  from the issuance of  convertible  promissory
notes,  $220,400  from the issuance of common  stock to employees in  connection
with expenses paid by such employees on behalf of the Company, $1.9 million from
the sale of preferred  stock,  and $6.1 million from the sale of common stock to
institutional investors and other high net worth individuals.                   

         We expect to  continue  to incur  substantial  operating  losses in the
future and to make capital  expenditures  to keep pace with the expansion of our
research and development programs and to scale up our commercial operations.  We
expect  that our  existing  cash will be used to fund  working  capital  and for
capital expenditures and other general corporate purposes. The amount and timing
of  actual  expenditures  may vary  significantly  depending  upon a  number  of
factors, such as the progress of our product                                    

38

SB-2
43rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 43rd
development,  regulatory requirements,  commercialization efforts and the amount
of cash used by operations.                                                     

         We  believe  that  our  existing  cash  and  cash  equivalents  will be
sufficient to fund our minimum working capital and capital expenditure needs for
at least the next twelve months. However, if our working capital requirements or
capital expenditures are greater than we expect, or if we expand our business by
acquiring  complementary  businesses or assets,  we may need to raise additional
debt or  equity  financing.  We are  continually  evaluating  various  financing
strategies to be used to expand our business and fund future  growth.  There can
be no assurance that  additional  debt or equity  financing will be available on
acceptable  terms or at all. We currently  do not have any material  commitments
for capital expenditures.                                                       

OPERATING ACTIVITIES                                          

         For the six months  ended March 31,  2007,  net cash used in  operating
activities  was $1.6  million and  consisted of net loss of $1.5 million and net
cash used by operating assets and liabilities of $0.3 million offset by non-cash
items of $0.2 million.  Operating assets and liabilities  consisted primarily of
increases in accounts receivables and prepaid expenses and decreases in accounts
payable.  Non-cash items consisted primarily of non-cash interest expense offset
by other income.                                                                

         For the six months  ended March 31,  2006,  net cash used in  operating
activities was $243,200 and consisted of net loss of $694,300 offset by net cash
provided by operating  assets and  liabilities  of $411,200,  offset by non cash
items of  $39,900.  Operating  assets and  liabilities  consisted  primarily  of
increases  in accounts  payable,  accrued  liabilities,  deferred  compensation,
accrued consulting and accrued interest.                                        

         In fiscal 2006, net cash used in operating  activities was $597,600 and
consisted of net income of $82,600,  and cash  provided by operating  assets and
liabilities of $1.1 million offset by non-cash items of $1.8 million.  Operating
assets and  liabilities  consisted  primarily of increases in accounts  payable,
accrued  liabilities,  deferred  compensation,  accrued  consulting  and accrued
interest.  Non-cash items  consisted of gains on derivative  instruments of $1.1
million  and gains on  troubled-debt  restructuring  of $1.1  million  offset by
stock-based compensation of $369,900 and amortization of intangibles of $79,800.

         In fiscal 2005, net cash used in operating  activities was $233,000 and
consisted  of net loss of $1.5  million  offset by cash  provided  by  operating
assets and  liabilities  of $961,600 and non-cash  items of $310,300.  Operating
assets and  liabilities  consisted  primarily of increases in accounts  payable,
accrued  liabilities,  deferred  compensation,  accrued  consulting  and accrued
interest.  Non-cash items consisted primarily of a loss on derivative instrument
of $212,500 and amortization of intangibles of $79,800                          

INVESTING ACTIVITIES                                          

         For the six months  ended March 31,  2007,  net cash used in  investing
activities  was $7,100 and  consisted  of a loan to employee  and an increase in
deposits.  For the six months  ended  March 31,  2006,  there were no  investing
activities.                                                                     

         In fiscal 2006, net cash used in investing  activities was $175,900 and
consisted  of loans to officer  and  employees.  In fiscal  2005,  there were no
investing activities.                                                           

39

SB-2
44th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 44th
FINANCING ACTIVITIES                                          

         For the six months ended March 31, 2007, net cash provided by financing
activities was $7.8 million and consisted primarily of proceeds from the sale of
preferred  stock of $1.7  million  and from  the  sale of  common  stock of $6.1
million.  For the six months  ended  March 31,  2006,  there  were no  financing
activities.                                                                     

         In fiscal 2006, net cash provided by financing  activities was $500,000
and consisted of the issuances of convertible  promissory notes. In fiscal 2005,
net cash  provided by financing  activities  was  $499,500 and  consisted of the
issuances of convertible promissory notes.                                      

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, 2006, we had net operating loss carryforwards for
federal  income tax purposes of  $4,627,600.  If not  utilized,  the federal net
operating loss carryforwards  will expire beginning in 2021.  Utilization of net
operating loss and credit  carryforwards may be subject to a substantial  annual
limitation due to restrictions  contained in the Internal  Revenue Code that are
applicable if we experience an "ownership  change".  The annual  limitation  may
result in the expiration of our net operating loss and tax credit  carryforwards
before they can be used.                                                        

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS                      

         As of March 31, 2007, we had no significant contractual obligations. In
addition,   at  March  31,  2007,  we  did  not  have  any  relationships   with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.                                                  

40

SB-2
45th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 45th
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  SUBSIDIARY  CNS RESPONSE,  INC., A CALIFORNIA  CORPORATION  ("CNSR
CALIFORNIA").                                                                   

GENERAL                                                                         

         Founded in 2000, and located in Costa Mesa, California, our business is
focused on the  commercialization  of a patented  system that aids physicians in
the  identification  and determination of appropriate and effective  medications
for patients  with  certain  behavioral  (mental or  addictive)  disorders.  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  which are contained in a proprietary  outcomes  database.  This
methodology, called "Referenced-EEG" or "rEEG" represents an innovative approach
to identifying  effective  medications for patients  suffering from debilitating
behavioral disorders. Referenced-EEG and rEEG are registered trademarks of CNSR.

         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 rEEG
offers an  improvement  upon  traditional  methods for  determining an effective
course of  medication  because  rEEG is  designed  to  correlate  the success of
courses of medication and medication  combinations,  with the neurophysiological
characteristics of a particular patient.                                        

         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.  rEEG, in
combination  with  the  information  contained  in the  rEEG  database,  has the
potential  to be able to identify  novel uses for,  and novel  combinations  of,
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.                                                    

         The  initial  technology,  upon  which  rEEG is based,  was  originally
developed  by  an  M.D.   Pathologist/   Psychiatrist  as  well  as  a  clinical
Psychiatrist in response to observations  within their practice.  They partnered
and formalized their activities into NuPharm  Database,  LLC, for the purpose of
facilitating  investment in 1999. At the time of its  formation,  these founding
physicians assigned all of their rights in the technology to NuPharm.           

         CNSR California was incorporated in California on January 11, 2000, for
the purpose of acquiring and  commercializing  the rEEG  technology.  The patent
application for the primary technology was acquired from Mill City/CNSR,  LLC, a
Minnesota  limited  liability Company in January 2000 pursuant to the terms of a
Contribution  and  Subscription  Agreement  which  provided  for the issuance of
1,000,000  shares of CNSR's common stock to Mill City in exchange for all of its
assets. Mill City had previously acquired all of NuPharm's assets pursuant to an
Asset Purchase Agreement.                                                       

41

SB-2
46th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 46th
THE CHALLENGE AND THE OPPORTUNITY                                               

         The "CNS" in CNS Response,  Inc.  refers to the central nervous system,
the largest part of the nervous  system and includes the brain and spinal cord -
organs fundamental to behavioral  control.  Often referred to as mental illness,
behavioral  disorders  have  accounted for 7.4% of the total  increase in health
care spending from  1987-2000,  and they are second among the 15 conditions that
contributed  the most to rising health care  spending  over this period  (behind
only heart disease at 8.1%).(1)                                                 

         More  than  one out of  five  adolescents,  adults  or  senior  adults,
representing more than 60 million people collectively,  have mental or addictive
illness,  an epidemic by any  measure.(2)  In any given year,  only half of this
population   receives   some  care  for  their   problem.(3)   The   market  for
pharmaceuticals  to treat central nervous system  disorders in the United States
is measured at more than $44 billion  ($68  billion  worldwide)  or 23% of total
annual  pharmaceutical  sales.(4)  Unfortunately,  the  vast  majority  of these
expenditures  are  not  based  on  blood  tests,  CT  scans,  or  any  objective
measurement  of the system being  treated.  Dr.  Steven  Hyman,  Director of the
National Institute of Mental Health from 1996 to 2002 stated:                   

"IN MOST  BRANCHES  OF  MEDICINE,  PHYSICIANS  CAN BASE  THEIR
DIAGNOSIS ON OBJECTIVE  TESTS:  A DOCTOR CAN EXAMINE X-RAYS TO
SEE IF A BONE IS BROKEN,  FOR EXAMPLE,  OR CAN EXTRACT  TISSUE
SAMPLES TO SEARCH FOR CANCER  CELLS.  BUT FOR SOME  COMMON AND
SERIOUS  PSYCHIATRIC  DISORDERS,  DIAGNOSES  ARE  STILL  BASED
ENTIRELY  ON THE  PATIENT'S  OWN  REPORT OF  SYMPTOMS  AND THE
DOCTOR'S OBSERVATIONS OF THE PATIENT'S BEHAVIOR." (5)         

         Collectively,   the  industry  has  been  waiting  to  understand   the
physiology  of behavioral  disorders,  with the hope of finding an approach that
utilized objective patient data with prescriptive therapy.                      

         Fueling  the   increase  in  spending   are   patients   deemed  to  be
"Treatment-Resistant,"  typically  defined  as  failing  two or more  trials  of
standard of care  therapies of adequate dose and duration.  Treatment  costs for
such patients are exceedingly  high. For example,  those in  treatment-resistant
depression  reach $10,000  annually for patients  treated on an outpatient basis
only, and more than $40,000 annually for those treated on an inpatient basis.(6)
Based on conversations with managed  behavioral health care organization  (MBHO)
executives,  the Company estimates that  approximately 10% of patients represent
35-40%  of  MBHOs'  patient  costs,   with  the  overwhelming   majority  deemed
treatment-resistant  cases.  MBHOs manage an estimated  210 million lives in the
U.S. alone,  with 115 million  covered by four  organizations:  Magellan,  Value
Options, United Behavioral Health and CIGNA Behavioral Health.(7)               

         Historically,  the practice of  psychiatric  medicine has been operated
subjectively,  with  treatment  decisions  involving  powerful  neuropsychiatric
medications  being  prescribed with little or no understanding of the underlying
physiology  of  each   patient.(8)   Modern  medicine  has  been  successful  in
establishing  etiology and finding effective therapy for only a relatively small
group of mental                                                                 

----------                                                                      
(1) Moran, Mark, MANY MORE PEOPLE SEEKING MH TREATMENT SINCE 1980S.  Psychiatric
News 39-19 at 15 (October 1, 2004).                                             

(2) See SUPRA note 4 at xii.                                                    

(3) Id. at viii.                                                                

(4) See SUPRA note 2.                                                           

(5) Hyman, Steven. E., DIAGNOSING DISORDERS:PSYCHIATRIC ILLNESSES ARE OFTEN HARD
TO  RECOGNIZE,  BUT GENETIC  TESTING AND  NEUROIMAGING  COULD SOMEDAY BE USED TO
IMPROVE DETECTION, Scientific American, (3): 96-103 (September 2003).           

(6) Crown,  W.H.,  Finkelstein,  S., Berndt,  E.R., Ling, D., Poret, A.W., Rush,
A.J., and Russell, J.M.. THE IMPACT OF TREATMENT-RESISTANT  DEPRESSION ON HEALTH
CARE UTILIZATION AND COSTS, 63(11):963-71 (November 2002).                      

(7) Open Minds Yearbook of Managed  Behavioral Health Market Share in the United
States, 1998-1999, at 10-12 (Gettysburg, PA. 1999).                             

(8) Gardner,  R.,  SOCIOPHYSIOLOGY  AS THE BASIC SCIENCE OF PSYCHIATRY,  Journal
Theoretical Medicine and Bioethics, 18-4 at 335-356 (December, 1997).           

42

SB-2
47th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 47th
abnormalities(9)  and has,  therefore,  necessarily  had to rely on  symptomatic
diagnoses  to  make  course  of  treatment  decisions.  The  prevalence  of  the
prescription  of  multiple  courses  of  ineffective  medications  for  patients
suffering   from  mental   disorders,   coupled  with  the  attendant   economic
inefficiencies  of the practice of Psychiatry  in this manner  demands a logical
alternative.                                                                    

         Behavioral   disorders   are   common   in  the   United   States   and
internationally.  An estimated  26.2  percent of Americans  ages 18 and older --
about one in four adults -- suffer from a diagnosable mental disorder in a given
year.(10)  The  market  for  pharmaceuticals  to treat  central  nervous  system
disorders  is more than $42  billion  in the United  States  and is the  largest
market segment of  pharmaceutical  sales,  surpassing  pharmaceuticals  to treat
cardiac  disease,  cancer  and  diabetes.(11)  Traditionally,   prescription  of
medication  for the  treatment  of these  disorders  has been based on symptoms,
while the  underlying  physiology  and  pathology of the disease has rarely been
addressed.  This can result in multiple  ineffective,  costly and often  lengthy
courses of treatment before effective medications are identified, if at all.    

OUR SOLUTION                                                  

         rEEG  is  a  historical   outcomes-based   information  treatment  tool
personalized to the functional  imbalance of a patient's  brain. We believe rEEG
to be the first broad-based objective, quantitative,  neurophysiologic biomarker
system  for  facilitating  appropriate  and  effective  treatment  for  patients
suffering from  behavioral  (mental or addictive)  disorders.  In the past year,
psychiatrists in twelve states have used this system to guide treatment of their
treatment-resistant patients.                                                   

         With a rEEG  report,  a  physician  (a  "Client-Physician")  can obtain
neuropsychiatric medication sensitivity and resistance data for individuals that
have brain abnormalities  (abnormalities of electrical power distribution in the
brain) similar to that of their patient.  The  compelling  clinical  results and
economics   demonstrated  in  multiple  studies  completed  by  either  CNSR  or
independent parties provide the basis from which, we believe, rEEG will become a
standard for guidance of psychiatric treatment of treatment-resistant  patients.
See Section  captioned  "OUR  BUSINESS - rEEG  CLINICAL  TRIALS" for a review of
existing clinical data.                                                         

         Over the course of the last twenty years the Company and its scientific
founders  have   collected   treatment   outcomes  for  patients  using  various
medications  where the patients'  brain function was first measured with an EEG.
CNSR has  correlated  the EEG features  with  courses of treatment  and outcomes
information   provided  by   Client-Physicians.   This   information   has  been
subsequently  assembled and organized into a proprietary  database that we refer
to as the "rEEG  Outcomes  Database".  As of November 8, 2006, the rEEG Outcomes
Database  contained  outcomes  for  over  2000  patients  and more  than  13,000
treatment trials of medications on these patients.                              

         Using the rEEG  analysis  method and the  information  contained in the
rEEG Outcomes Database,  CNSR can provide a report (an "rEEG Analytical Report")
to a Client-Physician  identifying  medication groups (such as  antidepressants,
stimulants,  anticonvulsants  and beta blockers),  medication  subgroups such as
antidepressant subgroups of SSRI's (selective serotonin reuptake inhibitors,  an
example of which is Prozac),  TCA's  (tricyclic  antidepressants,  an example of
which is Desipramine), SNRI's (serotonin-                                       

----------                                                                      
(9) Breggin, P., R., M.D., Toxic Psychiatry:  Why Therapy, Empathy and Love Must
Replace  the  Drugs,   Electroshock,   and  Biochemical  Theories  of  the  "New
Psychiatry", at 291 (St. Martin's Press, 1991).                                 

(10) National Institute of Mental Health, The Numbers Count: Mental Disorders In
America (2006), http://www.nimh.nih.gov/publicat/numbers.cfm#Intro.             

(11)  IMS  Health   (NYSE:   RX),   IMS  Retail   Drug   Monitor   April   2006,
http://www.imshealth.com/vgn/images/portal/cit_40000873/56/43/78335031IMS%20    
Retail%20Drug%20Monitor%20April2006.pdf.                                        

43

SB-2
48th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 48th
norepinephrine reuptake inhibitors,  an example of which is Cymbalta).  Further,
and most  importantly,  CNSR's  statistical  models in combination with the rEEG
Outcomes Database  indicates which specific  medications  within these subgroups
(such as Zoloft, Prozac, Elavil, Wellbutrin, Effexor) are the most effective for
patients  whose EEGs  evidence  similar  characteristics  to that of the subject
patient.                                                                        

         Psychiatric  treatment  guided by rEEG has been shown,  in  independent
studies, to be significantly more efficacious than previous treatment practices.
See Section  captioned "OUR BUSINESS - rEEG CLINICAL  TRIALS."  Physicians  that
have utilized such reports to inform their  treatment  strategies  identify such
reports as  `essential'  or  `significantly  helpful'  in  approximately  75% of
patients  treated based upon the  information  contained in the rEEG  Analytical
Report.  The vast  majority of subject  patients  for whom we have  created rEEG
Analytical    Reports   have   been   identified   by   their    physicians   as
"treatment-resistant,"   generally   understood  to  be  the  most  challenging,
high-risk and expensive category of patients to treat.(12) Typically,  less than
25%  of  such  patients  find  success  in  their  next  treatment  efforts.(13)
Management believes that rEEG provides Client-Physicians with a unique tool that
can   dramatically   improve   treatment   outcome  based  on  a  patient's  own
neurophysiology.                                                                

rEEG METHOD                                                           

CNSR's rEEG method consists of the following four integrated components:        

  Quantitative      Quantitative
      Digital EEG   +   Normative   +   rEEG Outcomes  + EEG/ Medication
  Analysis          Analysis

1.       Digital Electrocephalogram ("EEG")                   

         The first step in the rEEG process is a standard digital EEG recording.
         An EEG is a  non-invasive,  painless  procedure  where a cap of  twenty
         electrodes records the electrical output of the brain while the patient
         is awake,  but resting with their eyes closed.  The recording  normally
         takes  between  20 and 45  minutes.  An EEG is a  common,  standardized
         procedure  in  neurology,  often used in diagnosis of epilepsy or other
         neurological disorders such as brain tumor, stroke, encephalopathy etc.

2.       Quantitative Normative Analysis                      

         The  electrical  output at each of the twenty  leads is "Fast  Fourier"
         transformed (a mathematical  technique  useful in wave analysis) into a
         spectrum of electrical power output at various  frequency  ranges.  One
         standard approach transforms these waves into defined frequency ranges,
         or bands,  labeled Delta,  Theta,  Alpha and Beta. Output of these four
         levels of frequency can be compared  among the twenty  leads.  Standard
         comparisons  include  electrical  power  of each of  these  bands on an
         absolute and relative power basis (% of the total power output).  Also,
         comparison  of various  leads can be made for symmetry and coherence (a
         measure of the phase of the energy output).  Each of these measurements
         (or groups of  measurements) in a patient can be compared to values for
         asymptomatic  people  (norms)  of the same age and noted  when they are
outside of standard normal ranges.                            

----------                                                                      
(12) Dewan, M.J., and Pies, R.W., The Difficult-to-Treat Psychiatric Patient, at
37, American Psychiatric Publishing, Inc. (September 2002).                     

(13) Rush, A.J., Trivedi,  M.H., Wisniewski,  S.R.,  Nierenberg,  A.A., Stewart,
J.W., Wadren, D., Niederehe,  G., Thase, M.E.,  Labori,  P.W.,  Lebowitz,  B.D.,
McGrath,  P.J., Rosenbaum,  J.F., Sackheim,  H.A., Kupfer, D.J., Luther, J., and
Fava, M., ACUTE AND LONGER-TERM OUTCOMES IN DEPRESSED  OUTPATIENTS REQUIRING ONE
OR SEVERAL  TREATMENT  steps:  A STAR*D  REPORT.  Am. J.  Psychiatry;  163:  11,
1905-1917.                                                                      

44

SB-2
49th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 49th
         Analysis of the rEEG outcomes  database has shown that certain abnormal
         indications identifiable in an EEG (individually or in combination) are
         indicators  of probable  response to different  medication  classes and
         individual  medications.  We refer to  these as  "biomarkers".  We have
         identified a significant  group of biomarkers that have shown relevance
         and we  calculate  their value for each  patient.  We then  examine the
         history of treatment response to specific medications for patients with
         similar  patterns  of  abnormality  in these  biomarkers  and compute a
         projected sensitivity analysis for the current patient using any of the
         specific  medications  or medication  classes where we have  sufficient
statistical power.                                            

3.       Quantitative rEEG Outcomes Analysis                  

         A core element of rEEG is the rEEG Outcomes Database.  This proprietary
         database  consists  primarily  of  patient  digital  EEGs,   medication
         histories and outcomes  collected  over a 20 year period.  An "outcome"
         can be  defined as a specific  measure of change in  behavior  obtained
         while taking specific  medications.  The rEEG Outcomes  Database allows
         for statistical correlation of more than 1,100 individual QEEG measures
         against  medication  success,  and includes more than 13,000  treatment
episodes with outcomes.                                       

         4.       EEG / Medication  Correlations  - Computation  of  Proprietary
   Variables and application of Correlation Engine

         Currently,  the rEEG  Outcomes  Database  allows the Company to analyze
         outcomes related to twenty-seven different medications from the classes
         of antidepressants, stimulants, anticonvulsants, beta-blockers and food
         supplements. The Company is continually growing the database and adding
         additional medications as they become statistically relevant. There are
         currently   seventy-eight   medications   marketed  in  the  U.S.   for
         depression,   anxiety  disorders,   bipolar  disorder,   schizophrenia,
         obsessive-compulsive  disorder (OCD),  attention-deficit  hyperactivity
         disorder (ADHD), post-traumatic stress disorder (PTSD), panic disorder,
         and insomnia.  This does not include sixty-one medications now marketed
         in the United  States for the  treatment  of  Alzheimer's,  Parkinson's
Disease, migraines and Epilepsy.(14)                          

TREATMENT DECISIONS MADE BY LICENSED PROFESSIONALS            

         We do not currently operate our own healthcare  facilities,  employ our
own treating physicians or provide medical advice or treatment to patients.  The
Client-Physicians  that contract for our rEEG  Analytical  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.  Physicians who contract
for rEEG Analytical  Reports are responsible  for exercising  their  independent
medical  judgment in determining  the specific  application  of the  information
contained in the rEEG Analytical Reports, and the appropriate course of care for
each   patient.    Following   the   prescription   of   any   medication,   the
Client-Physicians  are  presumed  to  administer  and  provide  continuing  care
treatment.                                                                      

PROCESS FLOW                                                  

         The  flow  chart  below  details  the  process  of  inception  to  rEEG
Analytical  Report  delivery.  Currently,  upon  receipt  of  the  EEG,  a  rEEG
Analytical Report is generally delivered to the referring physician 3-4 days. We
expect that through efficiency improvements,  turnaround will be reduced to next
day.                                                                            

----------                                                                      
(14)    Drug     Reference     for    FDA    Approved     Psychiatric     Drugs,
http://neurotransmitter.net/drug_reference.html.                                

45

SB-2
50th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 50th
PATIENT/PHYSICIAN            CNS RESPONSE              NEUROLOGIST      

________________________    _______________________                         
| EEG Recording in Field |_\|   Transfer to CNS     |                         
|                        | /|       (Secure)        |______________           
|________________________|  |_______________________|              |          
                              |                          |
                             ___________V___________     _________ V__________
                             |     Artifacting       |   | Neurologist Review  |
                             |  (remove eye blinks,  |   |  (confirming that   |
                             | muscle twitches, etc.)|/__| Patient is suitable |
                             |                       |\  |     for rEEG)       |
                             |_______________________|   |_____________________|
   |
   ___________V___________
   |     Quantitative      |
   |       Normative       |
   |       Analysis        |
   |_______________________|
   |
   ___________V___________
   |    Computation of     |
   | Proprietary Variables |
   |_______________________|
   |
   ___________V___________
   |                       |
   |  Correlation Engine   |
   |_______________________|
   |
________________________    ___________V___________                         
|  Receive rEEG Report   |  |     rEEG Report       |                         
|    (Utilize for        |/_|      Generation       |                         
|     Treatment)         |\ |      and Review       |                         
|________________________|  |_______________________|                         

         The chart above shows that the first step in the process is  collection
of a digital EEG from the patient. This may be done at the physician's office or
off-site  at a testing  center.  Some  physicians  own their own  equipment  for
testing while others arrange for  technicians to visit their offices for patient
appointments.  This  data is  then  typically  transferred  to a  secure  Health
Insurance  Portability  and  Accountability  Act  ("HIPPA")  compliant FTP (File
Transfer  Protocol)  Internet  site,  although it can also be sent via overnight
delivery service. Another early step in the process is artifacting.  This is the
process of selecting  segments of the QEEG record for analysis  that are free of
electrical distortions caused by muscle movement.  Also, early in the process is
a  conventional  review of the EEG by a neurologist or  neurophysiologist.  This
serves as a quality  control step to review the overall quality of the recording
and determine  whether it is acceptable for rEEG processing.  Also at this time,
the neurologist/neurophysiologist  will author a review of the conventional EEG.
This will appear on CNSR's Type I rEEG Report.                                  

OUR TECHNOLOGY AND INTELLECTUAL PROPERTY                                        

rEEG PATENTS                                                  

         We have two issued U.S.  Patents which  together  provide CNSR with the
right to exclude  others  from using the rEEG  technology.  In  addition,  these
patents  cover  the  analytical  methodology  utilized  by CNSR 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.               

rEEG TRADEMARKS                                               

         We have  filed  trademark  applications  in the  United  States for the
following  marks:  "Referenced-EEG"  and "rEEG".  We will continue to expand our
brand names and our proprietary trademarks worldwide as our operations expand.  

46

SB-2
51st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 51st
rEEG OUTCOMES DATABASE                                        

          The rEEG Outcomes Database  consists of approximately  13,000 clinical
outcomes  across 2,000 patients who had psychiatric or addictive  problems.  The
CNSR Outcomes 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.                                                      

2.       The Clinical Outcomes Database                       

         The  Clinical  Outcomes   Database   consists  of  physician   provided
         assessments of the clinical  outcomes of patients and their  associated
         medications.  The clinical outcomes of patients are generally  recorded
         using an  industry-standard  outcome rating scale, such as 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. In addition,  CNSR may utilize  specialized  scales
         applicable  to  specific  disorders,   including  the  Beck  Depression
         Inventory  and Ham-D  scales  (Hamilton  Depression  Rating  Scale) for
depression and anxiety.                                       

         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  Client-Physician  has access to his/her own patient
     data through the software tool that captures clinical outcome data.

         We consider the rEEG  Outcomes  Database to be a valuable  trade secret
and are diligent about protecting such  information.  The rEEG Outcomes Database
is stored on a secure server and only a limited  number of employees have access
to it. Any  individual  that is provided with access to the database is required
to enter into a strict confidentiality agreement.                               

OUR CURRENT OPERATIONS - LABORATORY INFORMATION SERVICES                        

         We provide  rEEG  analysis in a  relationship  analogous to the support
other  physicians  have  from  a  reference   laboratory  or  radiology  center.
Physicians  send us the QEEG  data,  and we return an  analytical  report  for a
standard charge. This revenue model requires minimal training or impact on their
current operation and is one that physicians readily understand.  In some cases,
we also provide the actual patient testing for acquisition of the QEEG data.    

         Our  revenues  are  currently  derived  primarily  from our  Laboratory
Information Services business.                                                  

         We currently offer rEEG Analytical  Reports  produced by our laboratory
based on QEEG data supplied by the physician or an independent  testing service.
There are two primary types of analysis available.                              

47

SB-2
52nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 52nd
TYPE I ANALYSIS                                               

         Type I analysis provides  medication  sensitivity  information based on
         statistical     probability     of    improved     outcomes     against
         neurophyisiologically  similar patients.  It is considered the baseline
         measurement  where the patient is preferably  tested in an  unmedicated
         state,  which means the patient  abstains from taking  neuropsychiatric
         medications that cross the blood-brain barrier and act on the brain for
      5 half-lives (can vary from 1 day for Ambien to 5 weeks for Prozac).

TYPE II ANALYSIS                                            

         Type II analysis provides medication  sensitivity  information based on
         the changes to the  patient's  neurophysiology  presumed to be from the
         intervening treatment. It is, therefore,  measured while the patient is
medicated.                                                    

         Laboratory   Information   Services  are  either:   1)  billed  to  the
Client-Physician  or 2)  billed to the  Patient  directly.  Currently,  the vast
majority  of  the  rEEG   Analytical   Reports   produced   are  billed  to  the
Client-Physician. We bill our Client-Physicians on a monthly basis.             

