<?xml version="1.0" encoding="us-ascii"?><InstanceReport xmlns:xsd="http://www.w3.org/2001/XMLSchema" xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance"><Version>2.4.0.8</Version><ReportLongName>0018 - Disclosure - 12. FAIR VALUE MEASUREMENTS</ReportLongName><DisplayLabelColumn>true</DisplayLabelColumn><ShowElementNames>false</ShowElementNames><RoundingOption /><HasEmbeddedReports>false</HasEmbeddedReports><Columns><Column FlagID="0"><Id>1</Id><IsAbstractGroupTitle>false</IsAbstractGroupTitle><LabelSeparator>

</LabelSeparator><CurrencyCode /><FootnoteIndexer /><hasSegments>false</hasSegments><hasScenarios>false</hasScenarios><MCU><KeyName /><CurrencySymbol /><contextRef><ContextID>From2012-04-01to2013-03-31</ContextID><EntitySchema>http://www.sec.gov/CIK</EntitySchema><EntityValue>0000882291</EntityValue><PeriodDisplayName /><PeriodType>duration</PeriodType><PeriodStartDate>2012-04-01T00:00:00</PeriodStartDate><PeriodEndDate>2013-03-31T00:00:00</PeriodEndDate><Segments /><Scenarios /></contextRef><UPS /><CurrencyCode /><OriginalCurrencyCode /></MCU><CurrencySymbol /><Labels><Label Key="CalendarSupplement" Id="0" Label="12 Months Ended" /><Label Key="Calendar" Id="1" Label="Mar. 31, 2013" /></Labels></Column></Columns><Rows><Row FlagID="0"><Id>1</Id><IsAbstractGroupTitle>true</IsAbstractGroupTitle><LabelSeparator>

</LabelSeparator><Level>1</Level><ElementName>aemd_FairValueDisclosuresTextBlockAbstract</ElementName><ElementPrefix>aemd_</ElementPrefix><IsBaseElement>false</IsBaseElement><BalanceType>na</BalanceType><PeriodType>duration</PeriodType><IsReportTitle>false</IsReportTitle><IsSegmentTitle>false</IsSegmentTitle><IsCalendarTitle>false</IsCalendarTitle><IsEquityPrevioslyReportedAsRow>false</IsEquityPrevioslyReportedAsRow><IsEquityAdjustmentRow>false</IsEquityAdjustmentRow><IsBeginningBalance>false</IsBeginningBalance><IsEndingBalance>false</IsEndingBalance><IsReverseSign>false</IsReverseSign><FootnoteIndexer /><Cells><Cell FlagID="0" ContextID="" UnitID=""><Id>1</Id><IsNumeric>false</IsNumeric><IsRatio>false</IsRatio><DisplayZeroAsNone>false</DisplayZeroAsNone><NumericAmount>0</NumericAmount><RoundedNumericAmount>0</RoundedNumericAmount><NonNumbericText /><FootnoteIndexer /><CurrencyCode /><CurrencySymbol /><IsIndependantCurrency>false</IsIndependantCurrency><ShowCurrencySymbol>false</ShowCurrencySymbol><DisplayDateInUSFormat>false</DisplayDateInUSFormat></Cell></Cells><ElementDataType>xbrli:stringItemType</ElementDataType><SimpleDataType>string</SimpleDataType><IsTotalLabel>false</IsTotalLabel><UnitID>0</UnitID><Label>Fair Value Measurements</Label></Row><Row FlagID="0"><Id>2</Id><IsAbstractGroupTitle>false</IsAbstractGroupTitle><LabelSeparator>

