UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30,
2012



OR



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from _____to_____



COMMISSION FILE NUMBER 000-21846



AETHLON MEDICAL, INC.






(Exact name of registrant as specified in
its charter)



|NEVADA                                                         |  | 13-3632859                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



8910 UNIVERSITY CENTER LANE, SUITE 660,
SAN DIEGO, CA 92122






(Address of principal
executive offices) (Zip Code)



(858) 459-7800

(Registrant's telephone number, including
area code)



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.    YESxNOo



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).    YESSNO£



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



|Large accelerated filero                                                             | Accelerated filero        
|------------------------------------------------------------------------------------ | --------------------------
|Non-accelerated
        filero
        (Do not check if a smaller reporting company) | Smaller reporting companyx



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YESoNOx



As of August 13, 2012, the registrant had outstanding 141,544,343
shares of common stock, $.001 par value.


















|PART I. FINANCIAL INFORMATION |                                                                                                                    
|----------------------------- | -------------------------------------------------------------------------------------------------------------------
|                              |                                                                                                                    
|ITEM 1.                       | FINANCIAL STATEMENTS                                                                                               
|                              |                                                                                                                    
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2012 (UNAUDITED) AND MARCH 31, 2012                              
|                              |                                                                                                                    
|                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2012 AND 2011 (UNAUDITED)
|                              |                                                                                                                    
|                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011 (UNAUDITED)      
|                              |                                                                                                                    
|                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                   
|                              |                                                                                                                    
|ITEM 2.                       | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                              
|                              |                                                                                                                    
|ITEM 3.                       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         
|                              |                                                                                                                    
|ITEM 4.                       | CONTROLS AND PROCEDURES                                                                                            
|                              |                                                                                                                    
|PART II.                      | OTHER INFORMATION                                                                                                  
|                              |                                                                                                                    
|ITEM 1.                       | LEGAL PROCEEDINGS                                                                                                  
|                              |                                                                                                                    
|ITEM 1A.                      | RISK FACTORS                                                                                                       
|                              |                                                                                                                    
|ITEM 2.                       | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                        
|                              |                                                                                                                    
|ITEM 3.                       | DEFAULTS UPON SENIOR SECURITIES                                                                                    
|                              |                                                                                                                    
|ITEM 4.                       | MINE SAFETY DISCLOSURES                                                                                            
|                              |                                                                                                                    
|ITEM 5.                       | OTHER INFORMATION                                                                                                  
|                              |                                                                                                                    
|ITEM 6.                       | EXHIBITS                                                                                                           





2





PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS



AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS





|                                                                                                                                                                                                                                                 |  | June 30, 2012 |             | March 31, 2012
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ----------- | --------------
|                                                                                                                                                                                                                                                 |  | (Unaudited)   |             |               
|ASSETS                                                                                                                                                                                                                                           |  |               |             |               
|Current assets                                                                                                                                                                                                                                   |  |               |             |               
|Cash                                                                                                                                                                                                                                             |  | $             | 596,058     |               
|Accounts receivable                                                                                                                                                                                                                              |  |               | –           |               
|Deferred financing costs                                                                                                                                                                                                                         |  |               | 22,512      |               
|Prepaid expenses and other current assets                                                                                                                                                                                                        |  |               | 63,506      |               
|Total current assets                                                                                                                                                                                                                             |  |               | 682,076     |               
|                                                                                                                                                                                                                                                 |  |               |             |               
|Property and equipment, net                                                                                                                                                                                                                      |  |               | 1,004       |               
|Patents and patents pending, net                                                                                                                                                                                                                 |  |               | 128,526     |               
|Deposits                                                                                                                                                                                                                                         |  |               | 11,173      |               
|Total assets                                                                                                                                                                                                                                     |  | $             | 822,779     |               
|                                                                                                                                                                                                                                                 |  |               |             |               
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                                            |  |               |             |               
|                                                                                                                                                                                                                                                 |  |               |             |               
|Current Liabilities                                                                                                                                                                                                                              |  |               |             |               
|Accounts payable                                                                                                                                                                                                                                 |  | $             | 648,303     |               
|Due to related parties                                                                                                                                                                                                                           |  |               | 720,070     |               
|Notes payable                                                                                                                                                                                                                                    |  |               | 490,000     |               
|Convertible notes payable, net of discounts                                                                                                                                                                                                      |  |               | 2,881,644   |               
|Derivative liabilities                                                                                                                                                                                                                           |  |               | 2,874,472   |               
|Accrued liquidated damages                                                                                                                                                                                                                       |  |               | 437,800     |               
|Other current liabilities                                                                                                                                                                                                                        |  |               | 1,161,581   |               
|Total current liabilities                                                                                                                                                                                                                        |  |               | 9,213,870   |               
|                                                                                                                                                                                                                                                 |  |               |             |               
|Commitments and Contingencies (Note 13)                                                                                                                                                                                                          |  |               |             |               
|                                                                                                                                                                                                                                                 |  |               |             |               
|Stockholders' Deficit                                                                                                                                                                                                                            |  |               |             |               
|Common stock, par value $0.001 per share; 500,000,000 shares authorized as of June 30, 2012 and 250,000,000 as of March 31, 2012; 139,993,381 and 117,515,892 shares issued and outstanding as of June 30, 2012 and March 31, 2012, respectively |  |               | 139,996     |               
|Additional paid-in capital                                                                                                                                                                                                                       |  |               | 48,068,982  |               
|Accumulated deficit                                                                                                                                                                                                                              |  |               | (57,600,069 | )             
|Total stockholders’ deficit                                                                                                                                                                                                                      |  |               | (8,391,091  | )             
|Total liabilities and stockholders' deficit                                                                                                                                                                                                      |  | $             | 822,779     |               





See accompanying notes.