         Typically,  after a 90 day medication regime guided by the Type I rEEG,
a Type II rEEG will be ordered if the  desired  outcome  has not been  achieved.
This follow-up analyzes changes post-medication in the patient's physiology, and
facilitates  the  preparation of an rEEG Report with data useful for determining
medication  dose  adjustment,   alternative  medicine  selection  or  additional
medication  augmentation.  Because our Type I analysis has shown strong efficacy
in guiding successful medication of subject patient's disorders,  we expect that
requests for Type II analysis will remain at their current levels.              

OUR CURRENT MARKETS                                                   

CURRENT APPLIED DISORDERS                                     

         In the last 12 months,  physicians  in twelve  states have used rEEG in
their  practice.  A series of eight studies  involving  rEEG have been conducted
over the last several  years  cumulating  500  patients.  See Section  captioned
"Clinical  Validation."  All studies,  which  involved most major  categories of
psychiatric  disorders  (except  for  schizophrenia),  have  shown  rEEG  to  be
demonstrably  effective  in  guiding  treatment.  To date,  these  studies  have
addressed  the  efficacy  of  rEEG  with  respect  to the  following  behavioral
disorders:                                                                      

         o        ATTENTIONAL  DISORDERS  (INCLUDING  ATTENTION DEFICIT DISORDER
               ("ADD")/ATTENTION DEFICIT HYPERACTIVITY DISORDER ("ADHD"));

o        ANXIETY DISORDERS;                                   

o        DEPRESSIVE DISORDERS;                                

o        BIPOLAR DISORDERS;                                   

o        IMPULSE CONTROL DISORDERS;                           

o        POST TRAUMATIC STRESS DISORDER;                      

o        COMPULSIVE AND OBSESSIVE DISORDERS;                  

         o        EATING  DISORDERS  (INCLUDING  ANOREXIA  NERVOSA  AND  BULIMIA
NERVOSA); AND                               

 o        ADDICTIVE DISORDERS (INCLUDING DRUG AND ALCOHOL ABUSE)

48

SB-2
53rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 53rd
PRIVATE PAYERS                                                

         Currently, a large majority of our rEEG Analytical Reports are paid for
directly by patients.                                                           

         Insurance  coverage  for  treatment  of  behavioral   disorders  varies
significantly.  Many health plans limit  coverage for mental health  benefits by
imposing  co-payments,  deductibles or limits on outpatient visits that are more
restrictive than those placed on physical illness.  Many times these benefits do
not extend to addiction treatment.  Lack of or limitations on insurance coverage
or  exhaustion  of insurance  coverage  often result in patients  needing to pay
privately for treatment of behavioral disorders.                                

         Another   reason   patients  pay  privately  is  that  access  to  plan
psychiatrists may be limited,  requiring patients to seek non-plan psychiatrists
that only accept direct patient payment.  Occasionally, a patient receiving care
from a health plan psychiatrist may become  disappointed with the amount of time
they are able to spend with that physician.  They may prefer to pay privately in
order to obtain more physician time and attention.                              

         Because of the nature of a behavioral disorder,  many patients seek out
private pay  psychiatrists as a result of a desire for greater  anonymity.  Some
patients are concerned about filing  reimbursement  claims with their employer's
health  benefit  program,  especially  in cases  where  they may not want  their
employer  to  know  of  their  affliction  (e.g.  addiction,  Attention  Deficit
Disorder, Obsessive-compulsive Disorder, Impulse Control Disorder).             

         Still  other  patients  are seeking  the best  quality of care  without
concern for  reimbursement.  Psychiatrists that accept private pay generally are
able to receive a higher  hourly rate from private pay patients than most health
plan provide.  As a psychiatrist  develops a reputation for quality service they
may be able to focus their practice on private pay patients to a greater degree.
It is this  reputation for quality service that may attract some of the patients
seeking best quality of care.                                                   

         For these  reasons and more there are a large  number of  psychiatrists
that  accept  only  patients  paying  privately  for  their  services.  CNSR has
estimated  that these  psychiatrists  treat  approximately  40% of the treatment
resistant  patients,  which  comprises  2 million  people in any given year or a
potential annual market of $1.2 billion with present pricing.                   

MANAGED BEHAVIORAL HEALTH ORGANIZATIONS/MANAGED CARE PAYERS   

         Currently, only a small portion of our rEEG Analytical Reports are paid
for by insurers or managed healthcare companies.                                

         Many  insurance/managed  health care  companies and many  self-insuring
employers providing behavioral health benefits seek to manage these services and
expenditures  through  separate  entities  (MBHOs)  that  focus  exclusively  on
managing the mental health benefit. MBHOs are separate entities such as Magellan
Health  Services or  ValueOptions,  Inc. or  subsidiaries  of larger  healthcare
management  organizations  such as United  Behavioral Health or CIGNA Behavioral
Health.                                                                         

         MBHOs  have  developed   contracted   networks  of  behavioral   health
specialists to service the needs of their insured members.  Various policies for
patients  and  providers  help to  efficiently  deliver  the  behavioral  health
benefit.  Employers that contract with MBHOs don't  necessarily  seek the lowest
cost  of  care.  Often,  the  employer's  goals  are  to  minimize  absenteeism,
disruption to their processes or time lost as a result of employee  disabilities
and prefer to contract  with  MBHO's that can deliver a better  quality of care,
accomplishing  these  goals.  Employers  may contract  directly  with an MBHO or
utilize MBHO's as part of the total health care managed care contract.          

49

SB-2
54th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 54th
         Based on our conversations with MBHO managers, we estimate that a small
subset  (10%-15%)  of  those  that  seek  treatment  in any year  account  for a
disproportionately high percentage (30%-45%) of the total medical costs paid out
by MBHOs. These are typically the treatment resistant  patients.  In addition to
being burdensome on the MBHO's, these patients are also typically more expensive
to their primary health  insurer as compared to other patients  because of their
higher use of  emergency  room  services,  pharmaceuticals  (which are often not
managed  by the MBHO),  and use of medical  services  associated  with  physical
ailments.                                                                       

         We estimate over 1 million  patients covered by MBHOs in any given year
are candidates for rEEG Report  guidance.  At present pricing this represents an
annual market opportunity of $600 million.                                      

TOTAL MARKET PERSPECTIVE                                      

         A 2004 Harris  Interactive  Poll stated that "an  estimated  59 million
people, or more than one in four U.S. adults,  have received some form of mental
health  treatment in the past two years. The vast majority of these people -- an
estimated  48  million  --  are  being  treated  with  prescription  medication.
Medications are clearly the dominant form of mental health treatment in America,
the survey found" (as reported in HEALTH DAY NEWS,  May 5, 2004).  The poll also
estimated  another 24 million  people  needed but were not getting  help because
they had given up on  treatment  or never  pursued  treatment.  We estimate  our
market  opportunity  for our  Laboratory  Information  Services  with respect to
central nervous system disorders to be in excess of $1.5 billion.               

PRICING                                                       

         We typically charge $400.00 to physicians for a Type I rEEG Report, our
standard  report,  which  reflects EEG data  obtained  while a patient is off of
medications.  Occasionally,  physicians  encounter patients that cannot tolerate
the discontinuation of their current medications to have a standard Type I test.
For these patients, we have a special report, Type I(m), which reflects EEG data
obtained  while the patient is medicated  with a medication  that is in the rEEG
Outcomes Database.  By estimating the likely EEG effect from the medication,  we
can  estimate the rEEG  parameters  of an  unmedicated  brain and issue a report
based on such  estimation.  Pricing to the  physician  for Type I(m) reports are
$800.                                                                           

         Type II testing  is for  patients  that have a baseline  Type I test on
record  and have been  medicated.  A Type II rEEG  Report  compares  changes  in
neurophysiology  from the Type I test data.  We currently  charge  $200.00 for a
Type II rEEG Report.                                                            

         Because the primary  tasks of rEEG  analysis  are  computer  automated,
direct costs of processing are relatively low. Currently,  CNSR contracts with a
neurophysiologist  to  supply  a  conventional  review  of and  commentary  on a
patient's  EEG  test.  CNSR  also  contracts  with  outside  services  to select
artifact-free (an eye-blink and the corresponding electrical signal from same is
an example of an artifact) sections of the recording suitable for rEEG analysis.
These  services  constitute  the  majority of the direct costs  associated  with
processing  a rEEG Type I  analysis.  We plan to bring  both of these  functions
in-house  during 2007,  thereby  reducing our costs per test,  and improving our
margins.                                                                        

CLINICAL VALIDATION                                           

         As  summarized  in a  2005  American  Psychiatric  Association  Poster,
reviewing  results  of rEEG  guided  treatment  in  prospective,  retrospective,
comparative  studies and independent  physician case series,  fairly  consistent
results were reported.  Generally, rEEG guided therapy, when used in conjunction
with  other  standard  clinical  information  has  shown  the  ability  to guide
physicians to successful  outcomes in 70% or more of mostly treatment  resistant
patients. Various studies in the literature would suggest the                   

50

SB-2
55th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 55th
current standard of care for treatment success with treatment resistant patients
is less than half that rate, and in some cases only 10-15%.(15)                 

COMPLETED INDEPENDENT STUDIES AND TRIALS

                                                        [Enlarge/Download Table]

--------------------  -----------------------  --------------------   ----------------------
                                                                                            
                       Veterans Association      CIGNA Treatment-          Davis-Atlanta    
ADD/Depression Study  Blind Prospective Major  Resistnat Field Trial        Case Study      
   100 Patients          Depression Study          56 Patients              15 Patients     
                           13 Patients                                                      

rEEG-Guided Efficacy   rEEG-Guided Efficacy    rEEG-Guided Efficacy   rEEG-Guided Efficacy  
       >80%                    83%                      70%                   100%          
--------------------  -----------------------  --------------------   ----------------------
    Monte Nido        Hamilton-Newport Beach     Hoffman-Denver        L'Abri Dual Diagnosis
Eating Disorder Case       Case Series            Case Series          San Diego Case Series
      Series               34 Patients            15 Patients              58 Patients      
    81 Patients                                                                             

rEEG-Guided Efficacy   rEEG-Guided Efficacy    rEEG-Guided Efficacy   rEEG-Guided Efficacy  
         83%                   78%                     73%                     93%          
--------------------  -----------------------  --------------------   ----------------------

ADD/DEPRESSION STUDY                                          
--------------------------------------------------------------------------------
Prospective study with retrospective analysis.                
EFFICACY:  >80%                                               

         Date:  1995. The initial  formalized trial consisted of 100 patients of
         which 46 were diagnosed with ADD and 54 with  depression.  Conventional
         thought  would  have  anticipated  that  the ADD  patients  would  have
         responded  to the  stimulants  and the  depressed  patients  would have
         responded to the  antidepressants.  In this study, those that failed to
         respond to  conventional  treatment were treated with  non-conventional
         medications.  rEEG correctly identified which patients would respond to
         which  medications  over 80% of the time.  This study was  published in
Clinical Electroencephalography.(16)                          

    VETERANS ADMINISTRATION BLINDED PROSPECTIVE MAJOR DEPRESSION STUDY
--------------------------------------------------------------------------------
Randomized, Prospective, Double-Blind Study                   

         Date:  1997-1999.  A pilot  prospective  study of severe and  long-term
         Veterans   Administration  patients  diagnosed  with  major  depressive
         disorders  was conducted  under the  direction of Dr Art Kling,  former
         Vice-Chairman  of the  Department  of  Psychiatry  at UCLA.  The  trial
         consisted of 13 patients,  all diagnosed with  depression  with average
         illness  duration of 16 years.  As measured  by all indices  used,  all
         patients but one in the rEEG guided treatment group showed  significant
         improvement  (86%).  In the control group,  where patients were treated
         without the  benefit of rEEG,  only one of the  patients  significantly
         improved based upon physician-guided medication selection (17%), and as
         it turned out, this patient  received the class of medication that rEEG
         predicted  would  most  benefit  the  patient  need  even  though  this
         knowledge  was not available to the  physicians  in the control  group.
This study has been submitted for publication.                

----------                                                                      
(15) DUNNER,  D.L., RUSH, A.J., RUSSELL,  J.M., BURKE, M., WOODARD, S., WINGARD,
P., and ALLEN, J., PROSPECTIVE, LONG-TERM, MULTICENTER STUDY OF THE NATURALISTIC
OUTCOMES OF PATIENTS WITH  TREATMENT-RESISTANT  DEPRESSION.  J CLIN  PSYCHIATRY.
67(5):688-95 (May 2006).                                                        

(16) Suffin,  S. C. and Emory,  W. H., CLINICAL  ELECTROENCEPHALOGRAPHY,  26(2),
1995.                                                                           

51

SB-2
56th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 56th
TREATMENT-RESISTANT PATIENT FIELD TRIAL - CIGNA CO-SPONSORSHIP
--------------------------------------------------------------------------------
         A pilot study  conducted  between  2000 and 2002 with CIGNA  Behavioral
         Health  and  its   network  of  Atlanta   psychiatrists   included   56
         treatment-resistant  patients.  All patients had  previously  failed at
         least two trials of medication treatments. Utilizing rEEG guidance, 69%
  of patients were reportedly responsive to identified treatments.

PHYSICIAN CASE SERIES                                         
--------------------------------------------------------------------------------
         Six  physicians in five  different  clinical  settings  covering a wide
         variety of diagnoses  and ages have now  reported on treatment  results
         aided by the use of rEEG in their clinics.  The physicians  received no
         remuneration  of any kind  from CNSR and,  in most  cases,  paid or had
         their patients pay for the test and rEEG analysis.  After  reporting on
         their results,  a number of these physicians  developed a strong desire
         to  instruct  other  physicians  in the use of rEEG,  and they have now
         become  regional  medical  directors with  responsibility  for training
         other physicians.  These physicians generally reported patient outcomes
         on the seven-point scale,  Clinical Global Improvement Index. Most also
         reported  their  subjective  assessment of the  helpfulness  of rEEG in
         treatment of each patient on a seven-point scale,  Clinical Helpfulness
         Index.  These  patients  had a  wide  variety  of  disorders  but  were
         generally  unresponsive to previous treatment  efforts.  We are pleased
         that virtually all reported case series have shown compelling treatment
         results  with 70% to 90% of patients  achieving  MUCH  IMPROVED or VERY
         MUCH IMPROVED rankings. Equally important, similar levels were reported
     in the rEEG Helpfulness Index (SIGNIFICANTLY HELPFUL or ESSENTIAL).

MONTE NIDO RESIDENTIAL TREATMENT CENTER                       
--------------------------------------------------------------------------------
         Monte  Nido  is  a  small   in-patient   treatment  clinic  in  Malibu,
         California,   treating  patients   suffering  from  significant  eating
         disorders,  primarily anorexia nervosa or bulimia.  Dr. W. Hamlin Emory
         is Medical Director of this facility.  An initial analysis of treatment
         results of 81 patients with pharmacotherapy  based on rEEG was compared
         to 10 patients  treated by physicians  without rEEG and 13 patients who
         had rEEG testing but decided against medication. 83% of the rEEG guided
         patient  achieved  SIGNIFICANT  or  MARKED  improvement.  None  of  the
         patients in the other two groups  achieved  this level of  improvement.
         These  results were  published  in a Scientific  Poster at the National
         Institute of Mental Health annual meeting, New Clinical Drug Evaluation
         Unit Symposium of 2004. The Monte Nido Residential  Treatment Center is
         now seeking  long term outcome data  through  patient  surveys.  We are
         looking  forward to learning of these  results.  The initial  study was
described in a report in 2001.                                

HAMILTON-NEWPORT BEACH CASE SERIES                            
--------------------------------------------------------------------------------
         Conducted by Dr. Jim  Hamilton,  a Physician in Newport  Beach,  CA. In
         this  study,  34   treatment-resistant   patients  medicated  based  on
         information  provided in rEEG  Analytical  Reports  were  followed  and
         rated. 19 of the 34 patients had addictive disorders. Only 28 of the 34
         cases were analyzed due to the fact that the balance were not available
         for  follow-up.  Of the 28  analyzed,  in 22 of these 28 cases rEEG was
         judged to be essential or very helpful in their treatment. In 14 out of
         these 28  cases,  where the rEEG was  judged  essential,  Dr.  Hamilton
         reported that rEEG had directed him "to  combinations of medicines that
         one would never find,  or would take years to find after  nothing  else
         had worked." In the 19 addiction  cases, 4 were lost to follow-up,  but
         in the 15 that were followed, rEEG was judged essential or very helpful
in 14 (79%) of the cases.                                     

52

SB-2
57th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 57th
HOFFMAN-DENVER CASE SERIES                                    
--------------------------------------------------------------------------------
         Conducted by Daniel Hoffman, M.D., now a Company Medical Director, with
         a practice in Denver, CO. This study was conducted prior to Dr. Hoffman
         becoming the National Medical Director for the Company.  In this study,
         rEEG  Analytical  Reports  were  provided  for  74  treatment-resistant
         patients who were then  followed,  and were rated on both the CGI scale
         and the  "Helpfulness"  Index.  In 56 (74%) of  these  cases,  rEEG was
         judged to be  essential  or very  helpful  in their  treatment.  A like
         percentage  reported  a much  improved  or very  much  improved  on the
Clinical Global Improvement index.                            

DAVIS-ATLANTA CASE SERIES                                     
--------------------------------------------------------------------------------
         Conducted by T. Albert Davis,  M.D.,  Medical  Director at the Florence
         McDonnell  Center in Atlanta.  This was Dr. Davis's initial study of 15
         patients that he treated with the aid of rEEG Analytical  Reports.  All
         15 patients were reported as having successful outcomes with 7 rated as
         Very Much  Improved  and 8 rated Much  Improved  on the CGI  scale.  In
         Helpfulness,  rEEG was  rated  essential  for 9 of these  patients  and
moderately helpful for six of these patients.                 

RANCHO L'ABRI DUAL DIAGNOSIS                                  
--------------------------------------------------------------------------------
         In this study,  58 "dual  diagnosis"  (addiction  and co-morbid  mental
         illness) patients were treated at Rancho L'Abri,  San Diego, one of the
         most respected  in-patient treatment facilities in Southern California.
         The physicians of Rancho L'Abri described their experience with rEEG in
         a scientific poster at the 2005 American Psychiatry  Association annual
         meeting.  The poster described both CGI rating of Very Much Improved or
         Much  Improved and  Helpfulness  rating of Essential or Very Helpful in
over 90% of the patients for whom it was used.                

OUR BUSINESS PLAN - LABORATORY INFORMATION SERVICES                             

Our Strategy                                                  

         Our  strategy  is to provide  rEEG  analysis in a  relationship  with a
physician  that  is  analogous  to  that  of a  reference  laboratory.  In  each
geographic  market,  we plan to support  this  service  with a full-time  market
manager, identified EEG testing sites and a part-time Regional Medical Director.
The  Regional  Medical  Director  will  provide  local  medical  leadership  and
training,   local  market  communications,   a  site  for  physicians  to  refer
particularly   challenging  cases  and  support  of  family  physicians  needing
specialty consults.                                                             

         In the next year, we plan to execute initiatives  designed to allow for
dramatic  introduction of rEEG to both treating physicians and their patients in
calendar year 2008. We envision this  introduction will have elements of pushing
demand for rEEG via  physician  education  and pulling  demand for rEEG  through
consumer  education.  The physician  introduction  will be accomplished  through
development of an in-house  direct sales force along with  professional  journal
and trade show  introduction.  The consumer  introduction will utilize the major
broadcast, print and electronic news media.                                     

Certain initiatives which are being considered for 2007 and 2008 include:       

53

SB-2
58th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 58th
1.       EXPAND OUR GROUP OF  CLIENT-PHYSICIANS TO INCLUDE MOST MAJOR US CITIES.
         This key infrastructure  development is one element necessary for rapid
         penetration. rEEG Analytical Reports often stimulate the identification
         of  treatment  strategies  that most  physicians  would  not  typically
         consider.   Physicians  often  are  inexperienced  in  these  treatment
         strategies,  and  they  also may be  unfamiliar  with  combinations  of
         medicines that may be suggested by our rEEG Analytical  Reports.  It is
         valuable for physicians  who are not familiar with our rEEG  Analytical
         Reports to have an  experienced  colleague  guide them through  initial
         treatments  that  are  facilitated  by the use of our  rEEG  Analytical
         Reports.  For physicians  that are unfamiliar  with our rEEG Analytical
         Reports,  their success is dependent on their ability to understand our
         rEEG  Analytical  Reports and integrate them as another tool of insight
to be used in conjunction with their existing training.       

2.       CONDUCT THREE PILOT PROGRAMS WITH MANAGED CARE PAYERS.  We believe that
         adoption  of  rEEG  for  reimbursement  is  best  accomplished  through
         demonstration  of its clinical and economic  impact with  patients in a
         health plan. In at least one of these pilot programs, CNSR will seek to
         pay for independent  economic and outcome  analysis that CNSR will have
         the right to publish.  We are currently in discussions with three MBHOs
to conduct our pilot programs.                                

3.       COMPLETE  CURRENT  MULTI-SITE AND CONDUCT  ADDITIONAL  ACADEMIC TRIALS.
         CNSR  is  beginning  a six  site,  100  patient,  academic  controlled,
         blinded,  and  randomized  study of patients  suffering  from treatment
         resistant  depression.   The  study  will  be  conducted  at  Stanford,
         Cambridge   Hospital-Harvard,   University   of  California  -  Irvine,
         University of California - San Diego, University of Texas - San Antonio
         and University of British  Columbia.  This study has been designed with
         significant care by many academicians including members of our advisory
         board.  Because of the involvement of respected  academic  centers,  we
         believe  that the  results of the study will be  published,  and widely
         disseminated.  In addition,  we plan to conduct at least two additional
         clinical  trials.  We are  also  advancing  designs  in  dual-diagnosis
         addiction  and  bulimia,  a  treatment  resistant  depression  study of
         different  design  and a  unique  study  amongst  high  performing  but
challenged college students.                                  

4.       IMPROVE  SYSTEM  TURN-AROUND  TO NEXT  DAY AND ADD  CAPACITY  TO  COVER
         PROJECTED  VOLUME. We plan to increase the usefulness of our service by
         returning reports to physicians one day after patient data is submitted
         to  us.  To  accomplish   this  task,  we  will  need  to  improve  the
         coordination  of functions  related to rEEG  analysis that we currently
         outsource.  Our longer term goal is to advance rEEG turn-around time to
be "while-you-wait."                                          

5.       ENHANCE  REPORTS TO PROVIDE  QUANTITATIVE  BIOMARKER  DATA AND  DEVELOP
         PHYSICIAN  TRAINING AND CERTIFICATION  PROCESS.  We plan to advance our
         training  programs this year with the aid of a training CD-ROM which is
         currently in development.  In addition, our next generation rEEG report
         is anticipated to provide  technical data on the set of rEEG biomarkers
         in a manner  that will  allow  trained  physicians  to better  consider
         treatment options and integrate their knowledge of clinical  assessment
         and historical  treatment  experience with the rEEG biomarker data. Our
         training program will aid physicians' use and understanding of our rEEG
         Analytical Reports.  The training process will have the added advantage
         of  communicating  to patients and their families that a  participating
         physician has completed rEEG  training,  and is competent in the use of
rEEG Analytical Reports to guide treatment.                   

6.       EXPAND REPORTED MEDICATIONS TO INCLUDE  ANTIPSYCHOTICS.  Antipsychotics
         are the only  significant  class of psychotropic  medications for which
         rEEG does not currently offer treatment  guidance.  Psychosis is one of
the most severe mental illness and is also one of the         

54

SB-2
59th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 59th
         most difficult to treat. We plan to conduct studies to determine if our
         rEEG  Analytical  Reports  are  useful  in  guiding  the  treatment  of
         psychosis,   especially  schizophrenia.  We  have  two  initiatives  to
         accomplish  this  objective.  The first is a grant from the  Washington
         Technology  Center and Washington State  University,  and the second is
with a group in China.                                        

7.       ADD KEY  LEADERSHIP IN MEDICINE AND  MARKETING.  We plan to continue to
         hire,  train,   retain  and  motivate   additional  skilled  personnel,
         particularly  managers with experience in growing healthcare companies,
         sales  representatives  who are responsible for customer  education and
         training and customer support,  as well as personnel with experience in
         clinical   testing  and  matters   relating  to  obtaining   regulatory
approvals.                                                    

MARKET INTRODUCTION                                           

         After  accomplishing  our  immediate  goals of  building  the  regional
medical   leadership  and  reaching  agreement  for  pilot  trials  with  MBHOs,
aggressive national  introduction will occur with establishment of that regional
leadership,  establishment of an introductory  sales force,  and  prepublication
release of our treatment-resistant depression or other key study data.          

         PUSH:  By accessing  thought  leaders in psychiatry at the national and
community level,  publicizing the clinical benefits in professional and consumer
media, and relying on our own dedicated sales force to educate  psychiatrists we
believe that the  compelling  benefits and economic  efficiency of rEEG guidance
will provide large scale physician trial.                                       

         Our main promotional  strategy with physicians will continue to be "try
it,  you'll like it - no charge".  Because of the low variable cost of producing
rEEG  Analytical  Reports,  we can offer free trials to  physicians to encourage
them to begin to experience  the benefits of rEEG.  Our current  program  offers
Physicians  five (5) free Type I reports  with their only  commitment  being the
completion of a consultative  review with one of our regional medical  directors
for each  report.  We  encourage  physicians  to select their most hard to treat
patients for these free trials.  It is our  expectation  that no matter how well
conducted  our  academic   trials,   physicians  need  to  experience  rEEG  for
themselves.  One physician  has written a letter to CNSR stating,  "I DON'T KNOW
THAT I COULD GO BACK TO PRACTICING BLINDED PSYCHIATRY.  UNTIL YOU EXPERIENCE HOW
DIFFERENT IT FEELS TO PRACTICE THIS WAY, I COULD SEE SKEPTICISM FROM OTHERS." We
believe physician trial is the key to adoption of rEEG.                         

         PULL: We intend to utilize major print,  broadcast and electronic  news
media to explain the  benefits of rEEG  directly to  patients.  We believe  that
these media are the most effective and cost-efficient  means to pull-in consumer
demand for rEEG and that we have an unusual opportunity to develop a large reach
at an early stage that can stimulate dynamic demand.                            

         This demand will also encourage  physicians to seek early understanding
of rEEG  and our  goal of  trial.  Assisting  patients  to find  early  adopting
physicians  by providing  identification  of trained  physicians on our web site
will likely provide another win- win for patients, physicians and CNSR.         

NEW MARKETS                                                   

ADDITIONAL APPLICABLE DISORDERS                               

         While physicians have  historically  classified  central nervous system
disorders as  psychiatric  or  neurological,  the diseases  themselves  could be
characterized as disorders of the same organ system,                            

55

SB-2
60th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 60th
primarily the brain.  The utility of using of  neurophysiological  data to guide
treatment of the brain in connection with psychiatric  disorders may well extend
to neurological disorders.                                                      

         For example,  we currently  have  significant  information  in our rEEG
Outcomes  Database  with respect to the  effectiveness  of  anticonvulsants  for
patients  with  certain  biomarkers.  We intend to  explore  the  utility of our
biomarkers for guiding use of medications, including anticonvulsants,  for their
primary  indication  of  seizure  disorders,  as well as their  utility  in pain
management for which they are also often prescribed.                            

ADDITIONAL APPLICATIONS BEYOND TREATMENT-RESISTANCE           

         Due to the  success  of  rEEG  with  treatment-resistant  patients,  we
believe that rEEG has the potential to become a useful tool for psychiatrists in
treating patients that do not qualify as treatment resistant. For example, it is
generally  acknowledged  that  children  have  a  wide  range  of  reactions  to
anti-depressants  and, in fact,  anti-depressants  in many cases  actually  harm
instead of help them.  The  ability to avoid  prescribing  anti-depressants  for
children that may have a physiological  predisposition to react negatively would
reduce suffering for both the children,  and their families,  and facilitate the
identification  of a successful  strategy  earlier in the process.  In addition,
adolescents,  who are typically  intolerant  of the long process of  medication,
would be especially good candidates for rEEG guided therapy.                    

