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&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;Aethlon Medical, Inc. (&amp;#34;Aethlon&amp;#34;, the &amp;#34;Company&amp;#34;,
&amp;#34;we&amp;#34; or &amp;#34;us&amp;#34;) is a medical device company focused on creating innovative devices that address unmet medical
needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the Aethlon ADAPT&amp;#153;
(Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or multiple affinity
drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles
from the entire circulatory system without loss of essential blood components. On June 25, 2013, the United States Food and Drug
Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to initiate human feasibility studies of
the Aethlon Hemopurifier&amp;#174; in the United States. Under the feasibility study protocol, we will enroll ten end-stage renal disease
patients who are infected with the Hepatitis C virus (HCV) to demonstrate the safety of Hemopurifier therapy. Successful completion
of this study will allow us the opportunity to initiate pivotal studies that are required for market clearance to treat HCV and
other disease conditions in the United States.&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;Successful outcomes of human trials will also be required by the
regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before FDA
approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or other
patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.&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;In prior years, Aethlon was classified as a development stage enterprise
under accounting principles generally accepted in the United States of America (&amp;#34;GAAP&amp;#34;) as it had not generated revenues
from its planned principal operations.&amp;#160;&amp;#160;In the three months ended December 31, 2011, we began to generate revenues from
a government contract with the Advanced Research Projects Agency (DARPA) of the U.S. Department of Defense and have emerged from
the development stage.&amp;#160;&amp;#160;Subsequent to December 31, 2011, we recorded the first commercial shipment of one of our products
to a life sciences company for diagnostics use.&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;Our common stock is quoted on the Over-the-Counter Bulletin Board
administered by the Financial Industry Regulatory Authority (&amp;#34;OTCBB&amp;#34;) under the symbol &amp;#34;AEMD.OB.&amp;#34;&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;PRINCIPLES OF CONSOLIDATION&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 accompanying consolidated financial statements include the accounts
of Aethlon Medical, Inc. and its wholly-owned subsidiary Exosome Sciences, Inc. (collectively hereinafter referred to as the &amp;#34;Company&amp;#34;
or &amp;#34;Aethlon&amp;#34;). All intercompany balances have been eliminated in consolidation.&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;GOING CONCERN&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 accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction
of liabilities in the ordinary course of business. We have incurred continuing losses from operations, are in default on certain
debt agreements, and have negative working capital of approximately $9,277,000, and an accumulated deficit of approximately $61,475,000
at March 31, 2013. These factors, among other matters, raise substantial doubt about our ability to continue as a going concern.
A significant amount of additional capital will be necessary to advance the development of our products to the point at which they
may become commercially viable. We intend to fund operations, working capital and other cash requirements (consisting of accounts
payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal year ending
March 31, 2014 through debt and/or equity financing arrangements as well as through the receipts under our original DARPA contract
and the related subcontract with Battelle (See Note 14).&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;We are currently addressing our liquidity issue by seeking additional
investment capital through private placements of common stock and debt and by applying for additional grants issued by government
agencies in the United States. We believe that our cash on hand and funds expected to be received from additional private investment
and/or government grants will be sufficient to meet our liquidity needs for fiscal 2014. However, no assurance can be given that
we will receive any funds in addition to the funds we have received to date.&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 successful outcome of future activities cannot be determined
at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or
generate positive operating results.&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 consolidated financial statements do not include any adjustments
related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue as a going concern.&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;RISKS AND UNCERTAINTIES&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;We operate in an industry that is subject to intense competition,
government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including
financial, operational, technological, regulatory, and including the potential risk of business failure.&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;USE OF ESTIMATES&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;We prepare our consolidated financial statements in conformity with
GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues
and expenses during the reporting periods. Significant estimates made by management include, among others, revenue recognition,
realization of long-lived assets, valuation of derivative liabilities, estimating fair value associated with debt and equity transactions
and valuation of deferred tax assets. Actual results could differ from those estimates.&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;CASH AND CASH EQUIVALENTS&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;Accounting standards define &amp;#34;cash and cash equivalents&amp;#34;
as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their maturity
that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement
presentation, we consider all highly liquid investment instruments with original maturities of three months or less when purchased,
or any investment redeemable without penalty or loss of interest to be cash equivalents.&amp;#160;&amp;#160;As of March 31, 2013 and 2012,
we had no assets that were classified as cash equivalents.&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;FAIR VALUE OF FINANCIAL INSTRUMENTS&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 carrying amount of our cash, accounts receivable, accounts payable
and accrued liabilities approximates their estimated fair values due to the short-term maturities of those financial instruments.