3





AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2012
and 2011

(Unaudited)



|                                                                          |  | Three Months Ended June 30, 2012 |             | Three Months Ended June 30, 2011
|------------------------------------------------------------------------- |  | -------------------------------- | ----------- | --------------------------------
|REVENUES                                                                  |  |                                  |             |                                 
|                                                                          |  |                                  |             |                                 
|Government contract revenue                                               |  | $                                | 216,747     |                                 
|                                                                          |  |                                  |             |                                 
|OPERATING EXPENSES                                                        |  |                                  |             |                                 
|                                                                          |  |                                  |             |                                 
|Professional fees                                                         |  |                                  | 477,121     |                                 
|Payroll and related                                                       |  |                                  | 554,095     |                                 
|General and administrative                                                |  |                                  | 176,337     |                                 
|Total operating expenses                                                  |  |                                  | 1,207,553   |                                 
|OPERATING LOSS                                                            |  |                                  | (990,806    | )                               
|                                                                          |  |                                  |             |                                 
|OTHER EXPENSE (INCOME)                                                    |  |                                  |             |                                 
|Gain on change in fair value of derivative liability                      |  |                                  | (687,600    | )                               
|Interest and other debt expenses                                          |  |                                  | 688,645     |                                 
|Interest income                                                           |  |                                  | (45         | )                               
|Other                                                                     |  |                                  | 24,978      |                                 
|Total other expense (income)                                              |  |                                  | 25,978      |                                 
|NET LOSS                                                                  |  | $                                | (1,016,784  | )                               
|                                                                          |  |                                  |             |                                 
|BASIC AND DILUTED LOSS PER COMMON SHARE                                   |  | $                                | (0.01       | )                               
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING – BASIC AND DILUTED |  |                                  | 126,315,501 |                                 





See accompanying notes.



4





AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Three Months Ended June 30, 2012
and 2011

(Unaudited)



|                                                                            |  | Three Months Ended June 30, 2012 |            | Three Months Ended June 30, 2011
|--------------------------------------------------------------------------- |  | -------------------------------- | ---------- | --------------------------------
|Cash flows from operating activities:                                       |  |                                  |            |                                 
|Net loss                                                                    |  | $                                | (1,016,784 | )                               
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                  |            |                                 
|Depreciation and amortization                                               |  |                                  | 2,752      |                                 
|Gain on debt conversion                                                     |  |                                  | 24,978     |                                 
|Stock based compensation                                                    |  |                                  | 169,299    |                                 
|Non cash interest expense                                                   |  |                                  | 11,846     |                                 
|Liquidated damages                                                          |  |                                  |            |                                 
|Fair market value of common stock, warrants and options issued for services |  |                                  | 124,182    |                                 
|Change in fair value of derivative liabilities                              |  |                                  | (687,600   | )                               
|Loss on settlement of convertible note termination                          |  |                                  | –          |                                 
|Amortization of debt discount and deferred financing costs                  |  |                                  | 484,223    |                                 
|Changes in operating assets and liabilities:                                |  |                                  |            |                                 
|Accounts receivable                                                         |  |                                  | 400,114    |                                 
|Prepaid expenses and other current assets                                   |  |                                  | (32,851    | )                               
|Interest receivable                                                         |  |                                  | –          |                                 
|Accounts payable and other current liabilities                              |  |                                  | 209,602    |                                 
|Due to related parties                                                      |  |                                  | (10,000    | )                               
|Net cash used in operating activities                                       |  |                                  | (320,239   | )                               
|                                                                            |  |                                  |            |                                 
|Cash flows from investing activities:                                       |  |                                  |            |                                 
|Purchases of property and equipment                                         |  |                                  | –          |                                 
|Net cash used in investing activities                                       |  |                                  | –          |                                 
|                                                                            |  |                                  |            |                                 
|Cash flows from financing activities:                                       |  |                                  |            |                                 
|Principal repayments of notes payable                                       |  |                                  | (29,610    | )                               
|Net proceeds from the issuance of convertible notes payable                 |  |                                  | –          |                                 
|Proceeds from the issuance of common stock                                  |  |                                  | 802,000    |                                 
|Proceeds from collection of secured notes receivable                        |  |                                  | –          |                                 
|Net cash provided by financing activities                                   |  |                                  | 772,390    |                                 
|                                                                            |  |                                  |            |                                 
|Net (decrease) increase in cash                                             |  |                                  | 452,151    |                                 
|                                                                            |  |                                  |            |                                 
|Cash at beginning of period                                                 |  |                                  | 143,907    |                                 
|                                                                            |  |                                  |            |                                 
|Cash at end of period                                                       |  | $                                | 596,058    |                                 



See accompanying notes.