CENTERS OF EXCELLENCE                                         

         It is our intention to work with our Client-Physicians, and our medical
advisors to support,  possibly with financial  resources,  the  establishment of
practices  and/or clinics that specialize in the use of rEEG guided therapy.  We
believe that a network of such practices, which we call "Centers of Excellence,"
will provide opportunities for physician training and additional clinical trials
and demonstrations of the value of rEEG technology. It is our goal to make these
Centers of  Excellence  a  destination  for  treatment-resistant  patients and a
resource for care managers of the MBHOs, and, in time, a network of such Centers
may be in a position  to  contract  for a disease  management  program  with the
managed care industry.                                                          

GOVERNMENT                                                    

         The market for our Laboratory Information Services potentially includes
state hospitals, wards of the state in specialty care homes for persistently and
seriously  ill and  jails.  2,186,230  prisoners  were held in  Federal or State
prisons or in local jails as of mid 2005.(17)  Rates of severe mental illness in
this population are reportedly as high as 24%.(18) We are not currently pursuing
this market,  in part because there is a substantial  incidence of Schizophrenia
in this population and we do not yet have  sufficient data to provide  treatment
guidance for Schizophrenic patients.                                            

         We believe the  incarcerated  population  returning to society may be a
particularly  good market for rEEG. We have not yet explored the  opportunity to
address  this  population  but are  interested  in studying  whether rEEG guided
treatment might add enough  improvement in efficiency and effectiveness to alter
the recidivism rate.                                                            

----------                                                                      
(17)    U.S.    Dept.    of    Justice-    Bureau   of    Justice    Statistics,
http://www.ojp.usdoj.gov/bjs/prisons.htm.                                       

(18) Daly, R., PRISON MENTAL HEALTH CRISIS  CONTINUES TO GROW,  Psychiatry News,
40-20 at 1 (October 20, 2006).                                                  

56

SB-2
61st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 61st
RESEARCH AND DEVELOPMENT                                      

         We will  continue  to enhance,  refine and improve the  accuracy of our
CNSR Database and rEEG through expansion of the number of medications covered by
our rEEG  Analytical  Reports,  expansion of our  biomarkers,  refinement of our
biomarker  system,  and by  reducing  the time to  turnaround  a  report  to the
physician. Other specific research and development goals consist of:            

o Developing  enhanced Type II Analyses that have increased value and content; o
Addition of other CNSR agents,  and possibly  cardiac  agents;  o Developing  an
automated Type I (m) for patients on a single well characterized medication;    
o        Advancing  our research to understand  the total balance  analysis that
can be used for monitoring or a more global scale; and        
o        Improved graphical presentation of results.                            

OUR BUSINESS PLAN - PHARMACEUTICAL DEVELOPMENT AND ADVANCEMENT                  

         Although we intend to emphasize  our  Laboratory  Information  Services
during the next twelve (12) months, we plan to increase our involvement with the
pharmaceutical industry in the future.                                          

OUR STRATEGY                                                          

         Our strategy in the next year is the initiation of marketing of rEEG to
selected  potential  pharmaceutical  development  partners.  Evaluation  of such
opportunities  by potential  partners is  complicated  by many issues  including
state of  intellectual  property,  regulatory  approval  for  marketing  and the
trial(s)  necessary,  medication  delivery  and  packaging  requirements  of the
medications,  therapeutic  synergy of the combination,  market needs in selected
indications and related competitive advantage, estimated market size, production
costs,  current  physician  familiarity  with the  individual  agents  and other
considerations.                                                                 

         A secondary  goal is to explore the business  opportunity  in aiding in
resuscitating opportunities for psychiatric medications that are no longer being
pursued by their developers despite the fact that such medications  demonstrated
significant  efficacy for subgroups of patients in clinical  trials.  We believe
that, by using our system of rEEG biomarkers,  we can aid in identifying patient
populations that are more likely to respond to a particular  medication based on
their  common  physiological  characteristics.  We are  interested  in exploring
cooperative  relationships,  which  utilize  our  technology  and rEEG  Outcomes
Database  to  aid  in  the   development  and  clinical  trials  of  efficacious
medications  that previously had failed to adequately  demonstrate that efficacy
in late stage trials.                                                           

         We intend to leverage  our  capabilities  and  technology  to develop a
pharmaceutical business from four sources:                                      

     COMBINATION OF OFF-PATENT  AGENTS  FORMULATED  INTO SINGLE PILL  FIXED-DOSE
COMBINATIONS.                                                         

         Our  data  has  demonstrated  that  some  patient  electrophysiological
abnormalities  are more  frequently  observed than others.  Most of the frequent
abnormalities   take  more  than  one   agent  to  bring  the   patient   to  an
electrophysiological  normal state.  This is not  surprising,  as the individual
agents   were  never   developed   from  an   electrophysiological   normalizing
perspective.  We have identified a number of high frequency  abnormalities  that
appear to be most effectively addressed by a combination of medications. We have
filed patent  applications on two categories of combinations  and expect to file
more.  Our current focus is for  opportunities  in bulimia,  treatment-resistant
depression and addiction.                                                       

57

SB-2
62nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 62nd
     PARTNERING  WITH  PHARMACEUTICAL  DEVELOPERS  TO  "RESCUE"  NEW  AGENTS  IN
DEVELOPMENT.                                                          

         New Chemical  Entities  (NCEs) that have been shown to be safe, but not
efficacious in late stage clinical  trials present  opportunities  to partner or
acquire  and  re-license.  Specifically,  our  interest is focused on a group of
agents that can  generally  be described  as having (a)  completed  pre-clinical
formulation,  toxicology,  pilot production development, and all required animal
studies,  (b) completed  Phase I human safety  studies,  (c) completed  Phase II
human dosing studies and possibly  conducted  initial Phase III pivotal efficacy
studies.  These agents will have shown  themselves to be generally  safe without
debilitating  adverse  affects but have been  discontinued in development due to
their  failure  to show  compelling  efficacy  in  either  Phase II or Phase III
studies.                                                                        

         We estimate that there are  approximately  200 central  nervous  system
compounds which are sitting idle at large pharmaceutical companies after failing
Phase II or Phase III  trial.(19)  We have  completed a review of 53 such agents
that fit the  described  criteria and  initially  has focused on eight which are
thought to be worthy of consideration for licensing. Five other agents have been
identified as to be worth  in-licensing  pursuit for United States  development.
These are agents  that have been  approved  in  overseas  markets but not in the
United States.  While they may not have been adequately  differentiated,  or the
regulatory  expense may not have seemed  justifiable  for the  potential  market
opportunity,  we believe  that  these  agents  belong to classes  that have been
generally under utilized for additional significant indications. We believe that
for  some  medications,  our  rEEG  biomarker  system  will be able to  identify
patients with a high likelihood of responding well to these medications based on
the presence of rEEG-defined biomarkers.                                        

We believe our rEEG biomarker system can be used to effect:   

         o        Reduction  of  placebo  responders  in  a  clinical  trial  by
                  focusing  on  treatment   resistant  patients  or  eliminating
                  patients  demonstrating normal  neurophysiologic  function and
balance;                                    

         o        An  increase  in  treatment  group   responders  by  selecting
                  patients for trial inclusion based on the presence of specific
rEEG defined neurophysiology.               

     AMELIORATING  THE CNSR SIDE EFFECTS OF  MEDICATIONS  USED FOR OTHER MEDICAL
PURPOSES.                                                             

         "Cancer  fog" is a  colloquial  term used to describe the response of a
patient or  care-givers  response to the  stresses  and perhaps the  medications
associated with cancer  therapeutics.  For patients,  these effects appear to be
particularly specific to certain chemotherapeutic agents.                       

         To the extent  these  agents  cause a  specific  common  alteration  in
neurophysiological function, rEEG should be able to note and identify this. This
should  allow the  creation of a  counteracting  medication  antidote for people
suffering from a neuropsychiatric condition following primary therapy.          

----------                                                                      
(19) Jarvis, L. M. TEACHING AN OLD DRUG NEW TRICKS: GENE LOGIC IS CONVINCING BIG
PHARMA TO TAKE ANOTHER LOOK AT ABANDONED DRUGS.  Chemical and Engineering  News,
84-7 at 52,54-55 (February 13, 2006).                                           

58

SB-2
63rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 63rd
COMPARABLE COMPANIES, COMPETITION AND INDUSTRY DEVELOPMENTS                     

INDUSTRY DEVELOPMENTS                                                 

         We are not aware of any reference  laboratories that service Psychiatry
with tools or information to direct  therapy,  although the following  firms are
using  neurophysiological  data in an attempt to diagnose certain disorders and,
in some cases, monitor or confirm therapy:                                      

   o        LEXICOR INC. (www.lexicor.com) uses EEG to diagnose ADHD

         o        NEURONETIX (www.neuronetix.com) uses tools to diagnose Autism,
Dyslexia and Alzheimer's                    

         o        AMEN  CLINIC - uses  SPECT for  diagnosis  and  monitoring  of
therapy                                     

         o        NEUROGNOSTICS  - uses  FMRI for  confirmation  of  therapeutic
efficacy                                    

         We are not  aware of any  companies  using  neurophysiological  data to
guide therapy in conjunction with a neurophysiology outcomes database.          

COMPARABLE COMPANIES                                                  

         Although  there are no  companies  offering  a service  similar to that
offered by CNSR, the following  companies  might be noted as comparable  through
some commonalities:                                                             

         o        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.  Boston  Scientific  invested $25
                  million in a joint venture to accelerate this effort. Patients
                  must  be  measured  prior  to  and  after  taking  medication.
                  Publicly available  knowledge 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  appears to involve sale of equipment  and a per-patient
 charge. The company is now conducting trials.

         o        HYTHIAM,  INC.  (Nasdaq:  HYTM).  Though  perhaps  more  of an
                  analogous  company  than a  competitor,  Hythiam  is a  public
                  company  introducing  a proprietary  addiction  detoxification
                  procedure  that  purports  to  address  physiologic  needs  of
                  addicts and impact  on-going  recovery.  The company charges a
                  $15,000  fee for  stimulant  abusers  and  $12,000 for alcohol
                  abusers.  Since  CNSR  does  not  provide  guidance  regarding
                  detoxification  of addictions (only their  post-detoxification
   treatment), Hythiam is not a direct competitor.

         o        BRAIN RESOURCE COMPANY (www.brainresource.com),  a development
                  stage  Australian  public  company  developing  EEG and  other
                  physiology data on patients with behavioral  illness through a
                  network of physician data  relationships.  Their revenue model
                  includes  physician  services and sale of systems and services
              to pharmaceutical development companies in the CNSR field.

         o        GENOMIC  HEALTH,  INC.  (NasdaqGM:  GHDX) This public  company
                  provides  analogous  services  to those  of CNSR for  patients
suffering from cancer.                      

59

SB-2
64th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 64th
EMERGING TECHNOLOGIES                                         

      The entire field of  neuropsychiatry  is undergoing  dramatic changes as a
result of the introduction of new technologies. Many of these changes are driven
by medical device companies including:                                          

         o        CYBERONICS,  INC. (Nasdaq:  CYBX). Cyberonics has developed an
                  implantable  Vagus  Nerve  Stimulation   device  approved  for
                  treatment-resistant   depression.  This  device  has  received
                  pre-marketing  approval  from the Food  and  Drug  Agency  for
                  patients and is believed to be under  reimbursement  review by
insurance payers.                           

         o        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.

         o        NEURONETICS (www.neuronetics.com). Neuronetics has developed a
                  trans-cranial  magnetic  stimulation  (rTMS)  device  which is
                  designed to be applied  externally  in a series of  treatments
                  over  several  weeks.  The  company  is  expected  to file FDA
registration soon.                          

         We view these developing  treatment options as expensive  augmentations
to existing therapies for  treatment-resistant  patients. From this perspective,
these devices can be considered as competitive  therapeutic treatment 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.           

GOVERNMENT REGULATION                                                           

         Currently,  we do not believe that sales of our Laboratory  Information
Services,  including  our rEEG  Analytical  Reports,  are subject to  regulatory
approval.  However,  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  intend  to  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.                                                           

60

SB-2
65th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 65th
DESCRIPTION OF PROPERTY                                                         

         We  currently  lease our office  space  under a lease  agreement  which
expires in November of 2007. The facility is  approximately  1900 sq. ft, and is
located in Costa Mesa, California.  It is from this facility that we conduct all
of our executive and administrative  functions. We believe our space is adequate
for our current needs and that suitable  additional or substitute  space will be
available  to  accommodate  the  foreseeable  expansion of our  operations.  Our
telephone number is (949) 248-5461.                                             

EMPLOYEES                                                                       

         As of May 17, 2007, we had 7 full-time employees.  Since inception,  we
have never had a work stoppage, and our employees are not represented by a labor
union. We consider our relationships with our employees to be positive.         

LEGAL PROCEEDINGS                                                               

         From time to time, we may be involved in litigation  relating to claims
arising  out of our  operations  in the normal  course of  business.  We are not
currently party to any legal  proceedings,  the adverse outcome of which, in our
management's  opinion,  individually  or in the  aggregate,  that  would  have a
material adverse effect on our results of operations or financial position.     

61

SB-2
66th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 66th
MANAGEMENT

         The  following  table sets forth the name,  age and position of each of
our  executive  officers  and  directors  as of  May  17,  2007.  The  following
individuals served as executive officers and directors of CNSR California before
our merger with CNSR California, and became our executive officers and directors
upon completion of the merger on March 7, 2007.                                 

NAME                       AGE     POSITION                                     
--------------------       ---     ---------------------------------------------
Leonard J. Brandt          50      Chairman of the Board, President,            
                           Chief Executive Officer and Secretary
Horace Hertz               57      Chief Financial Officer                      
David B. Jones             63      Director                                     
Jerome Vaccaro, M.D.       51      Director                                     

LEONARD J. BRANDT,  DIRECTOR,  PRESIDENT,  CHIEF EXECUTIVE OFFICER,  SECRETARY &
FOUNDER                                                                         

         Leonard J.  Brandt is a founder of CNSR  California,  and has served as
its  President  and  Chief  Executive  Officer,  and as  member  of its Board of
Directors  since its  inception  in 2000.  Mr.  Brandt  started  his career with
Norwest  Venture  Capital in 1980.  In 1983 he became Vice  President of Norwest
Growth Fund and General  Partner of Norwest  Venture  Partners,  where he served
until  1990.  In this  capacity  he was  primarily  responsible  for the  firm's
investments  in  the  healthcare  industry,   including  several  involving  the
behavioral health industry.  In 1995 Mr. Brandt founded Time Segment Publishing,
Inc and was its President  until 1999.  In 1999,  Mr.  Brandt  co-founded  Embro
Vascular,  LLC, a provider of technology  for  least-invasive  harvesting of the
saphenous  vein  for  heart-bypass   surgery.  He  also  individually   provided
consulting  to early  stage  ventures  from 1993 until he  co-founded  Mill City
Venture  Consulting  in 1998.  Mill City  Venture  Consulting  was  initially an
advisor to NuPharm,  Inc., the  predecessor of CNSR  California.  Mr. Brandt has
been  a  United  States  member  of the  government  of New  Zealand  Trade  and
Enterprise  Advisory  Board since 2005.  Len holds a Bachelor of Science  degree
from the College of Commerce at University of Illinois and a Masters of Business
Administration from Harvard University.                                         

HORACE HERTZ, CHIEF FINANCIAL OFFICER                                           

         Horace Hertz has served as Chief  Financial  Officer of CNSR California
since October 15, 2006.  From August 2003 to September 2006, Mr. Hertz served as
the Chief Operating Officer and Chief Financial  Officer of Bankers  Integration
Group,  a financial  information  company.  From April 2002 to August 2003,  Mr.
Hertz served as Chief Financial Officer of Infacare Pharmaceutical  Corporation,
a medication  development  company.  From April 2, 2001 to April 2002, Mr. Hertz
served as Interim Chief Executive Officer of Maxoptix,  Inc., a hardware company
undergoing a restructuring.  Prior to that Mr. Hertz served as a Chief Financial
Officer for a  NASDAQ-listed  public  company,  Aspeon,  Inc, a manufacturer  of
hardware,  for 3 years. Mr. Hertz, a Certified Public Accountant,  was a partner
of  Deloitte  &  Touche,  LLP from  1974 to 1991  and has a  Masters  Degree  in
Mathematics from the University of California at Irvine.                        

DAVID B. JONES, DIRECTOR                                                        

         David B. Jones has been a director of CNSR California  since July 2006,
has been a Managing  Partner of Odyssey  Venture  Partners II, L.P.  since 2003.
From 1997 to 2003, he served as Chairman and Chief Executive Officer of Dartron,
Inc., a computer accessories  manufacturer.  From 1985 to 1997, he was a general
partner of InterVen  Partners,  a venture  capital firm with offices in Southern
California and Portland,  Oregon.  From 1979 to 1985, he was President and Chief
Executive Officer of First Interstate                                           

62

SB-2
67th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 67th
Capital,  Inc., the venture capital affiliate of First Interstate  Bancorp.  Mr.
Jones is a director of Earthanol, Inc. He is a graduate of Dartmouth College and
holds Masters of Business  Administration and law degrees from the University of
Southern California.                                                            

JEROME VACCARO, M.D., DIRECTOR                                                  

         Jerome Vaccaro,  M.D., joined the Board of Directors of CNSR California
in 2006.  Dr.  Vaccaro is a Senior Vice  President  with United  Health  Group's
Specialized  Care  Services.  He has served in a number of health care executive
roles, most recently as Chief Executive Officer of United Behavioral Health, and
before that as President and Chief  Executive  Officer of PacifiCare  Behavioral
Health  ("PBH").  Dr.  Vaccaro  has  also  served  as  Medical  Director  of PBH
(1996-2001),   Chief   Executive   Officer  of  PacifiCare   Dental  and  Vision
(2002-2004),  and Senior Vice  President  for the  PacifiCare  Specialty  Health
Division  (2002-2004).  Dr.  Vaccaro has an  extensive  background  in community
mental  health  and  public  sector  work,   including   editing  the  textbook,
"Practicing  Psychiatry  in the  Community,"  which is hailed as the  definitive
community psychiatry text. Dr. Vaccaro completed medical school and a Psychiatry
Residency at the Albert Einstein College of Medicine in New York City. After his
training,  Dr.  Vaccaro  served on the  full-time  faculty of the  University of
Hawaii (1985-1989) and UCLA (1989-1996) Departments of Psychiatry.              

BOARD COMPOSITION AND COMMITTEES                                                

         Our board of directors  currently  consists of three  members:  Leonard
Brandt,  David Jones, and Jerome Vaccaro.  Each director was elected either at a
meeting of  shareholders or by written  consent of the  shareholders  and serves
until our next annual  meeting or until his or her successor is duly elected and
qualified.  We do not  have  a  separately  designated  audit,  compensation  or
nominating  committee of our board of directors  and the  functions  customarily
delegated to these  committees are performed by our full board of directors.  We
are not a "listed  company"  under SEC rules and are  therefore  not required to
have separate committees comprised of independent  directors.  We have, however,
determined that David Jones and Jerome Vaccaro are "independent" as that term is
defined in Section 4200 of the Marketplace Rules as required by the NASDAQ Stock
Market.  We have also determined that our board of directors does not include an
"audit  committee  financial  expert"  within  the  meaning  of  the  rules  and
regulations of the SEC. However, the company's board of directors has determined
that each of its members is able to read and  understand  fundamental  financial
statements and has substantial business experience that results in that member's
financial sophistication. Accordingly, our board of directors believes that each
of its members has sufficient  knowledge and experience necessary to fulfill the
duties and obligations that an audit committee would have.                      

         We intend to establish an audit,  compensation and nominating committee
of our board of  directors to the extent we expand our board to include at least
three directors who are independent  directors under the applicable rules of the
SEC and NASDAQ.                                                                 

         In the past five years,  none of our officers or directors  has had any
bankruptcy  petition  filed by or against any  business of which such officer or
director was a general  partner or executive  officer  either at the time of the
bankruptcy  or within two years  prior to that time.  None of our  officers  and
directors  have been  convicted  in a criminal  proceeding  or are  subject to a
pending   criminal   proceeding,   excluding   traffic   violations  or  similar
misdemeanors,  nor have  they  been a party to any  judicial  or  administrative
proceeding  during the past five years,  except for matters that were  dismissed
without  sanction or  settlement,  that resulted in a judgment,  decree or final
order enjoining the person from future violations of, or prohibiting  activities
subject to, federal or state  securities  laws, or a finding of any violation of
federal or state securities laws.  There are no family  relationships  among our
executive officers and directors.                                               

63

SB-2
68th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 68th
KEY EMPLOYEES                                                                   

MICHAEL TIPPIE has served as VP of Pharmaceutical  Business  Development for the
Company since January, 2006. Prior to CNSR, Mr. Tippie consulted for a number of
biotechnology therapeutic,  diagnostic and medical device companies from January
2002 to January 2006. From 1996-2002 Mr. Tippie was VP, Business Development for
LifeSpan  BioSciences,  Inc., a genomic database and pathology services company,
where  he  was  responsible  for  14  transactions  with  large   pharmaceutical
companies,  as well as the management of their contract research  business.  Mr.
Tippie  has   additional   senior   management   experience   in   biotechnology
(ZymoGenetics,  Tacora, StressGen  Biotechnologies),  as well as venture capital
experience  (Norwest  Venture  Capital  under  Mr.  Brandt;  Medical  Innovation
Partners).  Mr.  Tippie  started  his  career as a  medicinal  chemist at Syntex
Research  (since  acquired by Hoffman  LaRoche).  Mr.  Tippie holds a Masters of
Business Administration from the Sloan School of Management at the Massachusetts
Institute of Technology, a Master of Science in Chemistry from the University of
Washington and a Bachelor of Science in Chemistry from Reed College.            

BRIAN  MACDONALD,  a co-founder  of the  Company,  has served as its Director of
Engineering since 2000. Prior to receiving his Master of Business Administration
from the Wharton School of Business,  University of Pennsylvania, in 1990, Brian
was trained in operations and chemical engineering.  He consulted for Deloitte &
Touche  Management  Consulting  from  July  1990 to April  1995  KPMG  Strategic
Services from April 1995 through  April1996  and in private  practice from April
1996 until January 1999. Mr.  MacDonald's  focus throughout this time was in the
area of operations  and  information  systems.  Brian is co-founder of Mill City
Venture  Development,  an entity  founded in January 1999 that consulted for the
predecessor   company  to  CNSR.   In   addition  to  his  Masters  of  Business
Administration,  Mr.  MacDonald  holds a  Bachelor  of Science  degree  from the
University of Alabama.                                                          

SCIENTIFIC AND MEDIA ADVISORS                                                   

CNSR's Scientific Advisors and Media Advisors are experts in their field. During
their  tenure,  CNSR  Board of  Directors  and  management  team  utilize  their
specialized expertise on an as-needed basis.                                    

STEPHEN C. SUFFIN, MD, Advisor,  is certified in anatomic and clinical pathology
and has  published  more  than 50  scientific  papers.  Dr.  Suffin  is a former
Investigator at the Laboratory of Infectious  Diseases at the National Institute
of Allergy and Infectious  Diseases and consultant to the Armed Forces Institute
of Pathology  before  returning to the West Coast to become Medical  Director at
Upjohn's Laboratory Procedures.  Dr. Suffin has served as a medical director for
SmithKline  Beecham and Quest Diagnostics for over 20 years.  Additionally,  Dr.
Suffin is a board certified  psychiatrist who has served as the medical director
of two  psychiatric  hospitals and as the Chief Medical Officer of CNSR from its
founding in 2000 until 2002.                                                    

MAURIZIO  FAVA,  MD,  Advisor,  is currently  Associate  Chief of Psychiatry for
Clinical  Research and Director of the Depression  Clinical and Research Program
at the  Massachusetts  General  Hospital and  Professor of Psychiatry at Harvard
Medical  School.  Dr. Fava has  authored or  co-authored  more than 200 original
articles,  edited four books, published more than 50 chapters, 200 abstracts and
given more than 200 presentations at national or international  meetings. He has
received  several awards during his career and is on the editorial board of four
international medical journals.  Dr. Fava's prominence in the field is reflected
by his role as the co-principal  investigator of STAR*D,  the largest study ever
conducted in the area of depression.                                            

ALAN  SCHATZBERG,  MD,  Advisor,  is the Kenneth T. Norris,  Jr.,  Professor and
Chairman of the  Department of Psychiatry  and  Behavioral  Sciences at Stanford
University.  He has authored over 500 publications and abstracts,  including the
MANUAL OF CLINICAL PSYCHOPHARMACOLOGY, (fifth edition published in 2005), co-   

64

SB-2
69th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 69th
edited  the  TEXTBOOK  OF   PSYCHOPHARMACOLOGY   (third  edition  2003)  and  is
Co-Editor-in-Chief  of the  JOURNAL OF  PSYCHIATRIC  RESEARCH.  He has  received
numerous  awards during his career,  including  most recently the  Distinguished
Service in Psychiatry Award from the American College of Psychiatrists and is on
the editorial  board of several  international  medical  journals.  In 2003, Dr.
Schatzberg was elected into the Institute of Medicine of the National Academy of
Sciences.                                                                       

MAX A. SCHNEIDER,  MD, Medical Advisor to CNSR, Director of Education,  Positive
Action Center at Chapman Medical  Center,  Orange,  California,  is a Fellow and
Past  President of the American  Society of Addiction  Medicine  (ASAM),  a Past
Chair of the Board of Directors of the National  Council on Alcoholism  and Drug
Dependence  (NCADD),  a  former  consultant  to the Drug  and  Alcohol  Advisory
Committee  of the U.S.  Food and Drug  Administration  and a  Certified  Medical
Review Officer. He currently serves as a Clinical Professor at the University of
California at Irvine where he teaches in their Addiction  Medicine program which
he founded in 1969.  Dr.  Schneider  has produced ten films and five booklets on
addiction. In 1956 he was a member of the research team that developed "mouth to
mouth"   resuscitation   that   revolutionized   the   technique  of  artificial
resuscitation.                                                                  

GREGORY  VISTICA,  Advisor to CNSR, is the president of Washington  Media Group,
Inc., a communications firm that specializes in crisis management.  He is also a
principal with SAIL Venture Partners, an energy/cleantech venture firm. He is an
author and former  award-winning  investigative  journalist  who has worked as a
correspondent  for  NEWSWEEK,  a  contributing  writer  for THE NEW  YORK  TIMES
MAGAZINE,  a staff writer for THE WASHINGTON POST, a producer for 60 MINUTES II,
and a  military  affairs  writer  for THE SAN DIEGO  UNION-TRIBUNE.  He has been
nominated  for an EMMY by CBS  News  and was a  finalist  for a  PULITZER  PRIZE
nominated  by the New York  Times.  He won a PEABODY  AWARD and THE GEORGE  POLK
AWARD for his investigative reporting of the "Tailhook Scandal."                

65

SB-2
70th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 70th
EXECUTIVE COMPENSATION

CNS RESPONSE, INC. (FORMERLY STRATIVATION, INC.)                                

         We did not have a bonus, profit sharing, or deferred  compensation plan
for the benefit of our employees,  officers or directors in 2006 or 2005. We did
not pay any other salaries or other compensation above $100,000 to our officers,
directors  or employees  in 2006 or 2005.  Further,  we have not entered into an
employment  agreement with any of our officers,  directors or any other persons.
We have not accrued any officer compensation.                                   

         There were no option grants to any executive officers during our fiscal
year ended  December 31, 2006,  and no options were  exercised by any  executive
officer during the fiscal year ended December 31, 2006.                         

         In 2006, none of our directors received compensation for their services
as directors on our board.                                                      

CNSR CALIFORNIA                                                                 

         The following table sets forth information  concerning all compensation
paid to CNSR California's  Executive Officers for services to CNSR California in
all capacities for each of the three fiscal years ended September 30,  indicated
below.                                                                          

                                                        [Enlarge/Download Table]
                     CNS RESPONSE SUMMARY COMPENSATION TABLE                                       

                                                                                        LONG-TERM  
                                                                                       COMPENSATION
                                                       ANNUAL COMPENSATION                AWARDS   
                                           ------------------------------------------  ------------
                                                                                        NUMBER OF  
NAME AND                    FISCAL YEAR                                                 SECURITIES 
PRINCIPAL                      ENDED                                     OTHER ANNUAL   UNDERLYING 
POSITION                    SEPTEMBER 30,    SALARY(1)       BONUS       COMPENSATION  OPTIONS *(2)
-------------------------   ------------   ------------   ------------   ------------  ------------
                                                                                                   
Leonard Brandt (1) ......           2006   $    175,000   $     10,000   $     59,700     2,124,740
  Chief Executive                   2005        175,000          8,000         48,900          --  
  Officer, Director                 2004        165,000          8,000         40,400          --  

*        The Number of Securities  Underlying  Options  represents the number of
         shares of our Common Stock for which the CNSR  California  common stock
         underlying the originally issued options was exchanged upon the closing
of the Merger.                                                

(1)      For the fiscal  years ended 2004,  2005 and 2006 Mr.  Brandt  agreed to
         forgo  payment of his salary and allow CNSR  California  to accrue such
         compensation.  In August 2006,  Mr.  Brandt agreed to settle his claims
         for compensation  through September 30, 2006 in the aggregate amount of
         $1,106,900  in  exchange  for the  issuance  of 298,437  shares of CNSR
         California common stock, which were exchanged for 298,437 shares of our
Common Stock upon the closing of the Merger.                  

(2)      The options are fully vested and exercisable at $0.132 per share.      

66

SB-2
71st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 71st
EMPLOYMENT CONTRACTS                                                            

         The Company is not currently party to any employment contracts with any
of its executive officers and we do not expect to have any employment agreements
with our new executive officers.                                                

DIRECTOR COMPENSATION                                                           

         Currently,  our non-employee  directors do not receive compensation for
their services on our board.  However,  we reimburse  directors for their travel
expenses associated with attendance at meetings of our board of directors. There
were no  reimbursements  for travel expenses for the fiscal year ended September
30, 2006, or for the six months ended March 31, 2007.                           