The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and as the interest
rate approximates current market interest rates for similar instruments. Derivative liabilities recorded in connection with warrants
and embedded conversion features of certain convertible notes payable are reported at their estimated fair value, with changes
in fair value being reported in results of operations (see Note 12).&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;Management has concluded that it is not practical to determine the
estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated at arm's
length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent
valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated potential
costs.&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;We do not have any assets or liabilities that are measured at fair
value on a recurring basis and, during the years ended March 31, 2013 and 2012, did not have any assets or liabilities that were
measured at fair value on a nonrecurring basis except as described in Note 12 under derivative 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;CONCENTRATIONS OF CREDIT RISKS&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;Cash is maintained at two financial institutions in checking accounts
and related cash management accounts. In October 2008, the Federal Deposit Insurance Corporation (&amp;#34;FDIC&amp;#34;) increased the
maximum level of deposit insurance at financial institutions from $100,000 to $250,000. Our cash balances were below such insured
amounts at both March 31, 2013 and 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;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;All of our accounts receivable at March 31, 2013 and 2012 and all
of our revenue in the fiscal year ended March 31, 2013 were from the U.S. Department of Defense.&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;PROPERTY AND EQUIPMENT&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;Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, which range from two to five years. Repairs
and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale or retirement of property
and equipment, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss included in
the consolidated statements of operations.&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;INCOME TAXES&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;Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is
more likely than not that some portion of the deferred tax assets may not be realized.&lt;/p&gt;

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

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

&lt;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;LONG-LIVED ASSETS&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;Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is
greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. We believe no
impairment charges were necessary during the fiscal years ended March 31, 2013 and 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;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;LOSS PER SHARE&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;Basic loss per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss
per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were
dilutive. As we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential
common shares have been excluded as their effect would be antidilutive.&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;As of March 31, 2013 and 2012, a total of 142,701,202 and 130,756,916
potential common shares, consisting of shares underlying outstanding stock options, warrants and convertible notes payable were
excluded as their inclusion would be antidilutive.&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;SEGMENTS&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;We currently operate in one segment, and accordingly, no additional
segment related disclosures are required.&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;DEFERRED FINANCING COSTS&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;Costs related to the issuance of debt are capitalized and amortized
to interest expense over the life of the related debt using the effective interest method.&amp;#160;&amp;#160;We recorded amortization
expense related to our deferred offering costs of $127,200 and $404,614 during the fiscal years ended March 31, 2013 and 2012,
respectively.&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;REVENUE 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;With respect to revenue recognition, we entered into a government
contract with DARPA and have recognized revenue of $1,230,004 and $1,358,189 under that contract during the fiscal years ended
March 31, 2013 and 2012, respectively. We adopted the Milestone method of revenue recognition for the DARPA contract under ASC
605-28 &amp;#147;Revenue Recognition &amp;#150; Milestone Method&amp;#148; and we believe we meet the requirements under ASC 605-28 for
reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2013 and 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;p style="font: 8pt Times New Roman, Times, Serif; margin: 0"&gt;In order to account for this contract, we identify the deliverables
included within the contract and evaluate which deliverables represent separate units of accounting based on if certain criteria
are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated
among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.&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;A milestone is an event having all of the following characteristics:&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;(1) There is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved. A vendor&amp;#146;s assessment that it expects to achieve a milestone does not necessarily
mean that there is not substantive uncertainty associated with achieving the milestone.&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;(2) The event can only be achieved based in whole or in part on either:
(a) the vendor&amp;#146;s performance; or (b) a specific outcome resulting from the vendor&amp;#146;s performance.&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;(3) If achieved, the event would result in additional payments being
due to the vendor.&amp;#160;&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;A milestone does not include events for which the occurrence is either:
(a) contingent solely upon the passage of time; or (b) the result of a counterparty&amp;#146;s performance.&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 policy for recognizing deliverable consideration contingent upon
achievement of a milestone must be applied consistently to similar deliverables.&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 assessment of whether a milestone is substantive is performed
at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following
for the milestone to be considered substantive:&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;(1) The consideration is commensurate with either: (a) the vendor&amp;#146;s
performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a result of a specific
outcome resulting from the vendor&amp;#146;s performance to achieve the milestone;&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;(2) The consideration relates solely to past performance; and&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;(3) The consideration is reasonable relative to all of the deliverables
and payment terms (including other potential milestone consideration) within the arrangement.&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;A milestone is not considered substantive if any portion of the associated
milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not relate solely to past
performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone is achieved,
the milestone must be substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and nonsubstantive
components. In addition, if a portion of the consideration earned from achieving a milestone may be refunded or adjusted based
on future performance, the related milestone is not considered substantive.&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;See Note 14 for the additional disclosure information required under
ASC 605-28.&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;STOCK-BASED COMPENSATION&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;Employee stock options and rights to purchase shares under stock
participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when all granting
activities have been completed, generally the grant date, based on the fair value of the award. The exercise price of options is
generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the OTCBB on the date
of grant. Compensation cost recognized by the Company includes (a) compensation cost for all equity incentive awards granted prior
to April 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of
the then current accounting standards, and (b) compensation cost for all equity incentive awards granted subsequent to April 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting standards. We use