5





AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (CONTINUED)

For the Three Months Ended June 30, 2012
and 2011

(Unaudited)



|                                                                                                                  |  | Three Months Ended June 30, 2012 |         | Three Months Ended June 30, 2011
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | --------------------------------
|Supplemental disclosures of cash flow information:                                                                |  |                                  |         |                                 
|                                                                                                                  |  |                                  |         |                                 
|Cash paid during the period for:                                                                                  |  |                                  |         |                                 
|                                                                                                                  |  |                                  |         |                                 
|Interest                                                                                                          |  | $                                | 2,821   |                                 
|                                                                                                                  |  |                                  |         |                                 
|Income taxes                                                                                                      |  | $                                | –       |                                 
|                                                                                                                  |  |                                  |         |                                 
|Supplemental disclosures of non-cash investing and financing activities:                                          |  |                                  |         |                                 
|                                                                                                                  |  |                                  |         |                                 
|Debt and accrued interest converted to common stock                                                               |  |                                  | 767,467 |                                 
|                                                                                                                  |  |                                  |         |                                 
|Debt discount recorded in connection with beneficial conversion feature of convertible notes and related warrants |  |                                  | –       |                                 
|                                                                                                                  |  |                                  |         |                                 
|Reclassification of note payable to convertible note payable                                                      |  |                                  | 75,000  |                                 
|                                                                                                                  |  |                                  |         |                                 
|Reclassification of warrant derivative liability into equity                                                      |  |                                  | 26,543  |                                 





See accompanying notes.



6







AETHLON MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)

June 30, 2012



NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION



Aethlon Medical, Inc. ("Aethlon", the "Company",
"we" or "us") 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 ADAPTTM
(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. Approval to embark on human trials is still needed
to reach commercial viability of the Hemopurifier® and approval by the U.S. Food and Drug Administration ("FDA").
Successful outcomes of human trials will be required by the regulatory agencies of certain foreign countries where we intend to
sell this device. We have submitted an Investigational Device Exemption ("IDE") to the FDA. 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.



Our common stock is quoted on the Over-the-Counter Bulletin
Board administered by the Financial Industry Regulatory Authority ("OTCBB") under the symbol "AEMD.OB."



The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q
and applicable sections of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments necessary to make the financial statements
not misleading have been included. The condensed consolidated balance sheet as of March 31, 2012 was derived from our audited financial
statements. Operating results for the three months ended June 30, 2012 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2013. For further information, refer to our Annual Report on Form 10-K for the year ended
March 31, 2012, which includes audited financial statements and footnotes as of March 31, 2012 and for the years ended March 31,
2012 and 2011.



NOTE 2. LIQUIDITY



The accompanying unaudited condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the ordinary course of business. We have experienced continuing losses from operations, are in default
on certain debt, have negative working capital of approximately $8,532,000, recurring losses from operations and an accumulated
deficit of approximately $57,600,000 at June 30, 2012, which among other matters, raises significant doubt about our ability to
continue as a going concern. We have not generated significant revenue or any profit from operations since inception. 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. Our current financial resources are insufficient to fund our capital expenditures, 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, 2013 ("fiscal 2013"). Therefore we will be required to seek additional
funds through debt and/or equity financing arrangements to finance our current and long-term operations.



We are currently addressing our liquidity needs by exploring
investment capital opportunities through the private placement of common stock or issuance of additional debt. We believe that
our access to additional capital, together with existing cash resources and anticipated receipts under the DARPA contract, will
be sufficient to meet our liquidity needs for fiscal 2013. However, no assurance can be given that we will receive any funds in
connection with our capital raising efforts.



The unaudited condensed consolidated financial statements do
not include any adjustments relating to the recoverability of assets that might be necessary should we be unable to continue as
a going concern.





7





NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The summary of our significant accounting policies presented
below is designed to assist the reader in understanding our condensed consolidated financial statements. Such financial statements
and related notes are the representations of our management, who are responsible for their integrity and objectivity. These accounting
policies conform to GAAP in all material respects, and have been consistently applied in preparing the accompanying condensed
consolidated financial statements.



PRINCIPLES OF CONSOLIDATION



The accompanying condensed consolidated financial statements
include the accounts of Aethlon Medical, Inc. and its wholly-owned subsidiary, Exosome Sciences, Inc. (collectively hereinafter
referred to as the "Company" or "Aethlon").  There exist no material intercompany transactions or
balances between Aethlon and its subsidiary.



LOSS PER COMMON SHARE



Basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of
computation. Diluted loss per common 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 the potential common shares had been issued,
and if the additional common shares were dilutive. As we had net losses for all periods presented, basic and diluted loss per common
share are the same, since additional potential common shares have been excluded as their effect would be antidilutive.



The potentially dilutive common shares outstanding for the quarters
ended June 30, 2012 and 2011, which include common shares underlying outstanding stock options, warrants and convertible debentures,
were 135,921,754 and 89,196,757, respectively.