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY 

         The Delaware  General  Corporation  Law and certain  provisions  of our
certificate of incorporation an bylaws under certain  circumstances  provide for
indemnification  of our officers,  directors  and  controlling  persons  against
liabilities  which  they  may  incur  in  such  capacities.  A  summary  of  the
circumstances in which such indemnification is provided for is contained herein,
but this description is qualified in its entirety by reference to our bylaws and
to the statutory provisions.                                                    

         In general, any officer, director, employee or agent may be indemnified
against expenses,  fines,  settlements or judgments arising in connection with a
legal  proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in our best interest,  and were not unlawful.
Unless  such  person  is   successful   upon  the  merits  in  such  an  action,
indemnification  may be  awarded  only  after  a  determination  by  independent
decision  of the  board  of  directors,  by legal  counsel,  or by a vote of the
stockholders,  that the applicable  standard of conduct was met by the person to
be indemnified.                                                                 

         The circumstances under which  indemnification is granted in connection
with an action  brought on our behalf is  generally  the same as those set forth
above;  however,  with respect to such actions,  indemnification is granted only
with respect to expenses  actually  incurred in  connection  with the defense or
settlement of the action.  In such actions,  the person to be  indemnified  must
have  acted in good  faith  and in a manner  believed  to have  been in our best
interest, and have not been adjudged liable for negligence or misconduct.       

         Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future or pursuant to a vote of stockholders or
directors. The provision cited above also grants the power to us to purchase and
maintain  insurance  which  protects  our  officers  and  directors  against any
liabilities  incurred in connection  with their service in such a position,  and
such a policy may be obtained by us.                                            

         A stockholder's  investment may be adversely  affected to the extent we
pay the costs of settlement and damage awards against  directors and officers as
required by these indemnification  provisions.  At present,  there is no pending
litigation or proceeding  involving any of our directors,  officers or employees
regarding  which  indemnification  by us is  sought,  nor  are we  aware  of any
threatened litigation that may result in claims for indemnification.            

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,  officers or persons  controlling us pursuant
to the foregoing  provisions,  we have been informed that, in the opinion of the
SEC,  this  indemnification  is  against  public  policy  as  expressed  in  the
Securities Act and is therefore unenforceable.                                  

67

SB-2
72nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 72nd
PRINCIPAL AND SELLING STOCKHOLDERS

         The selling security holders may offer and sell, from time to time, any
or all of the shares of common stock held by them.  Because the selling security
holders  may offer all or only some  portion of the  9,983,138  shares of common
stock to be registered,  we cannot  estimate how many shares of common stock the
selling security  holders may hold upon termination of the offering,  nor can we
express,  as a  percentage,  how this  number of shares will relate to the total
number of shares that we will have outstanding at that time.                    

         The following  table  presents  information  regarding  the  beneficial
ownership of our common  stock as of May 17,  2007,  and the number of shares of
common  stock  covered  by this  prospectus.  The  number of shares in the table
represents an estimate of the number of shares of common stock to be offered by:

o        each of the executive officers;                      

o        each of our directors;                               

  o        all of our directors and executive officers as a group;

         o        each  stockholder  known by us to be the  beneficial  owner of
more than 5% of our common stock; and       

o        each of the selling stockholders.                    

         Beneficial  ownership is determined in accordance with the rules of the
SEC  and  generally   includes  voting  or  investment  power  with  respect  to
securities.  Unless otherwise indicated below, to our knowledge, the persons and
entities  named in the table  have sole  voting and sole  investment  power with
respect to all shares  beneficially  owned,  subject to community  property laws
where  applicable.  Shares of our common  stock  subject to options and warrants
from the company that are currently exercisable or exercisable within 60 days of
May 17, 2007 are deemed to be outstanding  and to be  beneficially  owned by the
person holding the options for the purpose of computing the percentage ownership
of that person but are not treated as  outstanding  for the purpose of computing
the percentage ownership of any other person.                                   

         The information  presented in this table is based on 25,303,302  shares
of our common stock outstanding on May 17, 2007. Unless otherwise indicated, the
address  of  each  of the  executive  officers  and  directors  and  5% or  more
stockholders named below is c/o CNS Response,  Inc., 2755 Bristol St., Suite 285
Costa Mesa, CA 92626                                                            

                                                        [Enlarge/Download Table]

                                                  NUMBER OF SHARES                            NUMBER OF SHARES      
                                                 BENEFICIALLY OWNED                          BENEFICIALLY OWNED     
                                                  PRIOR TO OFFERING                            AFTER OFFERING       
------------------------------------------  ---------------------------     NUMBER      --------------------------- 
                                                           PERCENTAGE      OF SHARES                    PERCENTAGE  
                                                            OF SHARES       BEING                       OF SHARES   
NAME OF BENEFICIAL OWNER                       NUMBER      OUTSTANDING      OFFERED        NUMBER      OUTSTANDING  
------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
                                                                                                                    
EXECUTIVE OFFICERS AND DIRECTORS:                                                                                   
Leonard Brandt (1) .......................     8,536,277           29.7%             0     8,536,277           29.7%
   Director, President, Chief Executive                                                                             
   Officer and Secretary                                                                                            
David B. Jones(2) ........................     4,338,521           16.4%       484,250     3,854,271           14.6%
   Director                                                                                                         

68

SB-2
73rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 73rd
                                                        [Enlarge/Download Table]

                                                        NUMBER OF SHARES                            NUMBER OF SHARES      
                                                       BENEFICIALLY OWNED                          BENEFICIALLY OWNED     
                                                        PRIOR TO OFFERING                            AFTER OFFERING       
------------------------------------------------  ---------------------------     NUMBER      --------------------------- 
                                                                 PERCENTAGE      OF SHARES                    PERCENTAGE  
                                                                  OF SHARES       BEING                       OF SHARES   
NAME OF BENEFICIAL OWNER                             NUMBER      OUTSTANDING      OFFERED        NUMBER      OUTSTANDING  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
                                                                                                                          
Dr. Jerome Vaccaro .............................         5,000              *              0         5,000              * 
   Director (3)                                                                                                           
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Horace Hertz ...................................             0              0              0             0              0 
   Chief Financial Officer                                                                                                
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Directors and officers as a group (4 persons)                                                                             
(4) ............................................    12,879,798           43.0%       484,250    12,395,548           41.5%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
5% STOCKHOLDERS:                                                                                                          
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Stephen C. Suffin (5) ..........................     1,260,316            5.0%             0     1,260,316            5.0%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Sail Venture Partners LP (2) ...................     4,338,521           16.4%       484,250     3,854,271           14.6%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Brian MacDonald(6) .............................     1,985,039            7.6%             0     1,985,039            7.6%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
W. Hamlin Emory (7) ............................     1,316,781            5.1%             0     1,316,781            5.1%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Heartland Value Fund (8) .......................     2,340,000            9.1%     2,340,000          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
EAC Investment Limited Partnership (9) .........     1,766,279            6.8%             0     1,766,279            6.8%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
LMA SPC for and on behalf of Map 2 Segregated                                                                             
Portfolio; .....................................     1,625,000            6.3%     1,625,000          --             --   
Partner Healthcare Offshore Fund, Ltd.;                                                                                   
Partner Healthcare Fund, L.P. (10)                                                                                        
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
OTHER SELLING STOCKHOLDERS:                                                                                               
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Mark Abdou (11) ................................        15,609              *         15,609          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Addison Adams (12) .............................        15,610              *         15,610          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Corporate Capital Partners (13) ................        17,839              *         17,839          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Kevin Friedmann (14) ...........................        13,380              *         13,380          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Victor Fu (15) .................................        13,379              *         13,379          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Peter Hogan (16) ...............................         4,460              *          4,460          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Ryan Hong (17) .................................        22,299              *         22,299          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Lisa Klein (18) ................................        13,380              *         13,380          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Kevin Leung (19) ...............................        17,839              *         17,839          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Albert Liou (20) ...............................        22,300              *         22,300          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
A&E Capital Partners, LLC (21) .................        22,299              *         22,299          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Nimish Patel (22) ..............................        66,899              *         66,899          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Luan Phan (23) .................................        22,299              *         22,299          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Silas Phillips (24) ............................        22,300              *         22,300          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Erick E. Richardson (25) .......................        66,898              *         66,898          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Troy Rillo (26) ................................        22,300              *         22,300          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
John Tishbi (27) ...............................         4,460              *          4,460          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
David J. Zwiebel (28) ..........................        54,169              *         54,169          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Craig B. Swanson (29) ..........................        29,250              *         29,250          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Jaeger Family LLC (30) .........................        16,249              *         16,249          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Henry Harbin, M.D. (31) ........................        10,835              *         10,835          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Edward M. Giles (32) ...........................       110,500              *        110,500          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 

69

SB-2
74th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 74th
                                                        [Enlarge/Download Table]

                                                        NUMBER OF SHARES                            NUMBER OF SHARES     
                                                       BENEFICIALLY OWNED                          BENEFICIALLY OWNED    
                                                        PRIOR TO OFFERING                            AFTER OFFERING      
------------------------------------------------  ---------------------------     NUMBER      ---------------------------
                                                                 PERCENTAGE      OF SHARES                    PERCENTAGE 
                                                                  OF SHARES       BEING                       OF SHARES  
NAME OF BENEFICIAL OWNER                             NUMBER      OUTSTANDING      OFFERED        NUMBER      OUTSTANDING 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
                                                                                                                         
David J. Galey (33) ............................        10,970              *         10,970          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Bill and Kim Woodworth (34) ....................        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Edmund H. Melhado (35) .........................        36,563              *         36,563          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Bradley N. Rotter Self Employed Pension Plan &                                                                           
trust (36) .....................................       146,250              *        146,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Bradley Rotter (37) ............................       433,335            1.7%       433,335          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Paul E. von Kuster (38) ........................       109,688              *        109,688          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Paul E. von Kuster, Trustee, Credit trust                                                                                
under will of Thomas W. von Kuster (39) ........        55,575              *         55,575          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Joseph E. Stocke (40) ..........................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Martha S. McCormick (41) .......................        13,000              *         13,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
D. Dean McCormick III (42) .....................        13,299              *         13,299          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
David R. Holbrooke (43) ........................        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Max A Schneider, M.D. Trust (44) ...............        14,625              *         14,625          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Frederick E. Kahn, MD (45) .....................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Dr. Jim Greenblatt (46) ........................       129,028              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Lawrence M. Baill (47) .........................        32,886              *         14,625          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Lionsgate Capital (48) .........................       219,375              *        219,375          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Jospeh A. Bailey (49) ..........................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Dr. Samuel Klagsbrun (50) ......................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Daniel E. Greenblatt (51) ......................        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Fred Ehrman (52) ...............................       325,000            1.3%       325,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
William C. Brown (53) ..........................        36,563              *         36,563          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Michael T. Cullen, M.D. (54) ...................        48,182              *         26,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Crown Jewel Ventures, LLC (55) .................       131,807              *         30,713          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Thomas W. von Kuster Jr. (56) ..................        14,625              *         14,625          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
George Karfunkel (57) ..........................       130,000              *        130,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Westfield Microcap Fund L.P. (58) ..............       216,668              *        216,668          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Itasca Capital Partners, LLC (59) ..............        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
P. Kent Pachl (60) .............................         5,418              *          5,418          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Kerry Judd and Susan Stillman (61) .............        10,970              *         10,970          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Mr. & Mrs. Shannon Sullivan (62) ...............        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
H. R. Swanson Revocable Trust (63) .............        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Robert James Blinken Jr. (64) ..................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Van Zandt Hawn (65) ............................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Thomas E. Brust and Susan Brust(66) ............        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Brean Murray Carret & Co. (67) .................     1,270,323            4.9%     1,244,978        25,345              *
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Pradeep Sinha (68) .............................        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Dr. Daniel Hoffman (69) ........................        54,168              *         54,168          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Rotter Family Trust (70) .......................       130,000              *        130,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Hal F. Lewis (71) ..............................        32,500              *         32,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
G&A Consulting Retirement Trust (72) ...........        58,500              *         58,500          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Arthur J. Bauernfeind RLT dated 6/25/04 (73) ...       260,000            1.0%       260,000          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Frederick Winston Trustee, Frederick Winston                                                                             
Revocable Trust u/a dated 11/02/01 (74) ........        29,250              *         29,250          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------
Pacific Ridge Capital, LLC (75) ................        40,954              *         40,954          --             --  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------

70

SB-2
75th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 75th
                                                        [Enlarge/Download Table]

                                                        NUMBER OF SHARES                            NUMBER OF SHARES      
                                                       BENEFICIALLY OWNED                          BENEFICIALLY OWNED     
                                                        PRIOR TO OFFERING                            AFTER OFFERING       
------------------------------------------------  ---------------------------     NUMBER      --------------------------- 
                                                                 PERCENTAGE      OF SHARES                    PERCENTAGE  
                                                                  OF SHARES       BEING                       OF SHARES   
NAME OF BENEFICIAL OWNER                             NUMBER      OUTSTANDING      OFFERED        NUMBER      OUTSTANDING  
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
                                                                                                                          
SLWK Venture Fund, LLP (76) ....................        62,166              *         62,166          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Medlen & Carroll, LLP (77) .....................       119,834              *         16,035          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Hooper, Lundy & Bookman, Inc. (78) .............        27,085              *         27,085          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Scott Alderton (79) ............................        50,894              *         29,726        21,168              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Murray Markiles (80) ...........................        50,894              *         29,726        21,168              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
V. Joseph Stubbs (81) ..........................        50,894              *         29,726        21,168              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Jonathan Hodes (82) ............................        25,535              *         17,308         8,227              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
John McIlvery (83) .............................        25,804              *         17,308         8,496              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Greg Akselrud (84) .............................        21,272              *         15,411         5,861              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Scott Galer (85) ...............................        17,877              *         11,759         6,118              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Kevin DeBre (86) ...............................        22,558              *         15,756         6,802              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Ryan Azlein (87) ...............................         9,430              *          9,430          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
AJ Investors # 1 (88) ..........................       216,668              *        216,668          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Westminster Securities (89) ....................         2,633              *          2,633          --             --   
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
John Pagnucco (90) .............................       485,807            1.9%        64,125       421,682            1.7%
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 
Doug Metz (91) .................................        25,101              *          7,359        17,742              * 
------------------------------------------------  ------------   ------------   ------------  ------------   ------------ 

*        Less than 1%                                                           

(1)      Consists of (a)  5,138,991  shares of common stock  (including  540,000
         shares owned by Mr. Brandt's children),  and 3,397,286 shares of common
         stock issuable upon the exercise of vested and exercisable  options and
warrants held by Mr. Brandt.                                  

(2)      Consists  of (a)  3,109,406  shares of Common  Stock and (b)  1,229,115
         shares  of Common  Stock  issuable  upon the  exercise  of  vested  and
         exercisable  warrants  held by Sail  Venture  Partners,  LP.  Of  these
         holdings,  372,500  shares of common stock and 111,750 shares of common
         stock  reserved  for  issuance  upon  exercise  of certain  warrants to
         purchase  common stock are being  registered  for resale.  Sail Venture
         Partners,  LLC is the general partner of Sail Venture  Partners,  L.P..
         The unanimous  vote of the managing  members of Sail Venture  Partners,
         LLC (who are Walter Schindler,  Alan Sellers, Thomas Cain, and David B.
         Jones),  is required to voting and make  investment  decisions over the
         shares held by this  selling  stockholder.  The address of Sail Venture
      Partners, L.P. is 600 Anton Blvd., Suite 1750, Costa Mesa, CA 92626.

(3)      Consists of options to acquire 5,000 shares of common stock exercisable
within 60 days of May 17, 2007.                               

(4)      Consists of 8,248,397  shares of common stock and  4,631,401  shares of
         common  stock  issuable  upon the  exercise  of vested and  exercisable
options and warrants.                                         

(5)      Consists of 965,422 shares of common stock and 294,894 shares of common
         stock issuable upon the exercise of vested and exercisable  options and
warrants held by Mr. Suffin.                                  

(6)      Consists of  1,242,375  shares of common  stock and  742,664  shares of
         common  stock  issuable  upon the  exercise  of vested and  exercisable
         options to purchase  common  stock.  The address of Brian  MacDonald is
4007 Beard Ave. South, Minneapolis, MN 55410.                 

(7)      Consists of  1,019,249  shares of common  stock and  297,532  shares of
         common  stock  issuable  upon the  exercise  of vested and  exercisable
         options to purchase  common  stock.  The  address of Mr.  Emory is 9663
Santa Monica Blvd., Suite 221, Beverly Hills, CA 90210.       

(8)      Consists  of  1,800,000  shares of  common  stock  and  540,000  shares
         reserved  for  issuance  upon  exercise of warrants to purchase  common
         stock.  Heartland Group Value Fund is affiliated with Hartland Investor
         Services, LLC, a registered broker/dealer and member of NASD. Heartland
         Group Value Fund  purchased  or  otherwise  acquired  its shares in the
         ordinary    course   of   business   and,   at   the   time   of   such
         purchase/acquisition,  had no agreements or understandings, directly or
         indirectly, with any person, to distribute the securities to be resold.
         Mr. Paul T. Beste,  Vice President & Secretary of Heartland Group Inc.,
exercises                                                     

71

SB-2
76th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 76th
         voting and  investment  authority  over the shares held by this selling
         stockholder.  The  address  of the  selling  stockholder  is c/o  Brown
Brothers Harriman, 140 Broadway St., New York, NY 10005.      

(9)      Consists of  1,249,846  shares of common  stock and  516,433  shares of
         common stock issuable upon the exercise of warrants to purchase  common
         stock.  Anthony Morgentheau  exercises voting and investment  authority
         over the shares held by this  selling  stockholder.  The address of the
      selling stockholder is 380 Leucadendra Drive, Cora Gables, FL 33156.

(10)     Consists of 224,110  shares of common stock and 67,233 shares  reserved
         for issuance upon exercise of warrants to purchase common stock held by
         LMA SPC for and on behalf of Map 2 Segregated Portfolio; 651,090 shares
         of common stock and 195,327 shares  reserved for issuance upon exercise
         of certain warrants to purchase common stock held by Partner Healthcare
         Fund,  LP,  and  374,800  shares of common  stock  and  112,440  shares
         reserved  for  issuance  upon  exercise of warrants to purchase  common
         stock held by Partner Healthcare Offshore Fund, Ltd. Eric Moore, as the
         Chief  Financial  Officer of Partner  Healthcare  Offshore Fund,  Ltd.,
         exercises  voting and  investment  authority  over the  shares  held by
         Partner  Healthcare  Offshore  Fund,  Ltd.  Eric  Moore,  as the  Chief
         Financial  Officer of Partner  Healthcare Fund, L.P.,  exercises voting
         and  investment  authority  over the shares held by Partner  Healthcare
         Fund,  L.P..  Robert  P.  Swan,  as  director,   exercises  voting  and
         investment  authority over the shares held by LMA SPC for and on behalf
         of Map 2  Segregated  Portfolio.  The  address  of each of the  selling
         stockholders  is One Market  Plaza,  Steuart  Tower,  22nd  Floor,  San
Francisco, CA 94105.                                          

(11)     Consists  of 15,609  shares of common  stock.                          

(12)     Consists of 15,610 shares of common stock.                             

(13)     Consists of 17,839 shares of common stock.                             

(14)     Consists of  13,380 shares of common stock.                            

(15)     Consists of  13,379 shares of common stock.                            

(16)     Consists of  4,460 shares of common stock.                             

(17)     Consists of  22,299 shares of common stock.                            

(18)     Consists of   13,380 shares of common stock.                           

(19)     Consists of   17,839 shares of common stock.                           

(20)     Consists of   22,300 shares of common stock.                           

(21)     Consists  of 22,299  shares of common  stock.  Edgar  Park,  as member,
         exercises voting and investment  authority over the shares held by this
selling stockholder.                                          

(22)     Consists of 66,899 shares of common stock.                             

(23)     Consists of 22,299 shares of common stock.                             

(24)     Consists of 22,300 shares of common stock.                             

(25)     Consists of 66,898 shares of common stock.                             

(26)     Consists of 22,300 shares of common stock. (                           

27)      Consists of 4,460 shares of common stock.                              

(28)     Consists of 41,668  shares of common stock and 12,501  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(29)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(30)     Consists of 12,499 shares of common stock and 3,750 shares reserved for
         issuance  upon  exercise of warrants to  purchase  common  stock.  Eric
         Jaeger,  President  and General  Manager of Jaeger Family LLC exercises
         voting and  investment  authority  over the shares held by this selling
stockholder.                                                  

(31)     Consists of 8,334 shares of common stock and 2,501 shares  reserved for
issuance upon exercise of warrants to purchase common stock.  

(32)     Consists of 85,000  shares of common stock and 25,500  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

72

SB-2
77th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 77th
(33)     Consists of 8,438 shares of common  stock and 2532 shares  reserved for
issuance upon exercise of warrants to purchase common stock.  

(34)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
         for  issuance  upon  exercise of warrants  to  purchase  common  stock.
         Kimberly  Craig-Woodworth  and William N. Woodworth are affiliated with
         Brean  Murray,  Carret & Co. a registered  broker/dealer  and member of
         NASD.  Kimberly  Craig-Woodworth  and William N. Woodworth purchased or
         otherwise acquired these shares in the ordinary course of business and,
         at  the  time  of  such  purchase/acquisition,  had  no  agreements  or
         understandings,  directly or indirectly, with any person, to distribute
the securities to be resold.                                  

(35)     Consists of 28,125 shares of common stock and 8,438 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(36)     Consists of 112,500  shares of common stock and 33,751 shares  reserved
         for  issuance  upon  exercise of warrants  to  purchase  common  stock.
         Bradley Rotter,  Trustee of the Bradley N. Rotter Self Employed Pension
         Plan & Trust, exercises voting and investment authority over the shares
held by this selling stockholder.                             

(37)     Consists of 333,334 shares of common stock and 100,000 shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(38)     Consists of 84,375  shares of common stock and 25,313  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(39)     Consists of 42,750  shares of common stock and 12,825  shares  reserved
         for issuance upon exercise of warrants to purchase  common stock.  Paul
         E. von  Kuster,  Trustee,  Credit  trust  under  will of  Thomas W. von
         Kuster,  exercises voting and investment authority over the shares held
by this selling stockholder.                                  

(40)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(41)     Consists of 10,000 shares of common stock and 3,000 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(42)     Consists of 10,230 shares of common stock and 3,069 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(43)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(44)     Consists of 11,250 shares of common stock and 3,375 shares reserved for
         issuance  upon  exercise  of warrants to  purchase  common  stock.  Max
         Schneider, Trustee of the Max A Schneider, M.D. Trust, exercises voting
         and  investment   authority  over  the  shares  held  by  this  selling
stockholder.                                                  

(45)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(46)     Consists of 115,528  shares of common stock and 13,500 shares  reserved
         for issuance upon exercise of warrants to purchase common stock. 45,000
         shares of common stock and 13,500  shares  reserved  for issuance  upon
         exercise of warrants to purchase common stock are being  registered for
         re-sale by the selling  shareholder on this prospectus.  Dr. Greenblatt
         is a  contractor  who  acts  as one of CNS  Response,  Inc.'s  Regional
         Medical  Directors and in this  capacity,  among other  things,  trains
physicians in the use of rEEG.                                

(47)     Consists of 29,511 shares of common stock and 3,375 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  11,250
         shares of common  stock and 3,375 shares  reserved  for  issuance  upon
         exercise of warrants to purchase common stock are being  registered for
re-sale by the selling shareholder on this prospectus.        

(48)     Consists of 168, 750 shares of common stock and 50,625 shares  reserved
         for  issuance  upon  exercise of warrants  to  purchase  common  stock.
         Kenneth Rickel, as President of Liongate Capital,  exercises voting and
        investment authority over the shares held by this selling stockholder.

(49)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
         issuance upon exercise of warrants to purchase common stock. Mr. Bailey
         is  affiliated  with Brean  Murray,  Carret & Co.,  LLC,  a  registered
         broker/dealer and member of NASD, as he is an employee of Brean Murray,
         Carret & Co.,  LLC. Mr.  Bailey  purchased  or  otherwise  acquired his
         shares in the  ordinary  course of  business  and,  at the time of such
         purchase/acquisition,  had no agreements or understandings, directly or
         indirectly, with any person, to distribute the securities to be resold.

73

SB-2
78th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 78th
(50)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(51)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(52)     Consists of 250,000  shares of common stock and 75,000 shares  reserved
         for issuance  upon exercise of warrants to purchase  common stock.  Mr.
         Ehrman is  affiliated  with  Brean  Murray,  Carret & Co. a  registered
         broker/dealer  and member of NASD.  Mr.  Ehrman  purchased or otherwise
         acquired his shares in the ordinary course of business and, at the time
         of such  purchase/acquisition,  had no  agreements  or  understandings,
         directly or indirectly,  with any person,  to distribute the securities
to be resold.                                                 

(53)     Consists of 28,125 shares of common stock and 8,438 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(54)     Consists of 42,182 shares of common stock and 6,000 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  20,000
         shares of common  stock and 6,000 shares  reserved  for  issuance  upon
         exercise of warrants to purchase common stock are being  registered for
re-sale by the selling shareholder on this prospectus.        

(55)     Consists of 124,719  shares of common stock and 7,088  shares  reserved
         for issuance upon exercise of warrants to purchase common stock. Sharon
         Keene exercises voting and investment authority over the shares held by
         this  selling  stockholder.  23,625  shares of  common  stock and 7,088
         shares  reserved  for  issuance  upon  exercise of warrants to purchase
         common  stock  are  being   registered   for  re-sale  by  the  selling
shareholder on this prospectus.                               

(56)     Consists of 11,250 shares of common stock and 3,375 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(57)     Consists of 100,000  shares of common stock and 30,000 shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(58)     Consists of 166,667  shares of common stock and 50,001 shares  reserved
         for  issuance  upon  exercise of warrants  to  purchase  common  stock.
         William A. Muggia, the general partner of Westfield Microcap Fund L.P.,
         exercises voting and investment  authority over the shares held by this
selling stockholder.                                          

(59)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
         for  issuance  upon  exercise of warrants  to  purchase  common  stock.
         Michael S. Wallace,  the Managing  Member of Itasca  Capital  Partners,
         LLC, exercises voting and investment  authority over the shares held by
this selling stockholder.                                     

(60)     Consists of 4,167 shares of common stock and 1,251 shares  reserved for
issuance upon exercise of warrants to purchase common stock.  

(61)     Consists of 8,438 shares of common stock and 2,532 shares  reserved for
issuance upon exercise of warrants to purchase common stock.  

(62)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(63)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
         for issuance upon exercise of warrants to purchase  common stock. H. R.
         Swanson,  Trustee of the H. R. Swanson Rev. Trust, exercises voting and
        investment authority over the shares held by this selling stockholder.

(64)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(65)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(66)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
  for issuance upon exercise of warrants to purchase common stock.

(67)     Consists of 633,138 shares of common stock and 637,185 shares  reserved
         for issuance upon exercise of warrants to purchase common stock.  Brean
         Murray, Carret & Co., LLC is a NASD member firm. Brean Murray, Carret &
         Co., LLC  purchased  or  otherwise  acquired its shares in the ordinary
         course of business and, at the time of such  purchase/acquisition,  had
         no  agreements  or  understandings,  directly or  indirectly,  with any
         person, to distribute the securities to be resold.  William  McCluskey,
         President and Chief  Executive  Officer of Brean Murray,  Carret & Co.,
LLC, exercises voting and investment  authority over the      

74

SB-2
79th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 79th
         shares held by this selling stockholder. 625,218 shares of common stock
         and 619,760  shares  reserved for issuance upon exercise of warrants to
         purchase  common stock are being  registered for re-sale by the selling
shareholder on this prospectus.                               

(68)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
issuance upon exercise of warrants to purchase common stock.  

(69)     Consists of 41,667  shares of common stock and 12,501  shares  reserved
         for issuance  upon exercise of warrants to purchase  common stock.  Dr.
         Hoffman  is a  contractor  who acts as CNS  Response,  Inc.'s  National
         Medical  Director  and in this  capacity,  among other  things,  trains
physicians in the use of rEEG.                                

(70)     Consists of 100,000  shares of common stock and 30,000 shares  reserved
         for issuance upon exercise of warrants to purchase  common stock.  John
         Rotter,  Trustee  of the  Rotter  Family  Trust,  exercises  voting and
        investment authority over the shares held by this selling stockholder.

(71)     Consists of 25,000 shares of common stock and 7,500 shares reserved for
         issuance upon exercise of warrants to purchase common stock.  Mr. Lewis
         is affiliated with a registered  broker/dealer  and member of NASD. Mr.
         Lewis purchased or otherwise acquired his shares in the ordinary course
         of  business  and,  at the  time of such  purchase/acquisition,  had no
         agreements or understandings,  directly or indirectly, with any person,
to distribute the securities to be resold.                    

