Note 9.

Warrant Liabilities

Warrants issued to the placement agent in connection with the 2010 Private Placement contained provisions that protect holders from a decline in the issue price of its common stock (or "down-round" provisions) or that contain net settlement provisions. The Company accounted for these warrants as liabilities instead of equity. Down-round provisions reduce the exercise or conversion price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise or conversion price of those instruments or issues new warrants or convertible instruments that have a lower exercise or conversion price. Net settlement provisions allow the holder of the warrant to surrender shares underlying the warrant equal to the exercise price as payment of its exercise price, instead of physically exercising the warrant by paying cash. The Company evaluated whether warrants to acquire its common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of a "fixed-for-fixed" option.

The warrants issued to the placement agent, in conjunction with the 2010 Private Placement, contained a down-round provision. The triggering event of the down-round provision was not based on an input to the fair value of "fixed-for-fixed" option and therefore was not considered indexed to the Company's stock. Since the warrant contained a net settlement provision, and it was not indexed to the Company's stock, it is accounted for as a liability.

The Company recognized these warrants as a liability equal to their fair value on each reporting date. On June 22, 2011, the warrant holders converted their warrants on a cashless basis into 331,303 common shares at an agreed upon stock price of $16.40 per share. As a result of the warrant conversion we re-measured the fair value of these warrants as of June 22, 2011, and recorded other income associated with the re-measurement of $523,553.

In connection with our $1,800,000 12% convertible debenture issuance in August 2011, the Company issued warrants to the investors and placement agent which contained provisions that protect holders from a decline in the issue price of our common stock or "down-round" provisions. The warrants also contain net settlement provisions. Accordingly, the Company accounted for these warrants as liabilities instead of equity. In addition, we considered the dilution and repricing provisions triggered by the Company's October 2011 follow-on offering which impacted the accounting recognition of this financing.

The Company recognized an initial warrant liability for the warrants issued in connection with our $1,800,000 12% convertible debenture of $1,556,289 which was recorded as a debt discount. The initial warrant liability recognized on the related placement agent warrants totaled $1,522,784 which was recorded as debt issuance costs. Due to the fluctuation in the market value of our common stock from March 31, 2012 through June 30, 2012, we recognized $2,581,139 in warrant revaluation expense.

We recognized an initial warrant liability valuation on the series of warrants issued in connection with of $12,500,000 Unit Offering of $27,647,424. On October 28, 2011, at the initial closing of $12,155,000 of the Unit Offering, the closing price of our common stock as reported on OTC Markets was $1.25. On November 17, 2011, at the final closing of $345,000 of the Unit Offering, the closing price of our common stock as reported on OTC Markets was $0.90. On June 30, 2012, the closing price of our common stock as reported on OTC Markets was $1.15. Due to the fluctuations in the market value of our common stock from March 31, 2012 through June 30, 2012, we recognized $6,747,512 in warrant revaluation expense.

Accordingly, warrant revaluation expense for the three-month period ending June 30, 2012 related to our $1,800,000 12% convertible debenture, and $12,500,000 Unit Offering totaled $9,328,651.

The assumptions used in connection with the valuation of warrants issued were as follows:


	June 30, 2012	March 31, 2012
Number of shares underlying the warrants	32,880,252	32,880,252
Exercise price	$0.64-$1.00	$0.64-$1.00
Volatility	185%	211%
Risk-free interest rate	0.33%	1.04%
Expected dividend yield	0.00%	0.00%
Expected warrant life (years)	2.00 - 4.08	2.24 - 4.33

Recurring Level 3 Activity and Reconciliation

The tables below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the three month period ending June 30, 2012 for all financial liabilities categorized as Level 3 as of June 30, 2012.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):


Description	Number of Warrants	Fair Value at March 31, 2012		Increase in Fair Value		Fair Value at June 30, 2012

Bridge Warrant	8,789,064	$	6,604,706	$	2,278,849	$	8,883,555

Bridge Warrant Placement Agent	1,165,875		876,119		302,291		1,178,410

Unit Offering	19,800,313		15,816,980		5,824,227		21,641,207

Unit Offering Placement Agent	3,125,000		2,499,810		923,284		3,423,094
	32,880,252	$	25,797,615	$	9,328,651	$	35,126,266