PATENTS



We capitalize the cost of patents, some of which were acquired,
and amortize such costs over the estimated useful life, upon issuance of the patent.



RESEARCH AND DEVELOPMENT EXPENSES



We incurred research and development expenses during the three
month periods ended June 30, 2012 and 2011, which are included in various operating expense line items in the accompanying condensed
consolidated statements of operations. Our research and development expenses in those periods were as follows:



|                   |  | June 30, |         | June 30,
|------------------ |  | -------- | ------- | --------
|                   |  | 2012     |         | 2011    
|Three months ended |  | $        | 291,866 |         



FAIR VALUE OF FINANCIAL INSTRUMENTS





The fair value of certain convertible notes and related warrants
at June 30, 2012 is $2,874,472 based upon a third party valuation report that we commissioned. Warrants classified as derivative
liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of
operations.





8





EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY PARTIES OTHER THAN
EMPLOYEES



We account for transactions involving goods and 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
is 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:



(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).

(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.

(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.



IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS



We review our long-lived assets 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 (excluding interest), an impairment loss is recognized.
Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. We believe
that no impairment occurred at or during the three months ended June 30, 2012 and 2011.



BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE



The convertible feature of certain notes payable provides for
a rate of conversion that is below the market value of our common stock. Such feature is normally characterized as a "Beneficial
Conversion Feature" ("BCF"). We record the estimated fair value of the BCF, when applicable, in the condensed consolidated
financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the
term of the notes using the effective interest method.



DERIVATIVE LIABILITIES AND CLASSIFICATION



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.



The classification of a derivative instrument is reassessed
at each balance sheet 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.



On April 1, 2009 we adopted new guidance, as codified
in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-40, Derivatives
and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock(previously EITF 07-5), that requires us to apply a two-step model in determining whether a financial instrument or an
embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. We have identified several
convertible debt or warrant agreements in which the embedded conversion feature or exercise price contains certain provisions that
may result in an adjustment of the conversion or exercise price, which results in the failure of the these instruments to be considered
to be indexed to our stock. Accordingly, under this guidance, we are required to record the estimated fair value of these instruments
as derivative liabilities (see Note 9).



We re-measure the estimated fair value of derivative liabilities
at each reporting period and record changes in fair value in other expense (income) in the current statement of operations.



9





REGISTRATION PAYMENT ARRANGEMENTS



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 7).



STOCK-BASED COMPENSATION



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, but not yet vested as of April 1, 2006, 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 10).



INCOME TAXES



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.



SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS



There were no recent accounting pronouncements issued by
the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or the Securities
and Exchange Commission during the three months ended June 30, 2012 or that were issued in prior periods but do not become effective
until future periods that in the opinion of management had, or are expected to have a material impact on our present
or future consolidated financial statements.



NOTE 4. NOTES PAYABLE



Notes payable consist of the following:



|                            |  | June 30, 2012     |         | March 31, 2012  
|--------------------------- |  | ----------------- | ------- | ----------------
|                            |  | Principal Balance |         | Accrued Interest
|12% Notes payable, past due |  | $                 | 185,000 |                 
|10% Note payable, past due  |  |                   | 5,000   |                 
|IP Law Firm Note, past due  |  |                   | –       |                 
|Law Firm Note               |  |                   | –       |                 
|Tonaquint Note              |  |                   | 300,000 |                 
|Total                       |  | $                 | 490,000 |                 



During the three month period ended June 30, 2012, we recorded
interest expense of $13,029 related to the contractual interest rates of our notes payable.



10





12% NOTES



From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings (the "12% Notes"). On April 21, 2010,
a holder of $100,000 of the 12% Notes converted his principal balance and $71,758 of accrued interest into 687,033 shares of common
stock at an agreed conversion price of $0.25 per share. We incurred a loss upon this conversion of $68,703 since the closing price
of our common stock was $0.35 at the date of conversion. At June 30, 2012, 12% Notes with a principal balance of $185,000 are outstanding,
all of which are past due, in default, and bearing interest at the default rate of 15%. At June 30, 2012, interest payable on the
12% Notes totaled $305,250.



10% NOTES



At June 30, 2012, one 10% Note in the amount of $5,000,
which is past due and in default, remained outstanding. At June 30, 2012, interest payable on this note totaled $5,500.



Management's plans to satisfy the remaining outstanding balance
on these 12% and 10% Notes include converting the notes to common stock at market value or repayment with available funds.



IP LAW FIRM NOTE



On August 2, 2011, we entered into a Promissory Note with our
intellectual property law firm for the amount of $49,610, which represented the amount we owed to that firm. The Promissory Note
called for monthly payments of $5,000 from August 2011 through December 2011 and bore interest at 10% per annum.  We
paid off this note and related accrued interest with cash in April 2012.





LAW FIRM NOTE





On March 22, 2012, we entered into a Promissory Note with our
corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm. The Promissory
Note has a maturity date of December 31, 2012 and bears interest at five percent per annum. The note is convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $0.08 per share.  This ability of the holder to convert
became exercisable upon the next amendment of the Articles of Incorporation increasing the authorized shares of our common stock
to a number greater than 250,000,000.  As that increase in the authorized number of shares of our common stock was approved
by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June
30, 2012 (See Note 5).