(72)     Consists of 45,000  shares of common stock and 13,500  shares  reserved
         for issuance upon exercise of warrants to purchase  common stock.  Gary
         Gossard, as Trustee of the G&A Consulting  Retirement Trust,  exercises
         voting and  investment  authority  over the shares held by this selling
stockholder.                                                  

(73)     Consists of 200,000  shares of common stock and 60,000 shares  reserved
         for issuance upon exercise of warrants to purchase common stock. Arthur
         J.  Bauernfeind,  as  Trustee of the  Arthur J.  Bauernfeind  RLT dated
         6/25/04, exercises voting and investment authority over the shares held
by this selling stockholder.                                  

(74)     Consists of 22,500 shares of common stock and 6,750 shares reserved for
         issuance upon exercise of warrants to purchase common stock.  Frederick
         Winston,  as Trustee of the Frederick Winston Revocable Trust u/a dated
         11/2/01, exercises voting and investment authority over the shares held
by this selling stockholder.                                  

(75)     Consists of 8,334 shares of common stock and 32,620 shares reserved for
         issuance  upon  exercise of warrants to purchase  common  stock..  Mark
         Mansfield  of  Pacific  Ridge  Capital,   LLC,   exercises  voting  and
        investment authority over the shares held by this selling stockholder.

(76)     Consists of 47,820  shares of common stock and 14,346  shares  reserved
         for issuance upon exercise of warrants to purchase common stock.  Steve
         Lundberg of SLWK Venutre Fund,  LLP,  exercises  voting and  investment
authority over the shares held by this selling stockholder.   

(77)     Consists of 116,133  shares of common stock and 3,701  shares  reserved
         for issuance upon exercise of warrants to purchase common stock.  Peter
         Carroll  of Medlen & Carroll,  LLP,  exercises  voting  and  investment
         authority  over the shares  held by this  selling  stockholder.  12,334
         shares of common  stock and 3,701 shares  reserved  for  issuance  upon
         exercise of warrants to purchase common stock are being  registered for
re-sale by the selling shareholder on this prospectus.        

(78)     Consists of 20,834 shares of common stock and 6,251 shares reserved for
         issuance upon exercise of warrants to purchase common stock. Stephen K.
         Phillips  of  Hooper,  Lundy  &  Bookman,  Inc.  exercises  voting  and
        investment authority over the shares held by this selling stockholder.

(79)     Consists of 36,096  shares of common stock and 14,798  shares  reserved
         for issuance upon exercise of warrants to purchase common stock. 22,866
         shares of common stock and 6,860  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(80)     Consists of 36,096  shares of common stock and 14,798  shares  reserved
         for issuance upon exercise of warrants to purchase common stock. 22,866
         shares of common stock and 6,860  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(81)     Consists of 36,096  shares of common stock and 14,798  shares  reserved
         for issuance upon exercise of warrants to purchase common stock. 22,866
         shares of common stock and 6,860  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

75

SB-2
80th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 80th
(82)     Consists of 18,456 shares of common stock and 7,079 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  13,314
         shares of common stock and 3,994  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(83)     Consists of 18,624 shares of common stock and 7,180 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  13,314
         shares of common stock and 3,994  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(84)     Consists of 15,518 shares of common stock and 5,754 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  11,855
         shares of common stock and 3,556  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(85)     Consists of 12,869 shares of common stock and 5,008 shares reserved for
         issuance  upon  exercise of warrants to purchase  common  stock.  9,045
         shares of common stock and 2,714  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(86)     Consists of 16,371 shares of common stock and 6,187 shares reserved for
         issuance  upon exercise of warrants to purchase  common  stock.  12,120
         shares of common stock and 3,636  shares of common  stock  reserved for
         issuance upon  exercise of warrants to purchase  common stock are being
     registed for re-sale on this prospectus by the selling shareholder.

(87)     Consists of 7,254 shares of common stock and 2,176 shares  reserved for
issuance upon exercise of warrants to purchase common stock.  

(88)     Consists of 166,667  shares of common stock and 50,001 shares  reserved
         for issuance upon exercise of warrants to purchase  common stock.  Adam
         Katz, as Partner of AJ Investors #1,  exercises  voting and  investment
authority over the shares held by this selling stockholder.   

(89)     Consists  of 2,633  shares  reserved  for  issuance  upon  exercise  of
warrants to purchase  common stock.                           

(90)     Consists of 225,856 shares of common stock and 259,951 shares  reserved
         for issuance  upon exercise of warrants to purchase  common  stock.  Of
         these  holdings,  64,125  shares of common stock  reserved for issuance
         upon exercise of common stock are being  registered  for resale sale on
this prospectus by the selling shareholder.                   

(91)     Consists of 9,566 shares of common stock and 15,535 shares reserved for
         issuance upon exercise of warrants to purchase  common stock.  Of these
         holdings,  7,539  shares of common stock  reserved  for  issuance  upon
         exercise  of  common  stock  are being  registered  for  resale on this
prospectus by the selling shareholder.                        

76

SB-2
81st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 81st
RELATED PARTY TRANSACTIONS

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                  

CNSR CALIFORNIA                                                                 

         Except as follows,  and as contemplated by the Merger Agreement,  since
September 30, 2003,  there has not been, nor is there  currently  proposed,  any
transaction  or series of similar  transactions  to which CNSR  California is or
will be a party:                                                                

o        in which the amount involved exceeds $60,000; AND    

         o        in which any director,  executive officer,  other stockholders
                  of more  than 5% of our  common  stock or any  member of their
                  immediate  family  had or  will  have  a  direct  or  indirect
material interest.                          

         From August 2000 through  February  2003,  Leonard J. Brandt,  together
with Meyerlen,  LLC, a company in which Mr. Brandt owned a controlling interest,
loaned CNSR a total of approximately $718,900 and purchased warrants to purchase
approximately  945,750 shares of CNSR California  common stock,  pursuant to the
terms of certain  Note and  Warrant  Purchase  Agreements.  In October  2006 Mr.
Brandt agreed to cancel the  promissory  notes and convert the loans,  including
all outstanding principal and accrued interest thereon, into 1,218,741 shares of
CNSR  California's  Series  A-1  Preferred  Stock  and  255,306  shares  of CNSR
California's  Series A-2  Preferred  Stock.  At the closing of the  Merger,  the
1,218,741  shares of CNSR  California's  Series A-1 Preferred  Stock and 255,306
shares  of CNSR  California's  Series  A-2  Preferred  Stock  converted  into an
aggregate of 1,474,047 shares of our Common Stock.  Subsequent to the closing of
the Merger,  Meyerlen, LLC was dissolved,  and ownership of all of the shares of
our Common Stock formerly held by Meyerlen, LLC were distributed to Mr. Brandt. 

         In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm  Database,  LLC a certain  Promissory  Note dated  January 11, 2000 (the
"Original  NuPharm  Note")  pursuant  to which  Mill City was  obligated  to pay
NuPharm an aggregate  principal  amount of  $299,923.00  together  with interest
pursuant to the payment  schedule set forth in the  Original  NuPharm  Note.  In
January 2000, Mill City contributed  substantially all of its assets,  including
those  securing the  Original  Note,  to CNSR  California,  and CNSR  California
assumed  certain  debts and  obligations  of Mill City,  including  Mill  City's
obligations  under the Original  NuPharm Note. In October 2006,  CNSR California
entered  into an agreement  with NuPharm to cancel the Original  NuPharm Note in
consideration  for the extension of the expiration date of a Warrant to purchase
CNSR  California  Common Stock held by NuPharm and a new promissory  note in the
principal  amount of $287,423 (the "New NuPharm Note").  Upon the closing of the
Private Placement,  the principal and accrued interest through December 31, 2006
on the New NuPharm  Note  automatically  converted  into  215,567  shares of our
Common Stock.                                                                   

         In May 2005,  April 2006 and July 2006,  Odyssey  Venture  Partners II,
L.P.  (now called Sail  Venture  Partners LP) of which David Jones is a partner,
loaned CNSR  California  an aggregate of  approximately  $999,400 and  purchased
warrants to purchase  approximately  523,305  shares of CNSR  California  common
stock, pursuant to the terms of certain Note and Warrant Purchase Agreements. In
October 2006 Odyssey  Venture  Partners II, L.P. agreed to cancel the promissory
notes and convert the loans,  including  all  outstanding  principal and accrued
interest  thereon,  into  1,693,899  shares  of  CNSR  California's  Series  A-1
Preferred                                                                       

77

SB-2
82nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 82nd
Stock and 52,907 shares of CNSR California's  Series A-2 Preferred Stock. At the
closing of the Merger,  the  1,693,899  shares of CNSR  California's  Series A-1
Preferred  Stock and 255,306  shares of CNSR  California's  Series A-2 Preferred
Stock converted into an aggregate of 1,949,205 shares of our Common Stock.      

         On August  11,  2006,  Mr.  Brandt was  granted  an option to  purchase
2,124,740  shares of CNSR  California's  common  stock for an exercise  price of
$0.132 per share pursuant to CNSR California's 2006 Stock Incentive Plan. At the
closing  of the  Merger,  the  option  to  purchase  2,124,740  shares  of  CNSR
California's  common stock was converted into the right to purchase an aggregate
of  2,124,740  shares of our  Common  Stock at an  exercise  price of $0.132 per
share.                                                                          

         In September  2006, CNSR  California  entered into multiple  settlement
agreements  with its  employees  and  consultants  with respect to  compensation
accrued for services provided to CNSR California.  Pursuant to CNSR California's
settlement  agreement  with Mr.  Brandt,  CNSR  California  issued to Mr. Brandt
1,519,366  shares of its common stock in settlement of accrued  compensation due
in the  amount  of  $1,258,705.00.  In  connection  with this  settlement,  CNSR
California loaned Mr. Brandt approximately $91,700 to pay the withholding tax on
the  value of such  shares,  which  loan was  evidenced  by a  promissory  note.
Immediately  following  the  closing of the Merger,  the loan to Mr.  Brandt was
repaid by Mr. Brandt  returning to us 78,219 shares of our common stock having a
value equal to the loan amount plus accrued interest  thereon.  Under a separate
Settlement   Agreement,   Mr.  Brandt  was  issued   1,827,827  shares  of  CNSR
California's  common stock in settlement of amounts owed for  reimbursement  for
business  expenses paid by Mr.  Brandt  through July 2006. At the closing of the
Merger,  the 1,519,366 shares of CNSR California's  common stock issued pursuant
to the first of the  aforementioned  settlement  agreements,  and the  1,827,827
shares of CNSR  California's  common stock issued  pursuant to the second of the
aforementioned  settlement  agreements  converted into an aggregate of 3,347,193
shares of our Common Stock.                                                     

         In October  2006,  Odyssey  Venture  Partner II, L.P.  (now called Sail
Venture Partners LP) invested $800,000 in CNSR California's  mezzanine financing
and received  792,080 shares of CNSR  California's  Series B Preferred Stock and
warrants to purchase 475,248 shares of CNSR California's  common stock. David B.
Jones is one of the two board  members  that were  designated  by the holders of
CNSR  California's  Series B  Preferred  Stock  pursuant  to a Voting  Agreement
entered into in  connection  with the mezzanine  financing  and note  conversion
transaction.  At the closing of the Merger,  David B. Jones was  appointed  as a
director of the company.                                                        

CNS RESPONSE, INC. (A DELAWARE CORPORATION)                                     

         Other than the  transactions  described  below,  since January 1, 2005,
there has not been, nor is there currently  proposed,  any transaction or series
of similar transactions to which we were or will be a party:                    

         o        in which the amount involved exceeds the lessor of $120,000 or
                  1% of the average of our total assets at year-end for the last
three completed fiscal years; and           

         o        in which any  director,  executive  officer,  shareholder  who
                  beneficially owns 5% or more of our common stock or any member
                  of  their  immediate  family  had or  will  have a  direct  or
indirect material interest.                 

NEOTACTIX, INC. CONSULTING AGREEMENT                                            

         Prior to the Merger,  on June 22, 2004, the Company and NeoTactix (NTX)
entered into a Business Consulting Agreement ("NeoTactix Agreement") pursuant to
which  NeoTactix  agreed to provide certain  business  consulting  services,  in
exchange for 4,500,000 shares of the Company's common                           

78

SB-2
83rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 83rd
stock (on a  pre-reverse  stock  split  basis).  On August 24,  2004,  our board
elected both managing  partners of NTX, Scott Absher and George LeFevre,  to our
board of directors,  and also elected Mr.  Absher as CEO and Mr.  LeFevre as CFO
and Secretary. The Company and NTX agreed that the compensation shares issued by
the Company to  affiliates of NTX would be cancelled and returned to the Company
if, prior to October 31, 2005, the Company had not achieved  certain  benchmarks
pursuant to the NeoTactix Agreement. On October 5, 2005, the NeoTactix Agreement
was  extended to October 31,  2006.  On May 31,  2006,  the Board of the Company
approved  the  waiver  of the  forfeiture  clause  contained  in  the  NeoTactix
Agreement and it was deemed fully performed, and then terminated.               

STOCK PURCHASE AGREEMENT                                                        

         Prior to the Merger, on July 18, 2006, the Company entered into a Stock
Purchase  Agreement with seventeen  accredited  investors  pursuant to which the
Company agreed to issue 3,800,000  shares of the Company's  common stock (76,000
shares of our common stock after taking into account our 1-for-50  reverse stock
split which became effective on January 10, 2007) to the purchasers. The Company
received an aggregate of $237,669 as  consideration  for the share issuance.  In
addition,  these investors acquired shares in private  transactions with certain
of our stockholders, and acquired a majority stake in our issued and outstanding
shares.  In connection  with these  transactions,  effective  July 18, 2006, Mr.
Scott  Absher and Mr.  George  LeFevre  resigned as officers  and members of the
board of directors,  and Mr. Silas  Philips was  appointed  our Chief  Executive
Officer, Chief Financial Officer, Secretary, and sole director. Mr. Phillips was
an investor in this private placement.                                          

DEBT CANCELLATION AGREEMENTS                                                    

         Prior to the Merger,  on July 28, 2006,  Scott Absher,  our former CEO,
was paid a sum of $33,943 in full  satisfaction  of outstanding  debt payable to
him by the Company  pursuant to a Debt  Cancellation  Agreement.  The  remaining
balance of $47,612  including  accrued  interest was  forgiven.  Our former CFO,
George LeFevre,  also agreed to forgive all of his outstanding  debt,  including
accrued interest,  of $12,353 payable to the Company pursuant to a separate Debt
Cancellation Agreement.                                                         

NOTES PAYABLE                                                                   

         Prior to the Merger,  on July 28, 2006,  the  principal  balance of the
notes payable to related parties of $28,800 were satisfied. All related interest
was forgiven by related parties.                                                

PRIVATE PLACEMENT                                                               

         On March 7, 2007,  Odyssey  Venture  Partners II, L.P. (now called Sail
Venture Partners LP), invested an aggregate of $447,000 in our Private Placement
and in exchange were issued  372,500 shares of our Common Stock and a warrant to
purchase  111,750  shares of our common stock at an exercise  price of $1.80 per
share.  Mr.  Jones,  a director  of the  company,  is a partner of Sail  Venture
Partners, L.P.                                                                  

TRANSACTIONS WITH PROMOTERS AND CONTROL PERSONS                                 

         Prior to the Merger, which closed on March 7, 2007, Strativation,  Inc.
(now called CNS Response, Inc.) existed as a "shell company" with nominal assets
whose sole busines was to identify,  evalutate and investigate various companies
to acquire or with which to merge.                                              

79

SB-2
84th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 84th
SHARES FOR DEBT AGREEMENT                                                       

         Prior to the Merger,  on January 11, 2007, we entered into a Shares For
Debt  Agreement with  Richardson & Patel LLP ("R&P"),  our former legal counsel,
pursuant to which we agreed to issue and R&P agreed to accept 645,846 restricted
shares of our common stock (the  "Shares") as full and complete  settlement of a
portion of the total  outstanding debt in the amount of $261,201.84 that we owed
to R&P for legal services (the "Partial Debt"). On January 15, 2007, the company
and R&P agreed to amend and  restate the Shares for Debt  Agreement  to increase
the number of Shares to be issued in  settlement of such Partial Debt to 656,103
restricted  shares of our  common  stock,  which then  represented  75.5% of our
issued and outstanding common stock.                                            

REGISTRATION RIGHTS AGREEMENT                                                   

         On January 11, 2007, we entered into a Registration Rights Agreement in
connection  with the above  referenced  Shares For Debt  Agreement  with R&P and
various other  stockholders  of the  Corporation  signatory  thereto  ("Majority
Stockholders") in connection with the shares of the company acquired pursuant to
the  Shares  For Debt  Agreement  and  certain  other  previously  disclosed  or
privately negotiated transactions that took place on or around July 18, 2006. On
January 15, 2007, the company and the Majority  Stockholders agreed to amend and
restate the Registration Rights Agreement to provide  registration rights to the
Majority Stockholders for up to 767,101 shares of our common stock held or to be
acquired by them.                                                               

MERGER AGREEMENT                                                                

         On January 16, 2007,  we entered  into an Agreement  and Plan of Merger
with CNS Response, Inc., a California corporation (or CNSR California),  and CNS
Merger  Corporation,  a California  corporation and our wholly-owned  subsidiary
that was formed to facilitate the  acquisition of CNSR  California.  On March 7,
2007,  the  merger  with CNSR  California  closed,  CNSR  California  became our
wholly-owned subsidiary, and we changed our name from Strativation,  Inc. to CNS
Response, Inc..                                                                 

         At the  Effective  Time  of  the  Merger  (as  defined  in  the  Merger
Agreement,  as amended on February 23, 2007),  MergerCo was merged with and into
CNSR California,  the separate existence of MergerCo ceased, and CNSR California
continued as the surviving  corporation  at the subsidiary  level.  We issued an
aggregate of 17,744,625  shares of our common stock to the  stockholders of CNSR
California in exchange for 100% ownership of CNSR California.  Additionally,  we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase  shares of common stock on the same terms and conditions as
previously  issued by CNSR  California.  Pursuant to the merger  agreement,  our
former sole  director  and  executive  officer,  Silas  Phillips,  resigned as a
director and executive officer of our company effective as of the closing of the
Merger,  and the directors  and officers of CNSR  California  were  appointed to
serve as directors and officer of our company.  Except for the Merger Agreement,
as amended,  and the transactions  contemplated by that agreement,  neither CNSR
California,  nor the directors and officers of CNSR California  serving prior to
the consummation of the Merger,  nor any of their  associates,  had any material
relationship  with  us,  or any of our  directors  and  officers,  or any of our
associates prior to the merger.  Following the Merger, the business conducted by
the company is the business conducted by CNSR California.                       

         Immediately  prior to the  closing of the  Merger,  we had  outstanding
868,823 shares of common stock. Immediately after the closing of the Merger, and
without  taking into  consideration  the Private  Placement  offering  described
below,  we had 18,613,448  outstanding  shares of common stock,  and options and
warrants to purchase 8,407,517 shares of common stock.                          

80

SB-2
85th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 85th
DESCRIPTION OF CAPITAL STOCK

         The  information  set forth  below is a general  summary of our capital
stock  structure.  As a  summary,  this  Section  is  qualified  by,  and  not a
substitute for, the provisions of our Certificate of Incorporation,  as amended,
and Bylaws.                                                                     

AUTHORIZED CAPITAL STOCK                                                        

         Our authorized  capital stock consists of 750,000,000  shares of Common
Stock, par value $0.001 per share.                                              

COMMON STOCK                                                                    

         As of May 17, 2007, we had 25,303,302 shares of Common Stock issued and
outstanding.  In addition, we have reserved 4,136,103 shares of Common Stock for
issuance in respect of options to purchase common stock and 6,899,352  shares of
Common  Stock were  reserved  for  issuance  pursuant to issued and  outstanding
warrants to purchase our Common Stock.                                          

DIVIDEND RIGHTS                                               

         The  holders of  outstanding  shares of Common  Stock are  entitled  to
receive dividends out of funds legally available at the times and in the amounts
that our Board may determine.                                                   

VOTING RIGHTS                                                 

         Each  holder of Common  Stock is entitled to one vote for each share of
Common Stock held on all matters submitted to a vote of stockholders.           

NO PREEMPTIVE OR SIMILAR RIGHTS                               

         Holders of Common Stock do not have preemptive rights, and Common Stock
is not convertible or redeemable.                                               

RIGHT TO RECEIVE LIQUIDATION DISTRIBUTIONS                    

         Upon our  dissolution,  liquidation or  winding-up,  the assets legally
available for distribution to our stockholders are  distributable  ratably among
the holders of Common Stock.                                                    

WARRANTS                                                                        

At May 17, 2007, the following warrants were outstanding:     

         o        warrants  that will expire at various  times  through  2012 to
                  purchase an aggregate of 1,688,132  shares of our common stock
                  at an exercise price per share of $0.01, which were granted in
                 connection with the issuance of convertible promissory notes;
         o        warrants  that will expire at various  times  through  2015 to
                  purchase an aggregate of 1,427,022  shares of our common stock
                  at an exercise  price per share of $0.59 which were granted in
                 connection with the issuance of convertible promissory notes;
         o        warrants  that will expire at various  times  through  2011 to
                  purchase an aggregate of 1,143,587  shares of our common stock
                  at an  exercise  price per share of $1.51 which were issued to
                  investors in connection with the private  placement  completed
in November 2006;                           

81

SB-2
86th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 86th
         o        warrants that will expire in 2011 to purchase  7,921 shares of
                  our common stock at an exercise price per share of $1.01 which
                  were granted to the  placement  agent in  connection  with the
 private placement completed in November 2006;
         o        warrants  that will expire in 2011 to purchase an aggregate of
                  4,752  shares of our  common  stock at an  exercise  price per
                  share of $1.812 which were granted to the  placement  agent in
                  connection  with the private  placement  completed in November
2006;                                       
         o        warrants that will expire in 2012 to purchase 1,951,444 shares
                  of our common  stock at an  exercise  price per share of $1.80
                  which were issued to investors in connection  with the private
                  placement which was completed  concurrently with the Merger on
March 7, 2007;                              
         o        warrants that will expire in 2012 to purchase  520,381  shares
                  of our common  stock at an  exercise  price per share of $1.44
                  which were issued to the placement  agent in  connection  with
                  the private  placement which was completed  concurrently  with
the Merger on March 7, 2007;                
         o        warrants that will expire in 2012 to purchase  156,114  shares
                  of our common  stock at an  exercise  price per share of $1.80
                  which were issued to the placement  agent in  connection  with
                  the private  placement which was completed  concurrently  with
the Merger on March 7, 2007.                

OPTIONS                                                                         

         At May 17,  2007,  options to purchase  4,136,103  shares of our common
stock were outstanding.  These options were granted to former holders of options
of CNSR  California,  were assumed by us, and converted into options to purchase
shares of our common stock.  The options granted to former holders of options of
CNSR  California  are  exercisable  at a  weighted  average  exercise  price  of
approximately  $0.14 per share,  and will  expire at various  times on the tenth
anniversary of the date on which they were granted.                             

ANTI-TAKEOVER PROVISIONS                                                        

         Delaware  has  enacted  the  following  legislation  that may  deter or
frustrate takeovers of Delaware corporations, such as CNS Response:             

         SECTION  203 OF THE  DELAWARE  GENERAL  CORPORATION  LAW.  Section  203
provides,  with some exceptions,  that a Delaware  corporation may not engage in
any of a broad range of business  combinations  with a person or  affiliate,  or
associate  of the person,  who is an  "interested  stockholder"  for a period of
three  years  from the date that the  person  became an  interested  stockholder
unless:  (i) the  transaction  resulting  in a  person  becoming  an  interested
stockholder,  or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested  stockholder  acquires 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes it an interested stockholder,
excluding  shares owned by persons who are both  officers  and  directors of the
corporation, and shares held by some employee stock ownership plans; or (iii) on
or after the date the person  becomes an  interested  stockholder,  the business
combination  is  approved by the  corporation's  board of  directors  and by the
holders of at least 66 2/3% of the corporation's  outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
An  "interested  stockholder"  is defined as any person that is (a) the owner of
15% or  more  of the  outstanding  voting  stock  of the  corporation  or (b) an
affiliate or associate  of the  corporation  and was the owner of 15% or more of
the  outstanding  voting  stock  of the  corporation  at  any  time  within  the
three-year  period  immediately  prior to the date on which it is  sought  to be
determined whether the person is an interested stockholder.                     

82

SB-2
87th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 87th
         AUTHORIZED BUT UNISSUED  STOCK.  The authorized but unissued  shares of
our common stock are available for future issuance without shareholder approval.
These  additional  shares  may be used  for a  variety  of  corporate  purposes,
including  future  public  offering  to  raise  additional  capital,   corporate
acquisitions  and  employee  benefit  plans.  The  existence of  authorized  but
unissued shares of common stock may enable our Board to issue shares of stock to
persons friendly to existing management, which may deter or frustrate a takeover
of the company.                                                                 

TRANSFER AGENT AND REGISTRAR                                                    

         The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. The address of American Stock Transfer & Trust Company
is 59 Maiden Lane, New York, New York, and the phone number is (718) 921-8201.  

LISTING                                                                         

         Our common stock is currently quoted on the  Over-The-Counter  Bulletin
Board under the trading symbol "CNSO.OB".                                       

MARKET PRICE OF AND  DIVIDENDS  ON THE  REGISTRANT'S  COMMON  EQUITY AND RELATED
STOCKHOLDER MATTERS.                                                            

         Our   common   stock  is   currently   listed   for   trading   on  the
Over-the-Counter Bulletin Board under the symbol CNSO.OB.                       

         We have never paid dividends on our common stock.  CNSR  California has
never  paid  dividends  on its  common  stock.  We intend to retain  any  future
earnings for use in our business.                                               

83

SB-2
88th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 88th
PLAN OF DISTRIBUTION

         We are  registering the shares of common stock on behalf of the selling
security  holders.  Sales of shares  may be made by  selling  security  holders,
including   their   respective   donees,   transferees,    pledgees   or   other
successors-in-interest  directly to  purchasers  or to or through  underwriters,
broker-dealers  or  through  agents.  Sales may be made from time to time on the
Over-the-Counter  Bulletin Board or any exchange upon which our shares may trade
in the future,  in the  over-the-counter  market or otherwise,  at market prices
prevailing  at the time of sale,  at  prices  related  to market  prices,  or at
negotiated  or fixed  prices.  The  shares  may be sold by one or more of,  or a
combination of, the following:                                                  

         o        a block  trade in which  the  broker-dealer  so  engaged  will
                  attempt  to sell the  shares  as agent  but may  position  and
                  resell a portion of the block as principal to  facilitate  the
                  transaction  (including  crosses in which the same broker acts
as agent for both sides of the transaction);

         o        purchases by a  broker-dealer  as principal and resale by such
                  broker-dealer,  including resales for its account, pursuant to
this prospectus;                            

         o        ordinary brokerage  transactions and transactions in which the
broker solicits purchases;                  

o        through options, swaps or derivatives;               

o        in privately negotiated transactions;                

         o        in making short sales or in transactions to cover short sales;

      o        put or call option transactions relating to the shares; and

o        any other method permitted under applicable law.     

         The selling security  holders may effect these  transactions by selling
shares directly to purchasers or to or through broker-dealers,  which may act as
agents or principals.  These broker-dealers may receive compensation in the form
of discounts,  concessions  or  commissions  from the selling  security  holders
and/or the purchasers of shares for whom such  broker-dealers  may act as agents
or to  whom  they  sell  as  principals,  or both  (which  compensation  as to a
particular  broker-dealer  might be in excess  of  customary  commissions).  The
selling  security  holders  have  advised us that they have not entered into any
agreements,   understandings   or   arrangements   with  any   underwriters   or
broker-dealers regarding the sale of their securities.                          

         The selling security holders may enter into hedging  transactions  with
broker-dealers  or  other  financial  institutions.  In  connection  with  those
transactions,  the broker-dealers or other financial  institutions may engage in
short sales of the shares or of securities  convertible into or exchangeable for
the shares in the course of  hedging  positions  they  assume  with the  selling
security  holders.  The selling  security holders may also enter into options or
other  transactions with  broker-dealers or other financial  institutions  which
require  the   delivery  of  shares   offered  by  this   prospectus   to  those
broker-dealers  or other  financial  institutions.  The  broker-dealer  or other
financial institution may then resell the shares pursuant to this prospectus (as
amended or  supplemented,  if  required  by  applicable  law,  to reflect  those
transactions).                                                                  

         The  selling  security  holders  and  any  broker-dealers  that  act in
connection with the sale of shares may be deemed to be "underwriters" within the
meaning of Section  2(11) of the  Securities  Act of 1933,  and any  commissions
received  by  broker-dealers  or any profit on the resale of the shares  sold by
them while acting as principals  may be deemed to be  underwriting  discounts or
commissions  under the Securities Act. The selling security holders may agree to
indemnify any agent,  dealer or broker-dealer  that participates in transactions
involving sales of the shares against liabilities, including liabilities arising

84

SB-2
89th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 89th
under the Securities Act. We have agreed to indemnify  certain selling  security
holders and certain  selling  security  holders have agreed,  severally  and not
jointly,  to  indemnify  us against  some  liabilities  in  connection  with the
offering of the shares, including liabilities arising under the Securities Act. 