a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 6).&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 following table summarizes share-based compensation expenses
relating to shares and options granted and the effect on loss per common share during the years ended March 31, 2013 and 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&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; color: black"&gt;March 31, 2013&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; color: black"&gt;March 31, 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 style="width: 68%"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Vesting of Stock Options&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;355,578&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="width: 1%"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="width: 13%; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;372,296&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;Incremental fair value of option Modifications&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="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;23,028&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;&amp;#160;&lt;/td&gt;
    &lt;td style="text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;&amp;#150;&lt;/font&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="padding-bottom: 1pt"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Vesting Expense Associated with CEO Restricted Stock Grant&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 1pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 1pt solid"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 1pt solid; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;386,667&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 style="border-bottom: black 1pt solid"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 1pt solid; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;386,667&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: white"&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Total Stock-Based Compensation Expense&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&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;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;765,273&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&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;758,963&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: #EEEEEE"&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 style="text-align: right"&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 style="text-align: right"&gt;&amp;#160;&lt;/td&gt;
    &lt;td&gt;&amp;#160;&lt;/td&gt;&lt;/tr&gt;
&lt;tr style="vertical-align: bottom; background-color: white"&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&lt;font style="font-size: 8pt; color: black"&gt;Basic and diluted loss per common share&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&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;$&lt;/font&gt;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double; text-align: right"&gt;&lt;font style="font-size: 8pt; color: black"&gt;(0.01&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&lt;font style="font-size: 8pt; color: black"&gt;)&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&amp;#160;&lt;/td&gt;
    &lt;td style="border-bottom: black 2.25pt double"&gt;&lt;font style="font-size: 8pt; color: black"&gt;$&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;(0.01&lt;/font&gt;&lt;/td&gt;
    &lt;td style="padding-bottom: 2.5pt"&gt;&lt;font style="font-size: 8pt; color: black"&gt;)&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-align: center; text-indent: 0.5in"&gt;&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;We account for transactions involving services provided by third
parties where we issue equity instruments as part of the total consideration using the fair value of the consideration received
(i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.
In transactions, when the value of the goods and/or services are not readily determinable and (1) the fair value of the equity
instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the
transactions, we use the following methodology:&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;a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date of issuance).&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;b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the date of the contract.&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;c) For any transactions not meeting the criteria in (a) or (b) above,
we re-measure the consideration at each reporting date based on its then current stock 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;We review share-based compensation on a quarterly basis for changes
to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate
for all expense amortization after March 31, 2006 is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments for the fiscal year ended March 31, 2013 was insignificant.&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;PATENTS&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;Patents include both foreign and domestic patents. There were several
patents pending at March 31, 2013. We capitalize the cost of patents and patents pending, some of which were acquired, and amortize
such costs over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent. The unamortized
costs of patents and patents pending is written off when we determine there is no future benefit to those assets.&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;STOCK PURCHASE WARRANTS&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;We granted warrants in connection with the issuance of convertible
notes payable and the issuance of common stock for cash. When such warrants are classified as equity, we measure the relative estimated
fair value of such warrants which represents a discount from the face amount of the convertible notes payable. Such discounts are
amortized to interest expense over the term of the notes.&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;DERIVATIVE INSTRUMENTS&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;We evaluate free-standing derivative instruments (or embedded derivatives)
to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments
indexed to our common shares on a first-in-first-out basis.&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 classification of a derivative instrument is reassessed at each
reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as
of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.&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;Instruments classified as derivative liabilities are remeasured each
reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement of operations
in other (income) expense.&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;BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE&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 convertible feature of certain notes payable provides for a
rate of conversion that is below market value. Such feature is normally characterized as a &amp;#34;Beneficial Conversion Feature&amp;#34;
(&amp;#34;BCF&amp;#34;). We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required
to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.&amp;#160;&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;REGISTRATION PAYMENT ARRANGEMENTS&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;We account for contingent obligations to make future payments or
otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction agreements,
and any such contingent obligations are recognized only when it is determined that it is probable that the Company will become
obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated (see Note
8).&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;RESEARCH AND DEVELOPMENT EXPENSES&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;We incurred approximately $1,440,000 and $1,089,000 of research and
development expenses for the years ended March 31, 2013 and 2012, respectively, which are included in various operating expenses
in the accompanying consolidated statements of operations.&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;OFF-BALANCE SHEET ARRANGEMENTS&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;We have not entered into any off-balance sheet arrangements that
have or are reasonably likely to have a current or future material effect on our consolidated financial statements.&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;SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS&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;Management has evaluated significant recent accounting pronouncements
that are not yet effective for the Company and does not believe any such pronouncements will have a significant effect on the Company&amp;#146;s
present or future consolidated financial statements.&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 all significant accounting policies of the reporting entity.</ElementDefenition><ElementReferences>Reference 1: http://www.xbrl.org/2003/role/presentationRef

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