TONAQUINT NOTE





On June 28, 2011, we entered into a Termination Agreement with
Tonaquint, Inc. (See Note 5) under which both parties agreed that in consideration of the termination of a warrant, the waiving
of all fees, penalties, the creation of the selling program and other factors, we agreed to issue an unsecured non-convertible
promissory note (the "New Note") in the principal amount of $360,186, which provides for annual interest at a rate of
6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date of April 30, 2012.  We
subsequently extended the note to July 31, 2012 and converted $60,186 of the principal of the note into common stock (See Note
6). We recorded a loss on conversion of $24,978 on that partial conversion. At June 30, 2012, the balance of this note was $300,000
and accrued interest totaled $6,382. We are currently in discussions to further extend this note.





11





NOTE 5. CONVERTIBLE NOTES PAYABLE



Convertible Notes Payable consist of the following at June 30,
2012:



|                                                                |  | Principal |           | Unamortized Discount |  | Net Amount |         | Accrued Interest
|--------------------------------------------------------------- |  | --------- | --------- | -------------------- |  | ---------- | ------- | ----------------
|                                                                |  |           |           |                      |  |            |         |                 
|Amended and Restated Series A 12% Convertible Notes, past due   |  | $         | 885,000   |                      |  | $          | –       |                 
|2008 10% Convertible Notes, past due                            |  |           | 25,000    |                      |  |            | –       |                 
|December 2006 10% Convertible Notes, past due                   |  |           | 17,000    |                      |  |            | –       |                 
|October & November 2009 10% Convertible Notes, $25,000 past due |  |           | 75,000    |                      |  |            | (3,762  | )               
|April 2010 10% Convertible Note                                 |  |           | 75,000    |                      |  |            | (8,607  | )               
|September 2010 10% Convertible Notes, past due                  |  |           | 308,100   |                      |  |            | –       |                 
|April 2011 10% Convertible Notes, past due                      |  |           | 400,400   |                      |  |            | –       |                 
|July and August 2011 10% Convertible Notes                      |  |           | 357,655   |                      |  |            | (12,168 | )               
|September 2011 Convertible Notes                                |  |           | 223,760   |                      |  |            | (60,734 | )               
|February 2012 Convertible Notes, past due                       |  |           | 525,000   |                      |  |            | –       |                 
|Law Firm Note                                                   |  |           | 75,000    |                      |  |            | –       |                 
|Total – Convertible Notes                                       |  | $         | 2,966,915 |                      |  | $          | (85,271 | )               



All but two of the Convertible Notes Payable in the above
table are presently past due or will be due within one year of the June 30, 2012 balance sheet date. As a result, we
expect to amortize all but $4,284 of the remaining discounts during the fiscal year ending March 31, 2013.



During the three months ended June 30, 2012, we
recorded interest expense of $178,810 related to the contractual interest rates of our convertible notes and interest expense
of $386,172 related to the amortization of debt discounts on the convertible notes for a total of $564,982.



Convertible Notes Payable consisted of the following at March
31, 2012:



|                                                                |  | Principal |           | Unamortized Discount |  | Net Amount |          | Accrued Interest
|--------------------------------------------------------------- |  | --------- | --------- | -------------------- |  | ---------- | -------- | ----------------
|                                                                |  |           |           |                      |  |            |          |                 
|Amended and Restated Series A 12% Convertible Notes, past due   |  | $         | 900,000   |                      |  | $          | –        |                 
|2008 10% Convertible Notes, past due                            |  |           | 25,000    |                      |  |            | –        |                 
|December 2006 10% Convertible Notes, past due                   |  |           | 17,000    |                      |  |            | –        |                 
|October & November 2009 10% Convertible Notes, $25,000 past due |  |           | 75,000    |                      |  |            | (4,833   | )               
|April 2010 10% Convertible Note                                 |  |           | 75,000    |                      |  |            | (10,107  | )               
|September 2010 10% Convertible Notes                            |  |           | 338,100   |                      |  |            | –        |                 
|April 2011 10% Convertible Notes                                |  |           | 400,400   |                      |  |            | –        |                 
|July and August 2011 10% Convertible Notes                      |  |           | 357,655   |                      |  |            | (109,911 | )               
|September 2011 Convertible Notes                                |  |           | 238,760   |                      |  |            | (106,932 | )               
|November 2011 Convertible Notes                                 |  |           | 525,000   |                      |  |            | (51,220  | )               
|February 2012 Convertible Notes                                 |  |           | 525,000   |                      |  |            | (188,439 | )               
|Total – Convertible Notes                                       |  | $         | 3,476,915 |                      |  | $          | (471,442 | )               



12





AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES





In June 2010, we entered into Amended and Restated 12% Series
A Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes previously
issued by the Company (“Amended Series A 10% Convertible Notes” or the "Prior Notes"), and all amendments
to the Prior Notes.