         The selling security holders will be subject to the prospectus delivery
requirements  of the  Securities  Act. We have  informed  the  selling  security
holders that the anti-manipulative  provisions of Regulation M promulgated under
the Securities Exchange Act of 1934 may apply to their sales in the market.     

         Selling security holders also may resell all or a portion of the shares
in open market  transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.    

         Upon  being  notified  by a selling  security  holder  that a  material
arrangement  has been entered into with a  broker-dealer  for the sale of shares
through a block trade,  special  offering,  exchange  distribution  or secondary
distribution  or a purchase by a broker or dealer,  we will file a supplement to
this prospectus,  if required  pursuant to Rule 424(b) under the Securities Act,
disclosing:                                                                     

         o        the  name of each  such  selling  security  holder  and of the
participating broker-dealer(s);             

o        the number of shares involved;                       

o        the initial price at which the shares were sold;     

         o        the  commissions  paid or discounts or concessions  allowed to
the broker-dealer(s), where applicable;     

         o        that such  broker-dealer(s)  did not conduct any investigation
                  to verify the information set out or incorporated by reference
in this prospectus; and                     

o        other facts material to the transactions.            

         In  addition,  if  required  under  applicable  law  or  the  rules  or
regulations of the Commission, we will file a supplement to this prospectus when
a selling  security  holder  notifies us that a donee or pledgee intends to sell
more than 500 shares of common stock.                                           

         We are paying all expenses and fees in connection with the registration
of the  shares.  The  selling  security  holders  will  bear  all  brokerage  or
underwriting  discounts or commissions paid to broker-dealers in connection with
the sale of the shares.                                                         

85

SB-2
90th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 90th
 LEGAL MATTERS

         Stubbs  Alderton  &  Markiles,  LLP ("SAM  LLP"),  has  provided  legal
services to us in connection with its preparation of the registration  statement
covering the securities  offered by this  prospectus.  In addition,  SAM LLP has
rendered a legal opinion,  attached hereto as Exhibit 5.1, as to the validity of
the  shares of the our common  stock to be  registered  hereby.  SAM LLP was the
holder of 61,880  shares of common stock and warrants to purchase  37,128 shares
of  common  stock  at an  exercise  price  of $1.51  of CNS  Response,  Inc.,  a
California  corporation,  which converted into 61,880 shares of our common stock
and warrants to purchase  37,128 shares of our common stock at an exercise price
of $1.51  upon the  closing of the merger on March 7,  2007.  In  addition,  SAM
Venture Partners Invested $162,600 in the Private Placement that closed on March
7, 2007,  and in  exchange  received  135,500  shares of our common  stock,  and
warrants to purchase  40,650 shares of our common stock at an exercise  price of
$1.81 per share.  Subsequent  to the Private  Placement,  SAM  Venture  Partners
distributed the aforementioned shares and warrants to its partners, each of whom
is a partner in SAM LLP.                                                        

 EXPERTS

         The consolidated  financial statements included in this prospectus have
been  audited by  Cacciamatta  Accountancy  Corporation,  independent  certified
public accountants, to the extent and for the periods set forth in their reports
appearing  elsewhere herein,  and are included in reliance on such reports given
upon the authority of said firm as experts in auditing and accounting.          

 WHERE YOU CAN FIND MORE INFORMATION

         We file annual,  quarterly and current  reports,  proxy  statements and
other  information  with the SEC.  We have  also  filed  with the SEC  under the
Securities Act a registration  statement on Form SB-2 with respect to the common
stock offered by this prospectus. This prospectus, which constitutes part of the
registration  statement,  does not contain all the  information set forth in the
registration  statement  or the  exhibits  and  schedules  which are part of the
registration statement,  portions of which are omitted as permitted by the rules
and regulations of the SEC.  Statements  made in this  prospectus  regarding the
contents of any contract or other  document are summaries of the material  terms
of the contract or document.  With respect to each contract or document filed as
an exhibit to the registration statement, reference is made to the corresponding
exhibit.  For further information  pertaining to us and the common stock offered
by this prospectus,  reference is made to the registration statement,  including
the exhibits and  schedules  thereto,  copies of which may be inspected  without
charge at the  public  reference  facilities  of the SEC at 100 F Street,  N.E.,
Washington,  D.C.  20549.  Copies  of  all or any  portion  of the  registration
statement may be obtained from the SEC at prescribed  rates.  Information on the
public   reference   facilities   may  be   obtained   by  calling  the  SEC  at
1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports,
proxy and information statements and other information that is filed through the
SEC's EDGAR System. The web site can be accessed at http://www.sec.gov.         

86

SB-2
91st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 91st
INDEX TO FINANCIAL STATEMENT

                                                                            Page

Report of Independent Registered Public Accounting Firm ..................   F-2

Consolidated Balance Sheets ..............................................   F-3

Consolidated Statements of Operations ....................................   F-4

Consolidated Statement of Changes in Stockholders' Equity (Deficit) ......   F-5

Consolidated Statements of Cash Flows ....................................   F-6

Notes to Consolidated Financial Statements ...............................   F-8

F-1 

SB-2
92nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 92nd
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors                                                              
CNS Response, Inc.                                                              

We have  audited the  accompanying  balance  sheet of CNS  Response,  Inc.  (the
"Company")  as of September 30, 2006,  and the related  statements of operations
and comprehensive loss, changes in stockholders'  equity and cash flows for each
of the years in the two-year  period ended  September 30, 2006.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.                                                                     

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.                                               

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of CNS Response, Inc. at September
30, 2006,  and the results of its  operations  and it cash flows for each of the
years in the  two-year  period  ended  September  30,  2006 in  conformity  with
accounting principles generally accepted in the United States of America.       

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company's continued operating losses, limited capital
and stockholders'  deficit raise substantial doubt about its ability to continue
as a going  concern.  Management's  plans  in  regard  to this  matter  are also
described in Note 1. The  accompanying  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.             

/s/ Cacciamatta Accountancy Corporation                                         
---------------------------------------                                         
Irvine, California                                                              

November 15, 2006                                                               

F-2 

SB-2
93rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 93rd
                                                                [Download Table]
                               CNS RESPONSE, INC.                                   
            CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2007 (UNAUDITED)               
                             AND SEPTEMBER 30, 2006                                 

                                                        MARCH 31,                   
                                                           2007        SEPTEMBER 30,
                                                       (unaudited)         2006     
                                                       ------------    ------------ 
                                                                                    
ASSETS                                                                              
CURRENT ASSETS:                                                                     
  Cash .............................................   $  6,383,000    $    204,900 
  Accounts receivable (net                                                          
    of allowance for doubtful accounts of $17,200 in                                
    2007 and $4,800 in 2006) .......................         47,000          25,400 
  Prepaids and other ...............................        228,700          67,000 
                                                       ------------    ------------ 
    Total current assets ...........................      6,658,700         297,300 

OTHER ASSETS:                                                                       
  Intangible assets (net of accumulated amortization                                
    of $558,100 in 2007 and $538,200 in 2006) ......           --            19,900 
  Loans to related parties .........................           --            96,600 
  Other assets .....................................          8,700          80,400 
                                                       ------------    ------------ 
TOTAL ASSETS .......................................   $  6,667,400    $    494,200 
                                                       ============    ============ 

LIABILITIES AND STOCKHOLDERS'                                                       
  EQUITY (DEFICIT)                                                                  
CURRENT LIABILITIES:                                                                
  Accounts payable including ($8,000 in 2007                                        
    and $8,000 in 2006 to related parties) .........        361,900    $    666,100 
  Accrued liabilities ..............................        250,000         248,700 
  Deferred compensation (including $56,700                                          
    in 2007 and $58,000 in 2006 to related                                          
    parties) .......................................         79,100          75,200 
  Accrued consulting fees ..........................        103,000         136,700 
  Accrued interest (including $0 in 2007 and                                        
    $414,700 in 2006 to related parties) ...........         32,500       1,156,500 
  Note payable to NuPharm Database, LLC ............           --           287,400 
  Convertible promissory notes (including                                           
    $0 in 2007 and $1,768,300 in 2006 to                                            
    related parties) ...............................         50,000       3,116,700 
  Derivative instrument liability ..................      2,041,500            --   
                                                       ------------    ------------ 
    Total current liabilities ......................      2,918,000       5,687,300 
                                                       ------------    ------------ 

COMMITMENTS AND CONTINGENCIES                                                       

STOCKHOLDERS' EQUITY (DEFICIT):                                                     
  Common stock, $0.001 par value; authorized                                        
    750,000,000 shares; 24,638,912 outstanding                                      
    in 2007 and 7,902,940 outstanding in 2006 ......         24,600           7,900 
  Additional paid-in capital .......................     13,217,500       2,822,100 
  Accumulated deficit ..............................     (9,492,700)     (8,023,100)
                                                       ------------    ------------ 
    Total stockholders' equity (deficit) ...........      3,749,400      (5,193,100)
                                                       ------------    ------------ 
TOTAL LIABILITIES AND STOCKHOLDERS'                                                 

  EQUITY ...........................................   $  6,667,400    $    494,200 
                                                       ============    ============ 

 (See accompanying Notes to Consolidated Financial Statements)

F-3 

SB-2
94th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 94th
                                                        [Enlarge/Download Table]
                               CNS RESPONSE, INC.                                                                  
  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2007                                    
               (UNAUDITED) AND 2006 (UNAUDITED) AND FOR THE YEARS                                                  
                       ENDED SEPTEMBER 30, 2006 AND 2005.                                                          

                                                        SIX MONTHS ENDED MARCH 31,             YEAR ENDED          
                                                               (Unaudited)                    SEPTEMBER 30,        
                                                       ----------------------------   ---------------------------- 
                                                           2007            2006           2006           2005      
                                                       ------------    ------------   ------------    ------------ 
                                                                                                                   
REVENUES ...........................................   $    112,700    $     85,800   $    175,900    $    127,400 
                                                       ------------    ------------   ------------    ------------ 

OPERATING EXPENSES:                                                                                                
  Cost of revenues (including amortization expense                                                                 
    of $19,900 for the six months ended March 31,                                                                  
    2007, $39,800 for the six months ended March 31,                                                               
    2006, and $79,800 for each of the years ended                                                                  
    September 30, 2006 and 2005) ...................         76,600          75,700        175,900         165,100 
  Research and development .........................        451,200         204,200         76,700          58,500 
  Sales and marketing ..............................         47,500          71,300         36,000          52,900 
  General and administrative .......................        874,700         265,900      1,671,100         811,800 
                                                       ------------    ------------   ------------    ------------ 
    Total operating expenses .......................      1,450,000         617,100      1,959,700       1,088,300 
                                                       ------------    ------------   ------------    ------------ 

OPERATING LOSS .....................................     (1,337,300)       (531,300)    (1,784,200)       (960,900)
                                                       ------------    ------------   ------------    ------------ 

OTHER INCOME (EXPENSE):                                                                                            
  Interest expense, net ............................       (193,200)       (163,000)      (390,600)       (330,700)
  Gain (loss on derivative instruments .............           --              --        1,178,500        (212,500)
  Gain on troubled debt restructuring ..............           --              --        1,079,700                 
  Other ............................................         61,700            --             --              --   
                                                       ------------    ------------   ------------    ------------ 
  Total other income (expense) .....................       (131,500)       (163,000)     1,867,600        (543,200)
                                                       ------------    ------------   ------------    ------------ 

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES ....     (1,468,800)       (694,300)        83,400      (1,504,100)
PROVISION FOR INCOME TAXES .........................            800            --              800             800 
                                                       ------------    ------------   ------------    ------------ 
NET INCOME (LOSS) ..................................   $ (1,469,600)   $   (694,300)  $     82,600    $ (1,504,900)
                                                       ============    ============   ============    ============ 

BASIC NET INCOME (LOSS) PER SHARE ..................   $      (0.12)   $      (0.34)  $       0.03    $      (0.73)
                                                       ============    ============   ============    ============ 

DILUTED NET INCOME (LOSS) PER SHARE ................   $      (0.12)   $      (0.34)          --      $      (0.73)
                                                       ============    ============   ============    ============ 

WEIGHTED AVERAGE SHARES OUTSTANDING:                                                                               
  Basic ............................................     12,425,285       2,068,823      2,836,049       2,068,823 
                                                       ============    ============   ============    ============ 
  Diluted ..........................................     12,425,285       2,068,823     33,369,578       2,068,823 
                                                       ============    ============   ============    ============ 

 (See accompanying Notes to Consolidated Financial Statements)

F-4 

SB-2
95th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 95th
                                                        [Enlarge/Download Table]
                               CNS RESPONSE, INC.                                                                                 
       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)                                                        
                     FOR THE SIX MONTHS ENDED MARCH 31, 2007                                                                      
           (UNAUDITED) AND THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005                                                            

                                                                                Common Stock           Additional                 
                                                                       ----------------------------     Paid-in      Accumulated  
For the six months ended March 31, 2007                                   Shares          Amount        Capital         Deficit   
                                                                       ------------    ------------   ------------   ------------ 
                                                                                                                                  
BALANCE - October 1, 2004 ...........................................     2,068,823    $      2,100   $     26,100   $ (6,600,800)
Net loss for the year ended September 30, 2005 ......................          --              --             --       (1,504,900)
                                                                       ------------    ------------   ------------   ------------ 
BALANCE - September 30,2005 .........................................     2,068,823           2,100         26,100     (8,105,700)

Reclassification of derivative instrument ...........................          --              --          343,100           --   
Issuance of stock for settlement of debt ............................     5,834,117           5,800        695,000           --   
Troubled debt restructuring with related parties ....................          --              --        1,388,000           --   
Fair value of options issued to employees and consultants ...........          --              --          369,900           --   
Net income for the year ended September 30, 2006 ....................          --              --             --           82,600 
                                                                       ------------    ------------   ------------   ------------ 
BALANCE - September 30,2006 .........................................     7,902,940    $      7,900   $  2,822,100   $ (8,023,100)
Forgiveness of accrued interest from NuPharm and issuance and                                                                     
     exercise of warrants by NuPharm  (unaudited) ...................     2,800,000           2,800        334,800           --   
Conversion of convertible promissory notes and                                                                                    
     accrued interest (unaudited) ...................................     5,993,515           6,000      4,061,100           --   
Issuance of stock in connection with mezzanine                                                                                    
     financing, net of offering costs of $47,600 (unaudited) ........     1,905,978           1,900      1,875,500           --   
Issuance of stock for settlement of debt (unaudited) ................        11,015            --            1,300           --   
Issuance of options in settlement of accrued consulting fees                                                                      
    (unaudited) .....................................................          --              --           27,000           --   
Issuance of stock in connection with private                                                                                      
      placement, net of offering costs of $991,600 (unaudited) ......     5,840,375           5,800      6,011,100           --   
Issuance of stock as payment of placement agent fee (unaudited) .....        83,333             100           (100)          --   
Issuance of stock to repay note to NuPharm and                                                                                    
     related accrued interest (unaudited) ...........................       244,509             200        293,200           --   
Collection of loans receivable through the receipt of stock                                                                       
    (unaudited) .....................................................      (142,753)           (100)      (171,200)          --   
Stock- based compensation  (unaudited) ..............................          --              --            4,200           --   
Derivative instrument liability (unaudited) .........................          --              --       (2,041,500)          --   
Net loss for the six months ended March 31, 2007 (unaudited) ........          --              --             --       (1,469,600)
                                                                       ------------    ------------   ------------   ------------ 
Balance at March 31, 2007 (unaudited) ...............................    24,638,912    $     24,600   $ 13,217,500   $ (9,492,700)
                                                                       ============    ============   ============   ============ 



For the six months ended March 31, 2007                                       Total                                               
                                                                          ------------                                            
                                                                                                                                  
BALANCE - October 1, 2004 ...........................................     $ (6,572,600)                                           
Net loss for the year ended September 30, 2005 ......................       (1,504,900)                                           
                                                                          ------------                                            
BALANCE - September 30,2005 .........................................       (8,077,500)                                           

Reclassification of derivative instrument ...........................          343,100                                            
Issuance of stock for settlement of debt ............................          700,800                                            
Troubled debt restructuring with related parties ....................        1,388,000                                            
Fair value of options issued to employees and consultants ...........          369,900                                            
Net income for the year ended September 30, 2006 ....................           82,600                                            
                                                                          ------------                                            
BALANCE - September 30,2006 .........................................     $ (5,193,100)                                           
Forgiveness of accrued interest from NuPharm and issuance and                                                                     
    exercise of warrants by NuPharm  (unaudited) ....................          337,600                                            
 Conversion of convertible promissory notes and                                                                                   
     accrued interest (unaudited) ...................................        4,067,100                                            
 Issuance of stock in connection with mezzanine                                                                                   
     financing, net of offering costs of $47,600 (unaudited) ........        1,877,400                                            
 Issuance of stock for settlement of debt (unaudited) ...............            1,300                                            
 Issuance of options in settlement of accrued consulting fees                                                                     
    (unaudited) .....................................................           27,000                                            
Issuance of stock in connection with private                                                                                      
      placement, net of offering costs of $991,600 (unaudited) ......        6,016,900                                            
Issuance of stock as payment of placement agent fee (unaudited) .....             --                                              
Issuance of stock to repay note to NuPharm and                                                                                    
     related accrued interest (unaudited) ...........................          293,400                                            
Collection of loans receivable through the receipt of stock                                                                       
    (unaudited) .....................................................         (171,300)                                           
Stock- based compensation  (unaudited) ..............................            4,200                                            
Derivative instrument liability (unaudited) .........................       (2,041,500)                                           
Net loss for the six months ended March 31, 2007 (unaudited) ........       (1,469,600)                                           
                                                                          ------------                                            
Balance at March 31, 2007 (unaudited) ...............................     $  3,749,400                                            
                                                                          ============                                            

 (See accompanying Notes to Consolidated Financial Statements)

F-5 

SB-2
96th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 96th
                                                        [Enlarge/Download Table]
                               CNS RESPONSE, INC.                                                                           
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2007                                             
(UNAUDITED) AND 2006 (UNAUDITED) AND FOR YEARS ENDED SEPTEMBER 30, 2006 AND 2005                                            

                                                                    SIX MONTHS ENDED MARCH 31,                              
                                                                           (unaudited)            YEAR ENDED SEPTEMBER 30,  
                                                                    --------------------------   -------------------------- 
                                                                       2007           2006          2006           2005     
                                                                    -----------    -----------   -----------    ----------- 
                                                                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                       
   Net income (loss) ............................................   $(1,469,600)   $  (694,300)       82,600     (1,504,900)
   Adjustments to reconcile net income (loss) to net cash                                                                   
     used in operating activities:                                                                                          
     Amortization of intangibles ................................        19,900         39,900        79,800         79,800 
     Allowance for doubtful accounts ............................          --             --           4,800           --   
     Gain (loss) on derivative instruments ......................          --             --      (1,178,500)       212,500 
     Gain on troubled debt restructuring ........................          --             --      (1,079,700)          --   
     Other ......................................................       (51,800)          --            --             --   
     Stock based compensation ...................................         4,200           --         369,900           --   
     Non-cash interest expense ..................................       189,800           --            --             --   
     Warrants issued for marketing activities ...................          --             --            --           18,000 
     Changes in operating assets and liabilities:                                                                           
       Accounts receivable ......................................       (21,600)        (8,500)       (1,700)       (10,100)
       Prepaids and other .......................................      (157,700)          --         (67,000)          (800)
       Accounts payable .........................................      (170,300)       (41,200)      202,700         82,200 
       Accrued liabilities ......................................         1,200         27,800         5,900          3,700 
       Deferred compensation ....................................         7,900        120,400       298,800        297,300 
       Accrued consulting .......................................         6,400        152,100       301,300        265,800 
       Accrued interest .........................................         7,300        160,600       383,500        323,500 
                                                                    -----------    -----------   -----------    ----------- 
       Net cash used in operating activities ....................    (1,634,300)      (243,200)     (597,600)      (233,000)
                                                                    -----------    -----------   -----------    ----------- 

 CASH FLOWS FROM INVESTING ACTIVITIES-                                                                                      
   Increase in deposits .........................................        (3,000)          --            --             --   
   Loans to employees ...........................................        (4,100)          --        (175,900)          --   
                                                                    -----------    -----------   -----------    ----------- 
       Net cash used in investing activities ....................        (7,100)          --        (175,900)          --   
                                                                    -----------    -----------   -----------    ----------- 

 CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                      
   Repayment of debt ............................................        (5,000)          --            --             --   
   Proceeds from issuance of convertible promissory notes, net of                                                           
     offering costs .............................................          --             --         500,000        499,500 
   Proceeds from the sale of preferred stock, net of offering                                                               
     costs ......................................................     1,717,300                                             

                                      F-6                                                                                   

SB-2
97th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 97th
   Proceeds from the sale of common stock, net of offering costs      6,079,300           --            --             --   
   Proceeds from exercise of warrants ...........................        28,000           --            --             --   
                                                                    -----------    -----------   -----------    ----------- 
       Net cash provided by financing activities ................     7,819,600           --         500,000        499,500 
                                                                    -----------    -----------   -----------    ----------- 
 NET INCREASE (DECREASE) IN CASH ................................     6,178,200       (243,200)     (273,500)       266,500 
 CASH- BEGINNING OF PERIOD ......................................       204,800        478,400       478,400        211,900 

                                                                    -----------    -----------   -----------    ----------- 
 CASH- END OF PERIOD ............................................   $ 6,383,000    $   235,200   $   204,900    $   478,400 
                                                                    ===========    ===========   ===========    =========== 

 SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                                                                       
   INFORMATION:                                                                                                             
   Cash paid during the period for:                                                                                         
     Interest ...................................................         2,300           --            --             --   
                                                                    ===========    ===========   ===========    =========== 
     Income taxes ...............................................   $       800           --     $       800           --   
                                                                    ===========    ===========   ===========    =========== 
   Common stock issued for settlement of troubled debt ..........          --             --         700,800           --   
                                                                    ===========    ===========   ===========    =========== 
   Conversion of preferred stock into common stock ..............   $ 5,958,200           --            --             --   
                                                                    ===========    ===========   ===========    =========== 
   Common stock received as collection of loans receivable ......   $   171,300           --            --             --   
                                                                    ===========    ===========   ===========    =========== 
   Derivative instrument liability ..............................   $ 2,041,500           --            --             --   
                                                                    ===========    ===========   ===========    =========== 

 (See accompanying Notes to Consolidated Financial Statements)

F-7 

SB-2
98th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 98th
CNS RESPONSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX
 MONTHS ENDED MARCH 31, 2007 (UNAUDITED) AND MARCH
31, 2006 (UNAUDITED) AND THE YEARS ENDED SEPTEMBER
 30, 2006 AND 2005

1.       NATURE OF OPERATIONS                                                   

ORGANIZATION  AND NATURE OF OPERATIONS - CNS Response,  Inc. (the "Company") was
incorporated  in Delaware  on July 10,  1984.  The  Company  utilizes a patented
system that guides  psychiatrists  and other  physicians  to  determine a proper
treatment 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.                 

GOING CONCERN  UNCERTAINTY - The Company has a limited operating history and its
operations are subject to certain risks and uncertainties frequently encountered
by rapidly  evolving  markets.  These  risks  include  the failure to develop or
supply  technology  or  services,  the  ability  to obtain  adequate  financing,
competition within the industry and technology trends.                          

To date,  the Company has financed  its cash  requirements  primarily  from debt
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 ability to expand
and retain its customer base,  its ability to execute its current  business plan
and other factors.                                                              

The Company sold  6,504,765  Units at $1.20 per unit.  Each Unit is comprised of
(i) one share of Common Stock and one five year non-callable warrant to purchase
three-tenths  (3/10) of one share of Common Stock at an exercise  price of $1.80
per share.                                                                      

2.       REVERSE MERGER AND FINANCING                                           

COMPLETION OF MERGER (UNAUDITED)                                                

         On January 16, 2007, CNS Response, Inc. (formerly Strativation, Inc), a
Delaware  corporation  (the  "Company"),  along with CNS Merger  Corporation,  a
California corporation and the Company's wholly-owned  subsidiary ("Merger Sub")
entered into an Agreement and Plan of Merger (the "Merger  Agreement")  with CNS
Response,  Inc, a privately held  California  corporation  ("CNSR  California"),
pursuant to which CNSR  California  would be acquired by the Company in a merger
transaction  wherein Merger Sub would merge with and into CNSR California,  with
CNSR California  being the surviving  corporation  (the  "Merger").  On March 7,
2007, the Merger closed and CNSR California became a wholly-owned  subsidiary of
the Company. At the closing, the Company changed its name to CNS Response, Inc. 

         Accordingly,  from a historical perspective, CNSR California was deemed
to have been the acquirer in the reverse  merger and CNSR  California  is deemed
the survivor of the  reorganization.  As a result,  the  consolidated  financial
statements  of the  Company  presented  reflect the  historical  results of CNSR
California  prior to the Merger,  and of the  combined  entities  following  the
merger,  and do not  include  the  historical  financial  results  of the entity
formerly  known as  Strativation,  Inc.  Common  stock  has  been  retroactively
restated to reflect  the number of shares  received  by CNSR  California  equity
holders in the Merger after giving effect to the  difference in par value,  with
the offset to additional paid-in capital. The equity of the Company survives the
reorganization.  Upon the closing of the reorganization, the Company changed its
fiscal year to September 30. All costs  associated with the Merger were expensed
as incurred.                                                                    

F-8 

SB-2
99th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 99th
PRINCIPAL TERMS OF THE MERGER (UNAUDITED)                                       

         On March 7, 2007,  Merger Sub was merged with and into CNSR California,
the separate  existence of Merger Sub ceased,  and CNSR California  continued as
the surviving corporation at the subsidiary level. The Company issued 17,827,958
shares of its common stock pursuant to certain  exchange ratios set forth in the
Merger  Agreement to the stockholders of CNSR California in exchange for 100% of
the  issued  and  outstanding   shares  of  common  stock  of  CNSR  California.
Additionally, the Company assumed options to purchase shares of common stock and
warrants to purchase  shares of common stock on the same terms and conditions as
previously issued by CNSR California.                                           

         Pursuant  to the terms of the  Merger  Agreement,  CNS  Response,  Inc.
(formerly  Strativation,  Inc.) paid an advisory fee of $475,000 to Richardson &
Pattel,  LLP, the Company's  former legal  counsel and a principal  shareholder,
immediately upon the closing of the Merger.  The fee has been expensed as a cost
of the merger.                                                                  

         Immediately  after the closing of the Merger,  and without  taking into
consideration the Private Placement  Offering,  the issuance of shares of common
stock to repay  the  note to  NuPharm  Database,  LLC and the  tendering  to the
Company of shares of common  stock by an officer and certain  employees to repay
their loans to CNSR  California  described  below,  the Company had  outstanding
18,696,781  shares of common  stock,  options to  purchase  4,136,103  shares of
common stock and warrants to purchase 4,271,414 shares of common stock.         

THE PRIVATE PLACEMENT (UNAUDITED)                                               

         Immediately  following the closing of the Merger,  the Company received
gross proceeds of approximately $7.0 million in a private placement  transaction
(the "Private Placement") with institutional  investors and other high net worth
individuals ("Investors"). Pursuant to Subscription Agreements entered into with
these  Investors,  the Company sold  5,840,375  Investment  Units,  at $1.20 per
Investment  Unit.  Each  Investment Unit consists of one share of Company common
stock,  and a five year  non-callable  warrant to purchase  three-tenths  of one
share of the Company common stock at an exercise  price of $1.80 per share.  The
value of the warrants was  determined to be $1,503,600  using the  Black-Scholes
option pricing model with the following assumptions:  a volatility rate of 100%,
risk  free  interest  rate  of 5%,  an  expected  life of five  years  and  zero
dividends.  The  value of the  warrants  has been  recorded  as a  liability  in
accordance  with SFAS No. 133 and EITF 00-19. As of March 31, 2007, the value of
the warrants had not changed.                                                   

         In May 2007,  the  Company  completed  a second  closing of the Private
Placement for an additional  664,390  Investment  Units.  The  additional  gross
proceeds to the Company amounted to $797,300.                                   