</LabelSeparator><Level>2</Level><ElementName>us-gaap_FairValueDisclosuresTextBlock</ElementName><ElementPrefix>us-gaap_</ElementPrefix><IsBaseElement>true</IsBaseElement><BalanceType>na</BalanceType><PeriodType>duration</PeriodType><IsReportTitle>false</IsReportTitle><IsSegmentTitle>false</IsSegmentTitle><IsCalendarTitle>false</IsCalendarTitle><IsEquityPrevioslyReportedAsRow>false</IsEquityPrevioslyReportedAsRow><IsEquityAdjustmentRow>false</IsEquityAdjustmentRow><IsBeginningBalance>false</IsBeginningBalance><IsEndingBalance>false</IsEndingBalance><IsReverseSign>false</IsReverseSign><FootnoteIndexer /><Cells><Cell FlagID="0" ContextID="From2012-04-01to2013-03-31" UnitID=""><Id>1</Id><IsNumeric>false</IsNumeric><IsRatio>false</IsRatio><DisplayZeroAsNone>false</DisplayZeroAsNone><NumericAmount>0</NumericAmount><RoundedNumericAmount>0</RoundedNumericAmount><NonNumbericText>&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;We follow FASB ASC 820, &amp;#34;FAIR VALUE MEASUREMENTS AND DISCLOSURES&amp;#34;
(&amp;#147;ASC 820&amp;#148;) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent
to initial recognition.&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;ASC 820 requires that assets and liabilities carried at fair value
will be classified and disclosed in one of the following three categories:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;Level 1: Quoted market prices in active markets for identical assets
or liabilities.&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;Level 2: Observable market based inputs or unobservable inputs that
are corroborated by market data.&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;Level 3: Unobservable inputs that are not corroborated by market
data.&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The hierarchy noted above requires us to minimize the use of unobservable
inputs and to use observable market data, if available, when determining fair value.&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The fair value of our recorded derivative liabilities is determined
based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative
liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.&amp;#160;&amp;#160;Our
fair value measurements at the reporting date were as follows:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;At March 31, 2013:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td style="border-bottom: black 1pt solid"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Description&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Quoted Prices in&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Active Markets for&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Identical Assets&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;(Level 1)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Significant Other&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Observable Inputs&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;(Level 2)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Significant&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Unobservable&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Inputs (Level 3)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: #EEEEEE"&gt;
    &lt;td style="width: 52%"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Derivative Liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;3,588,239&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: white"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Total Assets&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;3,588,239&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;/table&gt;
&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;At March 31, 2012:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td style="border-bottom: black 1pt solid"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Description&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Quoted Prices in&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Active Markets for&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Identical Assets&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;(Level 1)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Significant Other&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Observable Inputs&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;(Level 2)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid"&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Significant&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Unobservable&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;Inputs&lt;/p&gt;
        &lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-align: center"&gt;(Level 3)&lt;/p&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td style="width: 52%"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Derivative Liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%; border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;3,588,615&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: #EEEEEE"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Total Assets&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;3,588,615&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;/table&gt;
&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, in connection with our April 2011 convertible note, July &amp;#38; August 2011
10% convertible notes and the September 2011 convertible note offerings&amp;#160;&amp;#160;and with respect to warrant and embedded conversion
option derivative instruments utilizing the Binomial Lattice option pricing model:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"&gt;
&lt;tr style="vertical-align: top"&gt;
    &lt;td style="width: 60%; border-bottom: black 1pt solid"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 40%; border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Fiscal Year Ended March 31, 2013&lt;/font&gt;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: top; background-color: #EEEEEE"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Risk free interest rate&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: center"&gt;&lt;font style="font-size: 8pt; color: black"&gt;0.05% - 1.56%&lt;/font&gt;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: top; background-color: white"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Average expected life&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: center"&gt;&lt;font style="font-size: 8pt; color: black"&gt;0.25 &amp;#150; 3.6 years&lt;/font&gt;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: top; background-color: #EEEEEE"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Expected volatility&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: center"&gt;&lt;font style="font-size: 8pt; color: black"&gt;76.0% - 107.1%&lt;/font&gt;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: top; background-color: white"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Expected dividends&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: center"&gt;&lt;font style="font-size: 8pt; color: black"&gt;None&lt;/font&gt;&lt;/td&gt;&lt;/tr&gt;
&lt;/table&gt;
&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The table below sets forth a summary of changes in the fair value
of our Level 3 financial instruments for the year ended March 31, 2013:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;April 1,&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Recorded New Derivative&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Change in estimated fair value recognized in results&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Reclassification of Derivative Liability to Paid in&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;March 31,&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;2012&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;of operations&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;capital&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;2013&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td style="width: 20%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: #EEEEEE"&gt;
    &lt;td style="padding-left: 11pt; text-indent: -11pt"&gt;&lt;font style="font-size: 8pt"&gt;Derivative liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;3,588,615&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;&amp;#150;&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;(44,705&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;)&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;44,329&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt"&gt;3,588,239&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;/table&gt;
&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;b&gt;&amp;#160;&lt;/b&gt;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The table below sets forth a summary of changes in the fair value
of our Level 3 financial instruments for the year ended March 31, 2012:&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&amp;#160;&lt;/p&gt;