The Amended and Restated Notes, in the principal amount of $900,000
matured on December 31, 2010. In connection with the restructuring we paid $54,001 of accrued and default interest through the
date of the restructuring, liquidated damages of $205,000 and $54,003 of prepaid interest through the expiration date in the aggregate
amount of $313,004 through the issuance of units ("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of
one share of our common stock and one common stock purchase warrant to purchase one share of our common stock at a fixed exercise
price of $0.20 per share as prescribed in the Amended and Restated Note Agreement.  The noteholders have antidilution price
protection on the Amended and Restated Notes.



In addition to the extension of the expiration date of the Amended
and Restated Notes to December 31, 2010, we agreed to increase the annual interest rate from ten percent to twelve percent.
We also agreed to change the exercise prices on all of the warrants held by the noteholders to $0.20 per share, to change certain
formerly contingent warrants to non-contingent warrants and to extend the expiration date of their warrants to February 2016.



As of December 31, 2010, the Amended and Restated Notes matured
and as of June 30, 2012 remain in default.



In June 2012, the holder of $15,000 of the Amended and Restated
Notes converted his principal and related accrued interest into common stock per the conversion formula.



We have begun discussions with the noteholders regarding an
extension to the notes but there can be no assurance that we will be able to do so on terms that we deem acceptable or at all.  At
June 30, 2012, the balance of the Amended and Restated Notes was $885,000 and interest payable on the Amended and Restated Notes
totaled $265,500.



2008 10% CONVERTIBLE NOTES





One 2008 10% Convertible Note in the amount of $25,000
which matured in January 2010 remained outstanding at June 30, 2012. This note is convertible into our common stock at
$0.50 per share. At June 30, 2012, the $25,000 principal balance was in default and interest payable on the remaining note
totaled $12,604.



DECEMBER 2006 10% CONVERTIBLE NOTES



At June 30, 2012, $17,000 of the December 2006 10%
Notes remained outstanding and in default. These notes are convertible into our common stock at $0.17 per share. At June 30
2012, the $17,000 balance of the notes was in default and interest payable on those notes totaled $13,883.



13









OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES





In October and November 2009, we raised $430,000 from the sale
to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October &
November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common
stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also received matching three year warrants
to purchase unregistered shares of our common stock at a price of $0.25 per share.  We measured the fair value of the
warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing this discount using the effective interest method over the term of the notes.



Deferred financing costs of $20,250 incurred in connection
with this financing were issued in the form of a convertible note with warrants on the same terms as those received by the
investors.  We capitalized the $20,250 of deferred financing costs and amortized them over the term of the notes
using the effective interest method.



Prior to March 31, 2012, $355,000 of the October and
November 2009 financing had been converted to common stock. At June 30, 2012, there were two notes remaining, one for $25,000
which is past due and the other for $50,000 and interest payable on these two notes totaled $24,250. On March 31, 2012, we
agreed to extend the expiration date and to change the exercise price of certain warrants of one of the note holders by two
years in exchange for the extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April
2010 10% Convertible Note (see below) by that same two year period.  We recorded a charge of $77,265 relating to
this modification.



In July 2012, we issued 461,409 shares of common stock to the
holder of the $25,000 note in exchange for the value of the principal and related accrued interest of $8,000 under the same terms
that we used to sell units consisting of one share of common stock and one-half of a stock purchase warrant on June 29, 2012 (See
Note 6). As part of that structure, the noteholder also received seven year warrants to purchase 230,705 share of common stock
at a price of $0.107 per share (See Note 14).





APRIL 2010 10% CONVERTIBLE NOTE



In April 2010, we raised $75,000 from the sale to an accredited
investor of a 10% convertible note. The convertible note matures in October 2011 and is convertible into our common stock at a
fixed conversion price of $0.25 per share prior to maturity. The investor also received three year warrants to purchase 300,000
unregistered shares of our common stock at a price of $0.25 per share.



We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this discount using
the effective interest method over the term of the note.



On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of the note holder by two years in exchange for his extension of $50,000 of the
October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note by that same two year period.  We
recorded a charge of $77,265 relating to this modification.



At June 30, 2012, the remaining outstanding principal balance
is $75,000 and interest payable on this note totaled $18,313.



14









JULY 2010 6% CONVERTIBLE NOTES



In July 2010, we entered into a Note and Warrant Purchase Agreement
(the "Purchase Agreement") with Tonaquint, Inc., a Utah corporation (the "Investor"), whereby we issued and
sold, and the Investor purchased: (i) a Convertible Promissory Note of the Company in the principal amount of $890,000 (the "Company
Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). As consideration for the issuance
and sale of the Company Note and Warrant, the Investor paid cash in the amount of $400,000 and issued two Secured Trust Deed Notes
to us (the "Trust Notes") each in the principal amount of $200,000. The variance of $90,000 represents fees and expenses
paid by us and an original issue discount which was recorded as deferred offering costs.