         As  consideration   for  services   rendered  further  to  the  Private
Placement,  the  Company's  placement  agent was issued  83,333 shares of common
stock,  warrants  to  purchase  520,381  shares of  Company  common  stock at an
exercise  price of $1.44 per share and  warrants to purchase  156,114  shares of
Company's  common stock at exercise  price of $1.80 per share . The value of the
warrants was  determined to be $537,900 using the  Black-Scholes  option pricing
model with the  following  assumptions:  a  volatility  rate of 100%,  risk free
interest  rate of 5%, an  expected  life of five years and zero  dividends.  The
value of the warrants has been recorded as a liability in  accordance  with SFAS
No. 133 and EITF 00-19.  As of March 31, 2007, the value of the warrants had not
changed.                                                                        

REPAYMENT OF NOTE PAYABLE TO NUPHARM DATABASE, LLC            

         In connection  with the January 2000 Asset Purchase  Agreement  between
the Company and NuPharm Database,  LLC (NuPharm) providing for the purchase of a
database and the assumption of certain NuPharm liabilities, the Company issued a
subordinated  note payable to NuPharm in the amount of $299,900 bearing interest
at 8% per year and due on March 15, 2004 and a warrant to purchase              

F-9 

SB-2
100th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 100th
2,800,000  shares of the Company's  common stock at $0.01 per share. The warrant
was not exercised before expiring in 2005.                                      

         In October 2006, the Company and NuPharm Database, LLC (NuPharm) agreed
to  exchange  the note and the  related  accrued  interest  for a 5% note in the
principal  amount  of  $287,400,   representing  the  outstanding  principal  at
September 30, 2006, and warrants to purchase  2,800,000  shares of the Company's
common  stock at $0.01 per share.  The note is due and  payable  on demand  five
years  from the date of  issuance,  can be  prepaid  by the  Company at any time
without  penalties and is convertible into shares of common stock of the Company
upon the  completion  of a  financing  (as  defined) at a price per share of the
common  stock in the  financing.  Such  warrant was  exercised  in October  2006
(unaudited).                                                                    

         The  Company  valued the warrant at  $309,550  using the  Black-Scholes
model and  recorded  the excess of the value of the  warrant  over the  forgiven
accrued  interest of $119,700 as a prepaid asset.  The excess is being amortized
as  interest  expense  over  the  expected  term  of the new  note  of one  year
(unaudited).                                                                    

         Pursuant to the  abovementioned  terms, the note payable to NuPharm was
converted into 244,509 shares of the Company's  Common Stock upon the completion
of the merger and private placement described above. Upon conversion, the entire
balance of the  unamortized  prepaid  interest  was charged to interest  expense
(unaudited).                                                                    

LOANS TO OFFICER AND EMPLOYEES                                                  

         In September  2006, the Company  loaned  certain  officer and employees
$167,200 under notes bearing interest at 5.26% per annum,  compounded  annually,
and requiring  payment on or after the earlier of (i) the date that is two years
following the date of the note,  and (ii) a demand by the Company  following the
date on which the  Company has  received an  aggregate  of  $5,000,000  from the
sale(s) of its capital  stock  provided the  assigned  value (as defined) of the
stock at the time of the demand is more than $1. The  repayment of the notes may
be made in one of the following ways, or in combination of both:                

(a)      in cash, or                                          

         (b)      by  tendering  Common  Stock  of  the  Company  owned  by  the
                  borrower,  with an aggregate Assigned Value (as defined) equal
       to the principal and accrued interest on the notes.

         Pursuant to the  abovementioned  terms, the Company demanded payment of
all such notes upon the  completion  of the merger  and  private  placement  for
$7,005,000 described above. The officer who owed the Company $93,900,  including
interest,  repaid the loan by tendering  78,219 shares of the  Company's  Common
Stock.  The remaining  employees repaid their loans by tendering an aggregate of
64,534 shares of the Company's Common Stock. (unaudited)                        

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                             

BASIS OF  CONSOLIDATION  - The  consolidated  financial  statements  include the
accounts of CNS Response, Inc., an inactive parent company, and its wholly owned
subsidiary CNSR California.  All significant intercompany transactions have been
eliminated in consolidation.                                                    

USE OF ESTIMATES - The  preparation  of the  consolidated  financial  statements
requires  management to make  estimates  and judgments  that affect the reported
amounts of assets,  liabilities,  revenue and expense, and related disclosure of
contingent  assets and liabilities.  On an ongoing basis, the Company  evaluates
its  estimates,  including  those  related  to  revenue  recognition,   doubtful
accounts,  intangible  assets,  income taxes,  valuation of equity  instruments,
contingencies  and  litigation.  The Company  bases its  estimates on historical
experience and on various other  assumptions  that are believed to be reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments about the carrying values of                                          

F-10

SB-2
101st Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 101st
assets and liabilities that are not readily apparent from other sources.  Actual
results may differ materially from these estimates.                             

UNAUDITED  INTERIM RESULTS - The accompanying  consolidated  balance sheet as of
March 31, 2006, the  consolidated  statements of operations and the consolidated
statements  of cash flows for the six months ended March 31, 2007 and 2006,  and
the consolidated statement of changes in stockholders' equity for the six months
ended March 31,  2007,  are  unaudited.  The  unaudited  consolidated  financial
statements have been prepared in accordance with generally  accepted  accounting
principles in the United States for interim  financial  information and with the
instructions to Item 310 of Regulation S-B. Accordingly, they do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles  in the  United  States  for  complete  financial  presentation.  The
accompanying unaudited consolidated financial statements reflect all adjustments
that,  in  the  opinion  of  management,  are  considered  necessary  for a fair
presentation of the financial  position,  results of operations,  and cash flows
for the periods  presented.  The results of operations  for such periods are not
necessarily  indicative of the results  expected for the full fiscal year or for
any future period.                                                              

CASH - The Company  deposits its cash with major financial  institutions and may
at times exceed federally insured limits.  The Company believes that the risk of
loss is minimal.  To date, the Company has not experienced any losses related to
cash deposits with financial institutions.                                      

FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS  - The  Company's  short-term  financial
instruments,  including  cash,  accounts  receivable  and  accounts  payable are
carried at cost. The cost of the short-term financial  instruments  approximates
fair value due to their  relatively  short  maturities.  The  carrying  value of
long-term  financial  instruments,  including notes payable,  approximates  fair
value as the interest  rates  approximate  current  market rates of similar debt
obligations.                                                                    

ACCOUNTS  RECEIVABLE  - The Company  estimates  the  collectibility  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.                                

INTANGIBLE ASSETS - Intangible assets consisted of a purchased database recorded
at cost and were amortized over an estimated useful life of seven years.        

LONG-LIVED ASSETS - As required by Statement of Financial  Accounting  Standards
("SFAS")  No. 144,  ACCOUNTING  FOR THE  IMPAIRMENT  OR  DISPOSAL OF  LONG-LIVED
ASSETS, 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 was  recorded  for the years  ended
September 30, 2006 and 2005, or for the six month period ended March 31, 2007.  

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 SFAS No. 123R,  SHARE-BASED
PAYMENT  (revised  2004)  and  related   interpretations   which  establish  the
accounting for equity instruments  exchanged for employee  services.  Under SFAS
No. 123R, share-based compensation cost is measured at                          

F-11

SB-2
102nd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 102nd
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 SFAS No. 109,  ACCOUNTING FOR INCOME TAXES. Under the provisions
of SFAS 109, 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) - SFAS No. 130,  REPORTING  COMPREHENSIVE  INCOME,
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, 2006 and 2005.                                                    

The Company's comprehensive income (loss) is the same as its reported net income
(loss) for the six months ended March 31, 2007 and 2006 (unaudited).            

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  one  measurement  of  profitability  and  does  not
disaggregate  its business for internal  reporting and  therefore  operates in a
single business segment.                                                        

RECENT ACCOUNTING PRONOUNCEMENTS                                                

         In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial  Instruments--an amendment of FASB Statements No. 133 and 140."
SFAS No. 155 eliminates  the exemption  from applying SFAS No. 133,  "Accounting
for Derivative  Instruments and Hedging Activities," to interests in securitized
financial  assets  so that  similar  instruments  are  accounted  for  similarly
regardless of the form of the  instruments.  SFAS No. 155 also allows issuers of
financial  statements  to  elect  fair  value  measurement  at  acquisition,  at
issuance,  or when a previously  recognized financial instrument is subject to a
remeasurement (new basis) event, on an instrument-by-instrument  basis, in cases
in which a derivative  would  otherwise have to be  bifurcated.  SFAS No. 155 is
effective  for all  financial  instruments  acquired  or issued  after the first
fiscal year beginning after September 15, 2006. The adoption of SFAS No. 155 did
not have a material impact on our consolidated financial statements.            

         In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing
of  Financial  Assets--an  amendment  of FASB  Statement  No. 140." SFAS No. 156
requires  that  all  separately   recognized   servicing  assets  and  servicing
liabilities  be  initially  measured  at fair  value,  if  practicable.  It also
permits,  but does not require,  the subsequent  measurement of servicing assets
and  servicing  liabilities  at fair  value.  An  entity  that  uses  derivative
instruments  to mitigate the risks  inherent in servicing  assets and  servicing
liabilities  is  required to account for those  derivative  instruments  at fair
value. Under SFAS No. 156, an entity can elect subsequent fair value measurement
of its servicing assets and servicing liabilities by class, thus simplifying its
accounting  and  providing  for income  statement  recognition  of the potential
offsetting changes in fair value of the servicing assets, servicing liabilities,
and  related  derivative  instruments.  An entity  that  elects to  subsequently
measure servicing assets and servicing  liabilities at fair value is expected to
recognize  declines  in  fair  value  of  the  servicing  assets  and  servicing
liabilities more consistently than                                              

F-12

SB-2
103rd Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 103rd
by reporting  other-than-temporary  impairments.  SFAS No. 156 is effective  for
fiscal years  beginning  after  September 15, 2006. The adoption of SFAS No. 156
did not have a material impact on our consolidated financial statements.        

         In June 2006,  Emerging  Issues Task Force Issue No.  06-3,  "How Sales
Taxes Collected from Customers and Remitted to Governmental  Authorities  Should
Be Presented in the Income Statement (That Is, Gross Versus Net  Presentation),"
or EITF 06-3, was issued.  EITF 06-3 requires  disclosure of the presentation of
taxes on either a gross (included in revenues and costs) or a net (excluded from
revenues)  basis  as an  accounting  policy  decision.  The  provisions  of this
standard are effective for interim and annual reporting  periods beginning after
December 15, 2006. We do not expect the adoption of EITF 06-3 to have a material
impact on our consolidated financial statements.                                

         In June 2006,  the FASB issued FASB  Interpretation  No. 48, or FIN 48,
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109,  Accounting  for Income  Taxes,"  which  clarifies the  accounting  for
uncertainty  in income  taxes.  FIN 48  prescribes a  recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax  position,  if that  position is more likely than not of being  sustained on
audit,  based on the  technical  merits of the  position.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective beginning
January 1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening  retained  earnings.  We are  continuing to
evaluate  the  possible  impact  of  FIN  48,  on  our  consolidated   financial
statements.                                                                     

         In September 2006, the SEC released Staff Accounting  Bulletin No. 108,
"Considering   the  Effects  of  Prior  Year   Misstatements   When  Quantifying
Misstatements in Current Year Financial  Statements" (SAB 108). SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year financial
statement  misstatements  should be  considered  in  quantifying  a current year
misstatement.  Prior practice allowed the evaluation of materiality on the basis
of the error quantified as the amount by which the current year income statement
was  misstated  (rollover  method) or the  cumulative  error  quantified  as the
cumulative  amount by which the current year balance sheet was  misstated  (iron
curtain  method).  The guidance  provided in SAB 108 requires both methods to be
used in evaluating  materiality.  Immaterial  prior year errors may be corrected
with the first filing of prior year financial  statements  after  adoption.  The
cumulative  effect of the correction  would be reflected in the opening  balance
sheet with  appropriate  disclosure of the nature and amount of each  individual
error  corrected in the  cumulative  adjustment,  as well as a disclosure of the
cause of the error and that the error had been  deemed to be  immaterial  in the
past. The adoption of SAB 108 did not have a material impact on our consolidated
financial statements.                                                           

         In September  2006, the FASB issued  Statement of Financial  Accounting
Standards No. 157,  "Fair Value  Measurements,"  or SFAS No. 157. This Statement
defines fair value as used in numerous accounting pronouncements,  establishes a
framework for measuring fair value in generally accepted accounting  principles,
or GAAP,  and expands  disclosure  related to the use of fair value  measures in
financial  statements.  SFAS  No.  157  does not  expand  the use of fair  value
measures in financial  statements,  but standardizes its definition and guidance
in GAAP. The Standard  emphasizes that fair value is a market-based  measurement
and not an entity-specific measurement based on an exchange transaction in which
the entity sells an asset or transfers a liability  (exit  price).  SFAS No. 157
establishes a fair value  hierarchy from  observable  market data as the highest
level to fair  value  based on an  entity's  own fair value  assumptions  as the
lowest level.  The  Statement is to be effective  for our  financial  statements
issued in 2008; however, earlier application is encouraged. We believe that SFAS
No.  157  will  not  have  a  material  impact  on  our  consolidated  financial
statements.                                                                     

F-13

SB-2
104th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 104th
         In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement  Plans-an amendment of FASB
Statements No. 87, 88, 106, and 132(R),"  which requires the  recognition of the
over-funded or under-funded status of a defined benefit postretirement plan in a
company's  balance  sheet.  This  portion of the new  guidance is  effective  on
December 31, 2006.  Additionally,  the  pronouncement  eliminates the option for
companies to use a  measurement  date prior to their fiscal  year-end  effective
December 31,  2008.  SFAS No. 158 provides two  approaches  to  transition  to a
fiscal year-end measurement date, both of which are to be applied prospectively.
Under the first  approach,  plan assets are measured on  September  30, 2007 and
then remeasured on January 1, 2008. Under the alternative  approach,  a 15-month
measurement  will be determined on September 30, 2007 that will cover the period
until the fiscal  year-end  measurement  is required on December 31, 2008. We do
not have any defined benefit pension or postretirement plans that are subject to
SFAS No. 158.  As such,  we do not expect the  pronouncement  to have a material
impact on our consolidated financial statements.                                

         In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial  Assets and Financial  Liabilities  Including an Amendment of FASB
Statement  No.  115,"  which  permits   companies  to  measure  many   financial
instruments  and  certain  other  assets  and  liabilities  at fair  value on an
instrument-by-instrument basis (the fair value option). Adoption of the standard
is optional and may be adopted  beginning in the first  quarter of 2007.  We are
currently  evaluating  the  possible  impact  of  adopting  SFAS No.  159 on our
consolidated financial statements.                                              

4.       TROUBLED   DEBT   RESTRUCTURING--DEFERRED   COMPENSATION   AND  ACCRUED
CONSULTING FEES                                               

         At  September  30,  2005,  the  Company  owed  certain   employees  and
consultants    deferred    compensation,    accrued   consulting   fees,   other
compensation-related   liabilities  and  accrued  interest  thereon  aggregating
$2,480,900.  Due to financial difficulties experienced by the Company, in August
and September 2006,  certain  employees and consultants to whom the Company owed
an aggregate of $3,199,400  forgave  approximately  80% of the debt and accepted
5,834,117   shares  of  the  Company's  common  stock  (of  which  182,952  were
restricted), and warrants and options to purchase an aggregate of 270,638 shares
of the  Company's  common stock at an exercise  price of $0.59 per share in full
settlement of the Company's remaining obligations.  On the date of transfer, the
amounts due to employees and consultants  exceeded the aggregate  estimated fair
value  (based on an  estimate of $0.12 per share) of the  shares,  warrants  and
options transferred by $2,467,700. The gain attributable to employees considered
related  parties of  $1,388,000  has been treated as a capital  transaction  and
included in additional paid-in capital in the accompanying financial statements.
The remaining  gain of  $1,079,700  has been recorded as a gain on troubled debt
restructuring in the accompanying financial statements.                         

5.       CONVERTIBLE PROMISSORY NOTES                                           

         The Company has issued  convertible  promissory  notes with  detachable
warrants from time to time to fund its operations. The notes bear interest at 8%
per year, compounded annually, and are payable on demand. The terms of the notes
provide for the (i)  conversion of principal and accrued  interest into the same
type  of  securities  issued  by  the  Company  upon a  qualified  institutional
financing, the amount of which financing varies between notes and ranges from $1
to $4 million,  and (ii)  conversion  price to be equal to the same price as the
shares sold in the  financing.  The notes provide for an aggregate of $2,196,000
in  principal  to  convert  automatically  and  $920,700  to convert at the note
holders' options based upon certain financing requirements (as defined).        

         Due to the  variable  conversion  price,  the  notes  were  potentially
convertible into an unlimited number of common shares. Accordingly,  the Company
has  accounted  for the notes  under SFAS 133 and EITF 00-19  which  require the
beneficial conversion feature to be treated as an embedded derivative, recording
a liability  equal to the  estimated  fair value of the  conversion  option.  In
addition,  all non-employee  warrants that are exercisable during the period the
notes were potentially convertible into an                                      

F-14

SB-2
105th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 105th
unlimited  number of common shares are required to be recorded as liabilities at
their fair value.  The fair value of the beneficial  conversion  feature and the
warrants were estimated using the  Black-Scholes  option pricing model. The fair
value of the  beneficial  conversion  feature and the  warrants  and options was
recomputed  each  reporting  period with the change in fair value  recorded as a
gain or loss on derivative instruments.                                         

         In August 2006, CNSR California  amended its Articles of  Incorporation
whereby the number of authorized  shares was increased to 100,000,000,  of which
80,000,000  were  designated as common shares and 20,000,000  were designated as
preferred shares.                                                               

         In October 2006,  the Company and the note holders agreed to modify the
terms of the original  agreements  such that all  convertible  notes and related
accrued interest were converted into 5,993,515 shares of the Company's preferred
shares and to change the  exercise  price for  warrants  to  purchase  1,087,514
shares of the Company's  common stock to $0.59 per share.  The preferred  shares
were  converted  into  5,993,515  shares of the Company's  common stock upon the
completion of the Merger described in Note 2.(unaudited)                        

         Since at  September  30,  2006,  the  number of  authorized  shares was
sufficient to accommodate the conversion of all notes,  related accrued interest
and outstanding warrants, the Company has reclassified the derivative instrument
liability with an estimated fair value of $343,100 to equity in the accompanying
financial statements.                                                           

6.       STOCKHOLDERS' EQUITY                                                   

COMMON AND PREFERRED STOCK                                                      

         As of March 31, 2007, the Company was  authorized to issue  750,000,000
shares of common stock. (unaudited)                                             

         As of September  30, 2006,  CNSR  California  was  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.    

         During August and September  2006,  CNSR  California  issued  5,834,117
shares of its common stock with a fair value of $700,800 in connection  with the
restructuring of certain debt. (See Note 4).                                    

         There were no shares of Preferred Stock outstanding as of September 30,
2006. In October 2006, CNSR California  issued 5,993,515 shares of its preferred
stock in  connection  with the  conversion of notes  payable.  (See Note 5). All
shares of preferred  stock were converted into 5,993,515  shares of common stock
concurrently with the completion of the Merger. (unaudited)                     

STOCK-OPTION PLAN                                                               

         On September 27, 2004,  the Company  adopted the 2004 Stock Option Plan
pursuant to which there were  15,000,000  shares of common  stock  reserved  for
issuance  and  under  which  the  Company  may issue  incentive  stock  options,
nonqualified  stock  options,  stock  awards  and  stock  bonuses  to  officers,
directors and employees.  The option price for each share of stock subject to an
option was to 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 was an ISO granted to an
eligible  employee who is a 10% shareholder,  the option price for each share of
stock  subject to such ISO was to be no less than 110% of the fair market  value
of a share of stock on the date such ISO is granted.  Stock options were to 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
was to be five years from the date of grant. ISOs                               

F-15

SB-2
106th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 106th
could be granted only to eligible  employees.  At March 31, 2007,  there were no
options outstanding under this plan (unaudited).                                

         In connection with the Merger  described in Note 2, the Company assumed
the CNSR  California  stock option plan  described  below and all of the options
granted thereunder at the same price and terms.                                 

         On August 3, 2006,  CNSR  California  adopted the CNSR  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  nonstatutory  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 March 31,
2007, there were 4,136,103  options and 183,937  restricted  shares  outstanding
under  the 2006 Plan and  5,679,960  shares  available  for  issuance  of awards
(unaudited).                                                                    

         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  SFAS No.  123R  (revised  2004),  "Share-Based
Payment",  and  related  interpretations.   Under  SFAS  No.  123R,  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:                                                      

Dividend yield ..........................       0%            
Risk-free interest rate .................    5.46%            
Expected volatility .....................     100%            
Expected life ...........................  5 years            

         The expense is recognized over the employees' requisite service period,
generally  the  vesting  period of the  award.  Compensation  costs  charged  to
operations  for  the  six  months  ended  March  31,  2007  amounted  to  $4,200
(unaudited),and  for fiscal  2006  amounted to  $369,900.  There were no options
issued or outstanding prior to September 2006..                                 

A summary of stock option activity is as follows:             

                                                        [Enlarge/Download Table]

                                                                                Weighted    
                                                                  Number         Average    
                                                                of Shares     Exercise Price
                                                              --------------  --------------
Outstanding at October 1, 2005                                                              
                                                                                            
     Granted ...............................................       4,000,403  $         0.13
     Exercised .............................................            --              --  
     Forfeited .............................................            --              --  
Outstanding at September 30, 2006 ..........................       4,000,403  $         0.13

Activity for the six months ended March 31, 2007 (unaudited)                                
     Granted ...............................................         135,700  $         0.30

                                      F-16                                                  

SB-2
107th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 107th
     Exercised .............................................            --              --  
     Forfeited .............................................            --              --  
Outstanding at end of year .................................       4,136,103  $         0.14

Weighted average fair value of options granted during:                                      
     Year ended September 30, 2006 .........................            --    $         0.09
     Six months ended March 31, 2007 (unaudited) ...........            --    $         0.27

         Following  is a  summary  of  the  status  of  options  outstanding  at
September 30, 2006:                                                             

                                        Weighted Average      Weighted Average
Exercise Price    Number of Shares  Average Contractual Life   Exercise Price 
----------------  -----------------  ------------------------  -----------------
$0.12             859,270              10 years                $0.12
----------------  -----------------  ------------------------  -----------------
 $0.132           3,112,545             10 years                $0.132
----------------  -----------------  ------------------------  -----------------
$0.59             28,588               10 years                $0.59
----------------  -----------------  ------------------------  -----------------

         At  September  30,  2006,  all of the above  options are fully  vested,
except for 20,000 options at an exercise price of $0.12.  Such options vest over
12 months.                                                                      

      Following is a summary of the status of options  outstanding  at March 31,
2007 (unaudited):                                                               

                                          Weighted Average      Weighted Average
Exercise Price    Number of Shares   Average Contractual Life   Exercise Price
----------------  ------------------  ------------------------  ----------------
$0.12             859,270               10 years               $0.12
----------------  ------------------  ------------------------  ----------------
 $0.132           3,112,545              10 years               $0.132
----------------  ------------------  ------------------------  ----------------
$0.30             135,700               10 years               $0.30
----------------  ------------------  ------------------------  ----------------
$0.59             28,588                10 years               $0.59
----------------  ------------------  ------------------------  ----------------

         At March 31,  2007,  options  to  purchase  4,043,603  shares are fully
vested;  options to purchase  10,000  shares at an exercise  price of $0.12 vest
over 6 months;  and options to purchase  82,500  shares at an exercise  price of
$0.30 vest over 20 months. (unaudited)                                          

WARRANTS TO PURCHASE COMMON STOCK                                               

         At September  30, 2006,  there were  warrants  outstanding  to purchase
3,115,154  shares of the Company's  common stock at exercise prices ranging from
$0.01 to $0.59 with a weighted  average  exercise  price of $0.28.  The warrants
expire at various times through 2016.                                           

         As described in Note 6, these  warrants  were  initially  recorded as a
liability at their fair value.  Fair value was computed using the  Black-Scholes
pricing model at each reporting period with the change in fair value recorded as
a gain or loss on derivative instruments. For the year ended September 30, 2006,
the Company recorded a gain on derivative  instruments  amounting to $1,178,500.
For the year ended September 30, 2005, the Company recorded a loss on derivative
instruments   of  $212,500.   As  of  September  30,  2006,  the  warrants  were
reclassified  to equity since the number of  authorized  shares was increased to
accommodate  the exercise of all warrants and  settlement of warrants was within
the control of the Company.                                                     

         During the six months ended March 31, 2007,  the  following  additional
3,515,772 warrants were granted and are outstanding as of such date (unaudited):

F-17

SB-2
108th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 108th
Exercise                        
Warrants to Purchase     Price      Issued in Connection With:                  
--------------------    --------    --------------------------------------------
    1,143,587 shares    $  1.51     Private placement described in Note 12 below

        7,921 shares    $  1.01     To  placement  agent for  private  placement
                  described in Note 12 below

        4,752 shares    $  1.812    To  placement  agent for  private  placement
                  described in Note 12 below

    1,752,113 shares    $  1.80     Private  placement   completed   immediately
                                after the merger and described in Note 2

      467,230 shares    $  1.44     To  placement  agent for  private  placement
                                    completed  immediately  after the merger and
           described in Note 2

      140,169 shares    $  1.80     To  placement  agent for  private  placement
                                    completed  immediately  after the merger and
           described in Note 2

         As described in Note 2, the  warrants to purchase  1,892,282  shares of
common stock at $1.80 per share and the warrants to purchase  467,230  shares at
$1.44 per share were initially recorded as a liability at their fair value. Fair
value was computed using the  Black-Scholes  pricing model.  No gain or loss was
reported  for the six months ended March 31, 2007 as there was no change in fair
value recorded. (unaudited)                                                     

7.       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:                                                                             

                                                               2006     2005
                                                               ----     ----
Federal income tax (benefit) at statutory rates ..............     34%     (34%)
Non-recognizable (gains) losses from derivative instruments ..   (483%)      5% 
Gain from troubled debt restructured with related parties ....    566%       0% 
Change in valuation allowance ................................   (117%)     29% 
State income taxes ...........................................      1%       0% 
Income tax provision .........................................      1%       0% 

         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, 2006 and 2005:       

                                                  2006              2005
                                                  -----------      -----------
Deferred income tax assets:                                                     
 Net operating loss carryforward ............     $ 1,851,000      $ 1,054,300
Deferred interest, consulting and                                           
   compensation liabilities .................         462,500        1,410,100
 Amortization ...............................         215,400          183,400
                                                  -----------      -----------
                                                    2,528,900        2,647,800

F-18

SB-2
109th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 109th
Deferred income tax liabilities - other ......         (34,600)         (81,300)
                                                  -----------      -----------
Deferred income tax asset - net before                                          
 valuation allowance ........................       2,494,300        2,566,500
Valuation allowance ..........................      (2,494,300)      (2,566,500)
                                                  -----------      -----------
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, 2006 we have net
operating loss carryforwards of approximately $4,627,600. The net operating loss
carryforwards  expire by 2026.  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.                                          

8.       EARNINGS PER SHARE                                                     

         In accordance with 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.  The number of dilutive common equivalent shares for the year
ended   September  30,  2006  has  been   determined  in  accordance   with  the
treasury-stock  method.  For the year ended  September 30, 2005, the Company has
excluded all common  equivalent  shares from the calculation of diluted net loss
per share as such securities are anti-dilutive.                                 

         A summary of the net  income  (loss)  and  shares  used to compute  net
income  (loss)  per share  for the  years  ended  September  30,  2006 and 2005,
respectively, is as follows:                                                    

                                                 2006           2005
                                                 -------------   -------------
Net income (loss) for computation of basic net                                  
  income (loss) per share ......................  $      82,600   $  (1,504,900)
Add interest expense relating to convertible                                    
debt .........................................        297,800            -- 
                                                 -------------   -------------
Net income (loss) for computation of dilutive                                   
  net income (loss) per share ..................  $     380,400   $  (1,504,900)

Basic net income (loss) per share ..............  $        0.03   $       (0.73)
                                                 =============   =============

Diluted net income (loss) per share ............  $        0.01   $       (0.73)
                                                 =============   =============

Basic weighted average shares outstanding ......      2,836,049       2,068,823 
Dilutive common equivalent shares ..............     30,533,528            --   
                                                 -------------   -------------
Diluted weighted average common shares .........     33,369,578       2,068,823 
                                                 =============   =============

Anti-dilutive common equivalent shares not                                      
included in the computation of dilutive net                                 
loss per share:                                                             
   Convertible debt ...........................           --       323,086,919
   Warrants ...................................      1,162,705       2,496,063

         A summary of the net  income  (loss)  and  shares  used to compute  net
income  (loss)  per  share for the six  months  ended  March 31,  2007 and 2006,
respectively, is as follows (unaudited):                                        

F-19

SB-2
110th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 110th
                                                   March 31,
                                                  ----------------------------
                                                  2007            2006
                                                  ------------    ------------
Net (loss) for computation of basic net                                         
  (loss) per share .............................   $ (1,469,600)   $   (694,200)
Basic weighted average shares outstanding ......     12,425,285       2,068,823 
Diluted weighted average shares outstanding ....     12,425,285       2,068,823 

Anti-dilutive common equivalent shares not                                      
included in the computation of dilutive                                     
net loss per share:                                                         
   Convertible debt ...........................           --        29,583,285
   Warrants ...................................      4,584,277       2,771,060
 Options ....................................      4,136,103            --

9.       COMMITMENTS AND CONTINGENT LIABILITIES                                 

LITIGATION--The  Company is subject to legal proceedings and claims, which arise
in the ordinary course of its business. The Company believes that although there
can be no  assurances  as to the  disposition  of the  proceedings,  based  upon
information available to the Company at this time, the expected outcome of these
matters would not have a material impact on the Company's  results of operations
or financial condition (unaudited).                                             

RENT  EXPENSE--The  Company  leases its  headquarters  under an operating  lease
expiring in November 2007 and requiring monthly rentals of $3,000.  Total rental
expense  for the year ended  September  30, 2006 and 2005 was $8,300 and $7,600,
respectively.                                                                   

In March 2007, the Company entered into a new lease for its  headquarters at the
same location expiring in November 2007 and requiring monthly rentals of $3,500.
Total rent  expense for the six months ended March 31, 2007 and 2006 was $18,000
and $3,600, respectively (unaudited).                                           

10.      SIGNIFICANT CUSTOMERS                                                  

         For the year ended September 30, 2006, five customers accounted for 75%
of the Company's revenue and 29% of accounts receivable at September 30, 2006.  