&lt;table cellspacing="0" cellpadding="0" style="font: 8pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse"&gt;
&lt;tr style="vertical-align: bottom"&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;April 1, &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;2011&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Recorded &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;New Derivative &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;Liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;Change in &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;estimated fair &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;value recognized &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;in results &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;of operations&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td colspan="2" style="border-bottom: black 1pt solid; text-align: center"&gt;&lt;font style="font-size: 8pt"&gt;March 31, &lt;/font&gt;&lt;br /&gt;
&lt;font style="font-size: 8pt"&gt;2012&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: #EEEEEE"&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;Derivative liabilities&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;2,002,896&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;2,352,622&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;(766,903&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;)&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;3,588,615&lt;/font&gt;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;/table&gt;
&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"&gt;&amp;#160;&lt;/p&gt;

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;The fair value of derivative liabilities that we recorded in the
fiscal year ended March 31, 2012 was related to our April 2011 convertible note, July &amp;#38; August 2011 10% convertible notes and
the September 2011 convertible note offerings (see Note 5) and was based upon an independent&amp;#160;valuation report.&lt;/p&gt;</NonNumbericText><FootnoteIndexer /><CurrencyCode /><CurrencySymbol /><IsIndependantCurrency>false</IsIndependantCurrency><ShowCurrencySymbol>false</ShowCurrencySymbol><DisplayDateInUSFormat>false</DisplayDateInUSFormat></Cell></Cells><ElementDataType>nonnum:textBlockItemType</ElementDataType><SimpleDataType>na</SimpleDataType><ElementDefenition>The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.</ElementDefenition><ElementReferences>Reference 1: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 107

 -Paragraph 15A

 -Subparagraph a-d

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 2: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 107

 -Paragraph 15C, 15D

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 3: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 107

 -Paragraph 3, 10, 14, 15

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 4: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 157

 -Paragraph 32, 33, 34

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 5: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 825

 -SubTopic 10

 -Section 50

 -Paragraph 21

 -URI http://asc.fasb.org/extlink&amp;oid=7491637&amp;loc=d3e13537-108611



Reference 6: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 133

 -Paragraph 44A, 44B

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 7: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 825

 -SubTopic 10

 -Section 50

 -Paragraph 10

 -URI http://asc.fasb.org/extlink&amp;oid=7491637&amp;loc=d3e13433-108611



Reference 8: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 825

 -SubTopic 10

 -Section 50

 -Paragraph 28

 -URI http://asc.fasb.org/extlink&amp;oid=6957238&amp;loc=d3e14064-108612



Reference 9: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 820

 -SubTopic 10

 -Section 50

 -Paragraph 2

 -URI http://asc.fasb.org/extlink&amp;oid=7578670&amp;loc=d3e19207-110258



Reference 10: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 825

 -SubTopic 10

 -Section 50

 -Paragraph 30

 -URI http://asc.fasb.org/extlink&amp;oid=6957238&amp;loc=d3e14172-108612



Reference 11: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Accounting Standards Codification

 -Topic 825

 -SubTopic 10

 -Section 50

 -Paragraph 16

 -URI http://asc.fasb.org/extlink&amp;oid=7491637&amp;loc=d3e13504-108611



Reference 12: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 107

 -Paragraph 15B

 -Subparagraph a, b

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



Reference 13: http://www.xbrl.org/2003/role/presentationRef

 -Publisher FASB

 -Name Statement of Financial Accounting Standard (FAS)

 -Number 159

 -Paragraph 17-22, 27, 28

 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009.  This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.



</ElementReferences><IsTotalLabel>false</IsTotalLabel><UnitID>0</UnitID><Label>FAIR VALUE MEASUREMENTS</Label></Row></Rows><Footnotes /><IsEquityReport>false</IsEquityReport><ReportName>12. FAIR VALUE MEASUREMENTS</ReportName><MonetaryRoundingLevel>UnKnown</MonetaryRoundingLevel><SharesRoundingLevel>UnKnown</SharesRoundingLevel><PerShareRoundingLevel>UnKnown</PerShareRoundingLevel><ExchangeRateRoundingLevel>UnKnown</ExchangeRateRoundingLevel><HasCustomUnits>true</HasCustomUnits><IsEmbedReport>false</IsEmbedReport><IsMultiCurrency>false</IsMultiCurrency><ReportType>Sheet</ReportType><RoleURI>http://aethlonmedical.com/role/FairValueMeasurements</RoleURI><NumberOfCols>1</NumberOfCols><NumberOfRows>2</NumberOfRows></InstanceReport>