The Company Note is convertible into shares of the Company's
common stock, at the option of the Investor, at a price per share equal to (a) the principal and interest due under the Company
Note divided by (b) 80% of the average of the closing bid price for the three (3) trading days with the lowest closing bid prices
during the twenty (20) trading days immediately preceding the conversion date (the “Conversion Price”). In no event
shall the Conversion Price be greater than the "Ceiling Price", which is $0.30 per share. The principal and interest
subject to conversion under the Note shall be eligible for conversion in tranches ("Tranches"), as follows: (1) an initial
Tranche in an amount equal to $450,000 and any interest and/or fees accrued thereon under the terms of the Company Note and the
other Transaction Documents (as defined in the Purchase Agreement), and (2) two additional subsequent Tranches each in
an amount equal to $220,000 and any interest or fees accrued thereon under the terms of the Company Note or the other Transaction
Documents. The first subsequent Tranche shall correspond to payment of the first Trust Note and the second subsequent Tranche shall
correspond to payment of the second Trust Note (as defined in the Purchase Agreement). The Investor's right to convert any of the
subsequent Tranches is conditioned upon the Investor’s payment in full of the Trust Notes corresponding to such subsequent
Tranche.  Accordingly, principal and interest under the Company Note may only be converted by the Investor in proportion
to the amounts paid under each of the Trust Notes. However, up to $450,000 may be converted at the Investor's option
at any time, representing amounts paid by the Investor on the closing of the transaction on July 15, 2010 (the "Closing").  The
Company Note bears interest at a rate of 6% per annum. The maturity date of the Company Note was July 15, 2011. The Company Note
contains "anti-dilution" protection, such that if the Company issues and sells common stock, or securities convertible
into or exercisable for common stock of the Company, at a price per share that is less than the applicable Conversion Price, then
the Conversion Price is adjusted downward to match such lower issuance price. However, in no event will the Conversion Price based
on anti-dilution adjustments be lower than the "Floor Price" which is $0.20 per share.



The number of shares of Common Stock that may be issued to
the lender pursuant to a conversion of this Note, combined with an exercise of the Warrant, shall not exceed a cap determined
by (a) dividing the sum of (i) the face amount of this Note, plus (ii) an amount equal to all interest that would accrue
under this Note during its term (assuming no payments of principal or interest are made prior to the Maturity Date), by (b) a
price per share of Common Stock equal to $0.20 (the Floor Price).



15





The Company Note also contains other standard adjustment features
for stock splits, recapitalizations and similar occurrences. The Company Note contains standard events of default related to payment,
performance of certain covenants and bankruptcy events. We have granted the Investor a security interest in the Trust Notes under
the terms of the Security Agreement. The sole collateral for the Company's payment and performance obligation under the Company
Note is the Trust Notes.  The Warrant entitles the Investor to purchase 3,636,364 shares of common stock at an exercise
price of $0.231 per share. The Warrant contains "anti-dilution" protection, such that if we issue and sell common stock,
or securities convertible into or exercisable for common stock of the Company, at a price per share that is less than the price,
then the price is adjusted downward to match such lower issuance price. The Warrant also contains other standard adjustment features
for stock splits, recapitalizations and similar occurrences.



We recorded a debt discount of $890,000 based on the estimated
fair value of the derivative liabilities associated with the warrants and embedded conversion feature which was amortized using
the effective interest method over the term of the note.



On June 28, 2011, we entered into a Termination Agreement
with Tonaquint under which both parties agreed to terminate the warrant to prevent continuing dilution of our common stock
and to eliminate confusion or disagreement as to the number of shares of common stock available for issuance under the
warrant in the future. Accordingly, under the Termination Agreement we issued 3,599,913 shares of common stock upon the final
exercise of the warrant, whereupon the warrant was terminated and is of no further force or effect. The Termination
Agreement also provides for a "Common Stock Sale Limitation" on all of our common stock held by Tonaquint, Inc.
Under the "Common Stock Sale Limitation", the daily limitation on the number of shares of common stock which
Tonaquint, Inc. may sell into the market on any trading day is limited to the greater of (i) $5,000 of sales amount, or (ii)
10% of the Average Daily Volume of our common stock sold on the Over The Counter Bulletin Board, where the Average Daily
Volume shall mean the average daily volume for the prior three month period as reported on each trading day on Yahoo Finance
with respect to our common stock. Under the terms of the Termination Agreement, Tonaquint, Inc. has waived and released us
from any obligation to pay or perform any fees, penalties, costs, or assessments that were or are due, or would have become
due, under the convertible note, the warrant and the note purchase agreement. In consideration of the termination of the
warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we agreed to issue an
unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,185, which provides for
annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option (See Note 4). The New Note
originally had a maturity date of April 30, 2012 and was subsequently extended to July 31, 2012. At June 30, 2012,
the balance of this note was $300,000 and accrued interest totaled $6,382. We are currently in discussions to further extend
this note.





SEPTEMBER 2010 10% CONVERTIBLE NOTES



On September 3, 2010, we entered into a Subscription Agreement
with three accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory
notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial closing under the Subscription Agreement
resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $743,600, (ii) five-year
warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.31125 per share, and (iii)
five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.43575 per share.
The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on September
3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due diligence fee
and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of
our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the
common stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10)
trading days preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may
not be more than $0.30 nor less than $0.20. There are no registration requirements with respect to the shares of common stock underlying
the notes or the warrants.