         For the six months ended March 31, 2007,,  six customers  accounted for
70% of the  Company's  revenue and 71% of accounts  receivable at March 31, 2007
(unaudited).                                                                    

11.      RELATED PARTY TRANSACTIONS                                             

         Convertible  promissory notes to related parties amounted to $1,768,300
and $1,257,000 at September 30, 2006 and 2005, respectively. Accrued interest to
related  parties  amounted to $414,300 and  $301,800 at  September  30, 2006 and
2005, respectively. Interest expense to related parties amounted to $112,900 and
$76,300 for the years ended September 30, 2006 and 2005, respectively.          

         Consulting  expenses to a director  amounted to $10,000 and $40,000 for
the years ended September 30, 2006 and 2005, respectively.                      

         As  described  in Note 4, in  August  2006 the  Company  and two of its
employees, who are significant  shareholders,  entered into an agreement whereby
the two  employees  received  4,362,652  shares of the  Company's  common stock,
warrants to purchase  242,050 shares of the Company's  common stock at $0.59 per
share and options to purchase  28,588  shares of the  Company's  common stock at
$0.59 per share in full settlement of debt aggregating  $1,943,100.  On the date
of transfer,  the amounts due to employees  exceeded  the  aggregate  fair value
(based on an estimate of $0.12 per share) of the  shares,  warrants  and options
transferred  by $1,388,000.  The gain has been treated as a capital  transaction
and  included  in  additional  paid-in  capital  in the  accompanying  financial
statements.                                                                     

F-20

SB-2
111th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 111th
12.      SUBSEQUENT EVENTS                                                      

         In October 2006, NuPharm (see Note 5) exercised the warrant to purchase
2,800,000 shares of the Company's common stock at a price of $0.01 per share.   

         In  October,  2006,  the  Company  sold  1,905,978  Units in a  private
financing  resulting in net  proceeds of  $1877,400.  Each Unit  consists of one
share of Series B Preferred  Stock and 5-year  warrants to purchase .6 shares of
the Company's common stock at $1.51 per share. Holders of the Series B Preferred
Stock will be entitled to receive non-cumulative  dividends at an annual rate of
4% when,  as and if declared by the Board.  Each share of the Series B Preferred
Stock  initially  converts into one share of the  Company's  Common Stock at any
time at the option of the  holder.  However,  each  share of Series B  Preferred
Stock  will  automatically  convert  into  Common  Stock at the then  applicable
conversion  rate in the  event of (i) the sale of  $5,000,000  or more of Common
Stock or units  consisting  of Common  Stock and warrants in one or more related
transactions;  (ii) the closing of an underwritten  public offering with a price
equal or greater  than $1.21 per share and net  proceeds  to the  Company of not
less than  $5,000,000,  or (iii) upon the written  consent of the holders of the
majority of the Series A Preferred  (see below) in the case of conversion of the
Series A Preferred  or the Series B Preferred in the case of  conversion  of the
Series B Preferred.                                                             

         In October  2006,  the Company  and the note  holders of certain of the
convertible promissory notes described in Note 6 converted promissory notes with
an aggregate  outstanding  balance of $3,061,700 and related  accrued and unpaid
interest  of  $1,005,300  at  September  30, 2006 into  5,993,515  shares of the
Company's Series A Preferred Stock. In addition,  the exercise price of warrants
to purchase  1,062,116 shares of the Company's common stock was changed to $0.59
per share.  The preferred  shares are convertible  into 5,993,515  shares of the
Company's common stock.                                                         

F-21

SB-2
112th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 112th
 PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.                            

         The Delaware  General  Corporation  Law and certain  provisions  of our
certificate of incorporation an bylaws under certain  circumstances  provide for
indemnification  of our officers,  directors  and  controlling  persons  against
liabilities  which  they  may  incur  in  such  capacities.  A  summary  of  the
circumstances in which such indemnification is provided for is contained herein,
but this description is qualified in its entirety by reference to our bylaws and
to the statutory provisions.                                                    

         In general, any officer, director, employee or agent may be indemnified
against expenses,  fines,  settlements or judgments arising in connection with a
legal  proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in our best interest,  and were not unlawful.
Unless  such  person  is   successful   upon  the  merits  in  such  an  action,
indemnification  may be  awarded  only  after  a  determination  by  independent
decision  of the  board  of  directors,  by legal  counsel,  or by a vote of the
stockholders,  that the applicable  standard of conduct was met by the person to
be indemnified.                                                                 

         The circumstances under which  indemnification is granted in connection
with an action  brought on our behalf is  generally  the same as those set forth
above;  however,  with respect to such actions,  indemnification is granted only
with respect to expenses  actually  incurred in  connection  with the defense or
settlement of the action.  In such actions,  the person to be  indemnified  must
have  acted in good  faith  and in a manner  believed  to have  been in our best
interest, and have not been adjudged liable for negligence or misconduct.       

         Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future or pursuant to a vote of stockholders or
directors. The provision cited above also grants the power to us to purchase and
maintain  insurance  which  protects  our  officers  and  directors  against any
liabilities  incurred in connection  with their service in such a position,  and
such  a  policy  may  be  obtained  by  us.  We  do  not   currently   have  any
indemnification agreements with any of our directors or executive officers.     

         A stockholder's  investment may be adversely  affected to the extent we
pay the costs of settlement and damage awards against  directors and officers as
required by these indemnification  provisions.  At present,  there is no pending
litigation or proceeding  involving any of our directors,  officers or employees
regarding  which  indemnification  by us is  sought,  nor  are we  aware  of any
threatened litigation that may result in claims for indemnification.            

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,  officers or persons  controlling us pursuant
to the foregoing  provisions,  we have been informed that, in the opinion of the
SEC,  this  indemnification  is  against  public  policy  as  expressed  in  the
Securities Act and is therefore unenforceable.                                  

         Reference is made to the following  documents filed as exhibits to this
Registration Statement regarding relevant  indemnification  provisions described
above and elsewhere herein:                                                     

         EXHIBIT                                                          NUMBER

         Certificate of Incorporation of Registrant, as amended            3.1.1

         Bylaws of Registrant                                                3.2

II-1

SB-2
113th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 113th
ITEM 25.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.                          

         The  Registrant  will bear all  expenses  of  registration  incurred in
connection with this offering.  The selling  shareholders whose shares are being
registered  will  bear all  selling  and other  expenses.  The  following  table
itemizes  the  expenses  incurred  by the  Registrant  in  connection  with  the
offering. All the amounts shown are estimates except the Securities and Exchange
Commission registration fee.                                                    
                                                                      AMOUNT
                                                                      ----------

Registration fee - Securities and Exchange Commission .............   $      506
Legal fees and expenses ...........................................   $   50,000
Accounting fees and expenses ......................................   $   10,000
Miscellaneous expenses ............................................   $    5,000
                                                                      ----------
     Total ........................................................   $   65,506

ITEM 26.  RECENT SALES OF UNREGISTERED SECURITIES.                              

RECENT SALES OF UNREGISTERED SECURITIES BY CNSR DELAWARE                        

         Reference is made to the Stock Purchase  Agreement entered into on July
18,  2006,  and the Shares for Debt  Agreement  entered into on January 11, 2007
described  above in the  section  entitled  Certain  Relationships  and  Related
Transaction, which is hereby incorporated by reference.                         

MERGER WITH CNSR CALIFORNIA                                                     

         On January 16, 2007,  we entered  into an Agreement  and Plan of Merger
with CNS Response, Inc., a California corporation (or CNSR California),  and CNS
Merger  Corporation,  a California  corporation and our wholly-owned  subsidiary
that was formed to facilitate the  acquisition of CNSR  California.  On March 7,
2007,  the  merger  with CNSR  California  closed,  CNSR  California  became our
wholly-owned subsidiary, and we changed our name from strativation,  Inc. to CNS
Response,  Inc.. At the  Effective  Time of the Merger (as defined in the Merger
Agreement,  as amended on February 23, 2007),  MergerCo was merged with and into
CNSR California,  the separate existence of MergerCo ceased, and CNSR California
continued as the surviving  corporation  at the subsidiary  level.  We issued an
aggregate of 17,744,625  shares of our common stock to the  stockholders of CNSR
California in exchange for 100% ownership of CNSR California.  Additionally,  we
assumed an aggregate of 8,407,517 options to purchase shares of common stock and
warrants to purchase  shares of common stock on the same terms and conditions as
previously issued by CNSR California.                                           

SECURITIES ISSUED IN PRIVATE PLACEMENT                                          

         On March 7,  2007,  simultaneous  with the  closing of the  Merger,  we
received  gross proceeds of  approximately  $7,008,450 in the first closing of a
private  placement  transaction  (the "Private  Placement")  with  institutional
investors  and  other  high net worth  individuals  ("Investors").  Pursuant  to
Subscription  Agreements  entered into with these  Investors,  we sold 5,840,374
Investment  Units, at $1.20 per Investment Unit. Each "Investment Unit" consists
of one share of our  common  stock,  and a five  year  non-callable  warrant  to
purchase  three-tenths of one share of our common Stock, at an exercise price of
$1.80 per share (the "Investor Warrant"). On May 16, 2007, we completed a second
closing of the Private Placement for an additional 664,390 Investment Units. The
additional gross proceeds to us amounted to $797,300.                           

         Brean Murray Carret & Co. ("Brean Murray") acted as placement agent and
corporate  finance advisor in connection with the Private  Placement.  For their
services as placement agent and financial  advisor,  pursuant to the terms of an
Engagement  Agreement  between CNSR  California  and Brean Murray,  Brean Murray

II-2

SB-2
114th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 114th
received a retainer in the form of 83,333  shares of our common stock  (having a
deemed value of  $100,000)  upon the closing of the Private  Placement.  We also
paid  Brean  Murray  a fee  equal  to 8% of the  funds  raised  in  the  Private
Placement,  or approximately  $624,500 of the gross proceeds from the financing.
In addition,  Brean Murray received warrants (the "Placement Agent Warrants") to
purchase  shares of our common stock in amounts equal to (i) 8% of the shares of
common stock sold by Brean Murray in the Private Placement  (520,381 warrants at
an exercise price of $1.44 per share),  and (ii) 8% of the shares underlying the
Investor  Warrants  sold by  Brean  Murray  in the  Private  Placement  (156,114
warrants at an exercise price of $1.80 per share).  The Placement Agent Warrants
are fully vested and have a term of 5 years. We also paid $87,700 in costs, fees
and expenses incurred by Brean Murray in connection with the Private  Placement.
We expressly  assumed  CNSR  California's  agreement  with Brean Murray upon the
closing of the Merger.  Pursuant to this agreement,  Brean Murray has a right of
first refusal to represent us in certain  corporate  finance  transactions for a
period of one year following the closing of the Private Placement. After payment
of  commissions  and  expenses  associated  with the  offering,  we received net
proceeds of approximately $6.9 million in the private placement financing.      

         In  connection  with the above  stock  issuances,  except as  otherwise
disclosed we did not pay any underwriting discounts or commissions.  None of the
sales of  securities  described  or referred to above was  registered  under the
Securities  Act  of  1933,  as  amended  (the  "Securities  Act").  Each  of the
purchasers  fell  into one or more of the  categories  that  follow:  one of our
existing  shareholders,  one of our  creditors,  one of our  current  or  former
officers or directors, one of our employees, one of our service providers, or an
accredited  investor with whom we or one of our  affiliates had a prior business
relationship.  As a result,  no general  solicitation or advertising was used in
connection  with the sales. In making the sales without  registration  under the
Securities  Act,  the  company  relied upon one or more of the  exemptions  from
registration contained in Sections 4(2) of the Securities Act, and in Regulation
D promulgated under the Securities Act..                                        

RECENT SALES OF UNREGISTERED SECURITIES BY CNSR CALIFORNIA                      

PREFERRED STOCK TRANSACTIONS                                                    

NOTE CONVERSION TRANSACTION                                   

         In October 2006, CNSR California and the holders of certain  promissory
notes  agreed to convert  such notes with an  aggregate  outstanding  balance of
$3,061,700  and related  accrued and unpaid  interest of $1,005,300 at September
30, 2006, into 5,189,294 shares of CNSR California's Series A-1 Preferred Stock,
and 804,221  shares of CNSR  California's  Series A-2  Preferred  Stock.  At the
closing of the Merger, the aforementioned  shares converted into an aggregate of
5,993,515 shares of our common stock.                                           

MEZZANINE FINANCING                                           

         In  October  2006,  CNSR  California  sold  1,905,978  units  (each,  a
"Mezzanine  Unit")  in  a  private  financing   resulting  in  net  proceeds  of
$1,925,000.  Each  Mezzanine  Unit  consisted of one share of CNSR  California's
Series B Preferred  Stock and a 5-year  warrant to  purchase  0.6 shares of CNSR
California's  common stock at $1.51 per share. At the closing of the Merger, the
aforementioned  shares and warrants were converted into 1,905,978  shares of our
common stock and a warrant to purchase an  aggregate of 1,138,835  shares of our
common stock at $1.51 per share on or before October 6, 2011.                   

COMMON STOCK TRANSACTIONS                                                       

SETTLEMENT AGREEMENT FINANCING                                

         In August and September 2006, certain employees and consultants to whom
CNSR California owed an aggregate of $3,199,400 forgave approximately 80% of the
debt and  accepted  5,834,117  shares of CNSR  California's  common  stock,  and
warrants  and  options  to  purchase  an  aggregate  of  270,638  shares of CNSR
California's  common  stock  at  $0.59  per  share  in full  settlement  of CNSR

II-3

SB-2
115th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 115th
California's  remaining   obligations.   At  the  closing  of  the  Merger,  the
aforementioned  shares and warrants were converted into 5,834,117  shares of our
common stock and warrants and options to purchase an aggregate of 270,638 shares
of our common stock at $0.59 per share.                                         

CONVERSION OF NUPHARM DATABASE, LLC PROMISSORY NOTE           

         In connection with the consummation of an asset purchase transaction in
January 2000, by and between Mill City/CNS, LLC and NuPharm, Mill City issued to
NuPharm  Database,  LLC a certain  Promissory  Note dated  January 11, 2000 (the
"Original  NuPharm  Note")  pursuant  to which  Mill City was  obligated  to pay
NuPharm an aggregate  principal  amount of  $299,923.00  together  with interest
pursuant to the payment  schedule set forth in the  Original  NuPharm  Note.  In
January 2000, Mill City contributed  substantially all of its assets,  including
those  securing the  Original  Note,  to CNSR  California,  and CNSR  California
assumed  certain  debts and  obligations  of Mill City,  including  Mill  City's
obligations under the Original NuPharm Note.                                    

         In October 2006, CNSR California entered into an agreement with NuPharm
to cancel the Original  NuPharm Note in  consideration  for the extension of the
expiration  date of a Warrant to purchase CNSR  California  Common Stock held by
NuPharm and a new promissory note in the principal  amount of $287,423 (the "New
NuPharm  Note").  Upon the closing of the  Private  Placement  and  Merger,  the
principal and accrued interest through December 31, 2006 on the New NuPharm Note
automatically converted into 244,509 shares of our Common Stock.                

         Immediately  upon  extension  of the of the  NuPharm  Warrant,  NuPharm
exercised the NuPharm  Warrant to purchase  2,800,000  shares of CNSR California
common stock for total proceeds of $147,700.  At the closing of the Merger,  the
aforementioned  shares  converted  into an aggregate of 2,800,000  shares of our
common stock.  Please also see the disclosure set forth above in relation to the
shares of common stock that were issued in the Merger and Private Placement.    

STOCK OPTIONS                                                                   

OPTION GRANT TO LEONARD BRANDT                                

         On August  11,  2006,  Mr.  Brandt was  granted  an option to  purchase
2,124,740  shares of CNSR  California's  common  stock for an exercise  price of
$0.132 per share pursuant to CNSR California's 2006 Stock Incentive Plan. At the
closing  of the  Merger,  the  option  to  purchase  2,124,740  shares  of  CNSR
California's  common stock was converted into the right to purchase an aggregate
of  2,142,740  shares of our  Common  Stock at an  exercise  price of $0.132 per
share.                                                                          

         In connection  with the above stock  issuances and option grants,  CNSR
California did not pay any  underwriting  discounts or commissions.  None of the
sales of  securities  described  or referred to above was  registered  under the
Securities  Act  of  1933,  as  amended  (the  "Securities  Act").  Each  of the
purchasers  fell  into one or more of the  categories  that  follow:  one of the
Company's  existing  stockholders,  one of the company's  creditors,  one of the
company's current or former officers or directors,  one of the company's service
providers,  or an  accredited  investor  with  whom  the  company  or one of its
affiliates  had  a  prior  business  relationship.   As  a  result,  no  general
solicitation or advertising was used in connection with the sales. In making the
sales without registration under the Securities Act, the company relied upon one
or more of the exemptions  from  registration  contained in Sections 4(2) of the
Securities Act, and in Regulation D promulgated under the Securities Act.       

SB-2
116th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 116th
ITEM 27.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.                           

(a)      The following exhibits are filed herewith:           

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 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           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.                         

4.1           2006 CNS Response,  Inc. Option Plan. Incorporated by reference to
              Exhibit  4.1 to the  Registrant's  Current  Report on Form  10-QSB
             (File No. 000-26285) filed with the Commission on May 15, 2007. *

4.2           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.                       

5.1           Opinion of Stubbs Alderton & Markiles LLP                         

10.1          Stock  Purchase  Agreement by and among the  Registrant and George
              LeFevre,  Scott Absher, and the purchasers signatory thereto dated
              July 18, 2006.  Incorporated  by reference  from the  Registrant's
              Current  Report on Form 8-K (File No.  000-26285)  filed  with the
Commission on July 24, 2006.                        

10.2          Amended and Restated Shares for Debt Agreement,  dated January 16,
              2007 by and  between the  Registrant  and  Richardson  & Patel LLP
              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 16, 2007.            

II-4

SB-2
117th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 117th
10.3          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.

10.4          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.

10.5          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.        

10.6          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.                       

10.7          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.              

21.1          Subsidiaries  of the  Registrant.  Incorporated  by  reference  to
              Exhibit 21 to the  Registrant's  Current  Report on Form 8-K (File
       No. 000-26285) filed with the Commission on March 13, 2007.

23.1          Consent of Stubbs,  Alderton & Markiles  LLP  (included in Exhibit
5.1)                                                

23.2          Consent of Cacciamatta Accountancy Corporation                    

24.1          Power of Attorney (included on signature page)                    

* Indicates a management contract or compensatory plan.                         

(b)      Financial Statement Schedules                        

         Schedules  not listed above have been omitted  because the  information
required  to be  set  forth  therein  is  not  applicable  or is  shown  in  the
consolidated financial statements or notes thereto.                             

II-5

SB-2
118th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 118th
ITEM 28.  UNDERTAKINGS.                                                         

         (a)      RULE  415  OFFERING.   The   undersigned   registrant   hereby
undertakes to:                                                                  

                  (1)  File,  during  any  period  in which it  offers  or sells
         securities,  a post-effective  amendment to this registration statement
to:                                                           

                           (i)  Include  any  prospectus   required  by  Section
10(a)(3) of the Securities Act;             

                           (ii)  Reflect in the  prospectus  any facts or events
                  which,  individually  or  together,  represent  a  fundamental
                  change in the information in the registration  statement;  and
                  notwithstanding  the  forgoing,  any  increase  or decrease in
                  volume of  securities  offered (if the total  dollar  value of
                  securities offered would not exceed that which was registered)
                  and any  deviation  from the low or high-end of the  estimated
                  maximum  offering  range  may  be  reflected  in the  form  of
                  prospects  filed with the  Commission  pursuant to Rule 424(b)
                  if, in the  aggregate,  the  changes  in the  volume and price
                  represent  no more than a 20% change in the maximum  aggregate
                  offering price set forth in the  "Calculation  of Registration
       Fee" table in the effective registration statement.

                           (iii)  Include  any  additional  or changed  material
information on the plan of distribution.    

                  (2) For determining  liability under the Securities Act, treat
         each  post-effective  amendment as a new registration  statement of the
         securities offered,  and the offering of the securities at that time as
the initial bona fide offering.                               

                  (3)  File  a   post-effective   amendment   to   remove   from
         registration any of the securities that remain unsold at the end of the
offering.                                                     

         (e)  REQUEST  FOR   ACCELERATION   OF   EFFECTIVE   DATE.   Insofar  as
indemnification  for  liabilities  arising  under  the  Securities  Act  may  be
permitted to directors,  officers and controlling  persons of the small business
issuer pursuant to the foregoing  provisions,  or otherwise,  the small business
issuer has been  advised  that in the  opinion of the  Securities  and  Exchange
Commission  such  indemnification  is against  public policy as expressed in the
Securities Act and is, therefore, unenforceable.                                

         In the event that a claim for indemnification  against such liabilities
(other than the  payment by the small  business  issuer of expenses  incurred or
paid by a director,  officer or controlling  person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director,  officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the  matter  has been  settled by  controlling  precedent,  submit to a court of
appropriate  jurisdiction  the question  whether such  indemnification  by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.                                           

         (g) RELIANCE ON 430C.  For the purpose of determining  liability  under
the  Securities  Act to any purchaser,  each  prospectus  filed pursuant to Rule
424(b) as part of a registration  statement relating to an offering,  other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance  on Rule  430A,  shall  be  deemed  to be part of and  included  in the
registration  statement  as of the date it is first  used  after  effectiveness.
Provided,  however,  that no  statement  made  in a  registration  statement  or
prospectus  that is part of the  registration  statement  or made in a  document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement  that was made in the  registration  statement or prospectus  that was
part of the  registration  statement  or made in any such  document  immediately
prior to such date of first use.                                                

II-6

SB-2
119th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 119th
SIGNATURES

         Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned,  in the City of Irvine,
California, on May 21, 2007.                                                    

CNS RESPONSE, INC.        
(Registrant)              

By:  /s/ Leonard J. Brandt
                                ------------------------------------------------
 Leonard J. Brandt
                                Chief Executive Officer, President and Secretary
             (Principal Executive Officer)

POWER OF ATTORNEY   

         KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below  constitutes and appoints  Leonard J. Brandt and Horace Hertz, and
each of them, his or her true and lawful  attorneys-in-fact and agents with full
power of  substitution,  for him or her and in his or her name, place and stead,
in  any  and  all  capacities,   to  sign  any  and  all  amendments  (including
post-effective  amendments)  to this  Registration  Statement,  and to sign  any
registration  statement  for  the  same  offering  covered  by the  Registration
Statement  that  is  to  be  effective  upon  filing  pursuant  to  Rule  462(b)
promulgated under the Securities Act, and all post-effective amendments thereto,
and to file the same, with all exhibits  thereto and all documents in connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorneys-in-fact  and agents,  and each of them, full power and authority to do
and perform each and every act and thing  requisite  and necessary to be done in
and about the premises,  as fully to all intents and purposes as he or she might
or  could  do  in  person,   hereby  ratifying  and  confirming  all  that  said
attorneys-in-fact  and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done or by virtue hereof.           

         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities and on the dates stated.                                             

      Signature                          Title                      Date
      ---------                          -----                      ----

/s/ Leonard J. Brandt              President, Chief Executive       May 21, 2007
------------------------------     Officer and Secretary, and                   
Leonard J. Brandt                  Chairman of the Board                        
                   (Principal Executive Officer)

/s/ Horace Hertz                   Chief Financial Officer          May 21, 2007
------------------------------     (Principal Financial and                     
Horace Hertz                       Accounting Officer)                          

/s/ David B. Jones                 Director                         May 21, 2007
------------------------------                                                  
David B. Jones                                                                  

Director  
------------------------------                                                  
Jerome Vaccaro, M.D.                                                            
Ma                                                                              

II-7

SB-2
120th Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 120th
 EXHIBIT INDEX

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 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           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.                         

4.1           2006 CNS Response,  Inc. Option Plan. Incorporated by reference to
              Exhibit  4.1 to the  Registrant's  Current  Report on Form  10-QSB
             (File No. 000-26285) filed with the Commission on May 15, 2007. *

4.2           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.                       

5.1           Opinion of Stubbs Alderton & Markiles LLP                         

10.1          Stock  Purchase  Agreement by and among the  Registrant and George
              LeFevre,  Scott Absher, and the purchasers signatory thereto dated
              July 18, 2006.  Incorporated  by reference  from the  Registrant's
              Current  Report on Form 8-K (File No.  000-26285)  filed  with the
Commission on July 24, 2006.                        

10.2          Amended and Restated Shares for Debt Agreement,  dated January 16,
              2007 by and  between the  Registrant  and  Richardson  & Patel LLP
              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 16, 2007.            

EX-1

SB-2
Last Page of 121
TOC
1st
Previous
Next
↓Bottom
Just 121st
10.3          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.

10.4          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.

10.5          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.        

10.6          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.                       

10.7          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.              

21.1          Subsidiaries  of the  Registrant.  Incorporated  by  reference  to
              Exhibit 21 to the  Registrant's  Current  Report on Form 8-K (File
       No. 000-26285) filed with the Commission on March 13, 2007.

23.1          Consent of Stubbs,  Alderton & Markiles  LLP  (included in Exhibit
5.1)                                                

23.2          Consent of Cacciamatta Accountancy Corporation                    

24.1          Power of Attorney (included on signature page)                    

* Indicates a management contract or compensatory plan.                         

EX-2

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘SB-2’ Filing		Date		First		Last			Other Filings
		10/6/11		30		114			4
		12/31/08		104					10-Q
		3/7/08		29
		1/1/08		104
		9/30/07		40		104			10KSB,  10KSB/A
		9/7/07		22		29
Filed as of:		5/22/07
Filed on:		5/21/07		1		119
		5/17/07		2		86
		5/16/07		27		113
		5/15/07		116		120			10QSB
		3/31/07		33		110			10QSB
		3/13/07		116		121			8-K
		3/7/07		6		121			3,  8-K
		3/1/07		116		120			8-K
		2/28/07		116		120
		2/23/07		27		113			8-K
		1/22/07		116		120			8-K
		1/16/07		27		121			8-K
		1/15/07		26		84			3,  8-K
		1/11/07		26		113			8-K
		1/10/07		4		83
		1/1/07		103
		12/31/06		30		115			10KSB
		12/15/06		103
		11/15/06		92
		11/8/06		47
		10/31/06		83
		10/20/06		60
		10/15/06		66
		9/30/06		29		114			10QSB
		9/15/06		102		103
		8/11/06		82		115
		8/3/06		106
		7/28/06		83					SC 13D
		7/24/06		116		120			8-K
		7/18/06		6		120			3,  8-K
		5/31/06		83
		3/31/06		33		110			10QSB,  NT 10-K,  NT 10-Q
		2/13/06		62
		10/31/05		83
		10/5/05		83
		10/1/05		106
		9/30/05		33		110			10QSB,  NT 10-Q
		1/1/05		82
		11/15/04		5		26			8-K
		10/6/04		5		26
		10/1/04		46		95			8-K
		9/27/04		105					8-K,  8-K/A
		8/24/04		83
		8/5/04		116		120			8-K
		8/2/04		5		120			8-K
		6/22/04		82					3
		6/8/04		116		120			8-K
		6/1/04		116		120			8-K
		5/5/04		54
		3/15/04		99
		1/1/04		5		26
		9/30/03		81					10QSB
		4/2/01		66					10KSB
		1/11/00		30		115
		6/7/99		116		120			10SB12G
									List all Filings