16





The following conversions of the September 2010 10% Convertible
Note have taken place during the fiscal year ended March 31, 2012 and the three months ended June 30, 2012:



|                           |  | Fiscal Year Ended March 31, 2012 |         | Three Months Ended June 30, 2012
|-------------------------- |  | -------------------------------- | ------- | --------------------------------
|Principal converted        |  | $                                | 405,500 |                                 
|Accrued interest converted |  | $                                | 19,255  |                                 



At June 30, 2012, the remaining principal balance of $308,100
was in default and interest payable on these notes totaled $81,895.



APRIL 2011 10% CONVERTIBLE NOTES



In April 2011, we entered into a Subscription
Agreement with two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible
promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the Subscription
Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of
$385,000, (ii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price
of $0.125 per share, and (iii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an
exercise price of $0.175 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of
ten percent (10%) and matured on April 1, 2012.  The aggregate gross cash proceeds to us were $350,000, the balance
of the principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes
are convertible at the option of the holders into shares of our common stock at a price per share equal to
eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by Bloomberg L.P.
for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the
proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.20
nor less than $0.10. There are no registration requirements with respect to the shares of common stock underlying the notes
or the warrants.



In addition, we issued (i) five-year warrants to purchase
an aggregate of 812,500 shares of our common stock at an exercise price of $0.125 per share, and (ii) five-year warrants to
purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per share to the Purchasers.
These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by the Purchasers
that were acquired from us in September 2010.



At June 30, 2012, the outstanding principal balance was $400,400
and interest payable on these notes totaled $55,050.



JULY & AUGUST 2011 10% CONVERTIBLE NOTES



During the three months ended September 30, 2011, we raised
$357,656 in 10% convertible notes.  Those notes had a fixed conversion price of $0.09 per share and carried an interest
rate of 10%.  The convertible notes mature in July and August 2012.  We also issued those investors five year
warrants to purchase 3,973,957 shares of common stock at $0.125 per share.



We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We are amortizing this discount
using the effective interest method over the term of the note.



At June 30, 2012, the outstanding principal balance was $357,655
and interest payable on these notes totaled $33,204.



17





SEPTEMBER 2011 CONVERTIBLE NOTES



On September 23, 2011, we entered into a Subscription
Agreement with two accredited investors (the “Purchasers”) providing for the issuance and sale of
convertible promissory notes and corresponding warrants in the aggregate principal amount
of $253,760. The warrants carried a five-year term to purchase an aggregate of 3,625,143 shares of our
common stock at an exercise price of $0.10 per share. The convertible promissory notes do not bear an interest
rate and mature on September 23, 2012.  The aggregate net cash proceeds to us were $175,000, the balance of the
principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes are
convertible at the option of the holders into shares of our common stock at a price per share equal to $0.07. Subject to
adjustments as described in the notes, the conversion price may not be more than $0.07. There are no registration
requirements with respect to the shares of common stock underlying the notes or the warrants.



We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $168,804 discount against the principal of the notes. We are amortizing this discount
using the effective interest method over the term of the note.



In March 2012, following the six month anniversary of the note
funding, one of the note holders converted $15,000 of principal into common stock and in the three months ended June 30, 2012,
that note holder converted an additional $15,000 of principal into common stock.



At June 30, 2012, the outstanding principal balance was $223,760
and there was no accrued interest as these notes do not bear interest.



NOVEMBER 2011 CONVERTIBLE NOTES



In November 2011, we raised $525,000 in 5% Original Issue Discount
Unsecured Convertible Debentures from five accredited investors pursuant to which the investors purchased an aggregate principal
amount of $525,000 for an aggregate purchase price of $500,000. The debentures bear interest at 20% per annum and matured on April
20, 2012. The debentures will be convertible at the option of the holders at any time into shares of our common stock, at a conversion
price equal to $0.0779, subject to adjustment. In connection with the debentures, the purchasers received warrants to purchase
3,369,706 shares of our common stock. The warrants are exercisable for a period of five years from the date of issuance at an exercise
price of $0.11, subject to adjustment.



Until December 31, 2012, upon any proposed issuance by us of
our common stock or equivalents (or a combination thereof as defined in the subscription agreement) for cash consideration, the
purchasers may elect, in their sole discretion, to exchange all or some of the debentures then held by such purchaser for any securities
issued in a subsequent financing on a $1.00 for $1.00 basis, provided, however, this right shall not apply with respect to (i)
an Exempt Issuance (as defined in the debenture) or (ii) an underwritten public offering of our common stock.



A Financial Industry Regulatory Authoristy (FINRA) registered
broker-dealer was engaged as placement agent in connection with the transaction. We paid the placement agent a cash fee in the
amount of $50,000 (representing a 8% sales commission and a 2% unaccountable expense allowance) and issued the placement agent
or its designees warrants to purchase an aggregate of 808,729 shares of common stock at $0.11 per share. The warrants issued to
the placement agent may be exercised on a cashless basis. In the event the placement agent exercises the warrants on a cashless
basis, we will not receive any proceeds.



During the three months ended June 30, 2012, all of the outstanding
principal balances on these notes and all related accrued interest of $53,803 were converted into common stock.





18





FEBRUARY 2012 CONVERTIBLE NOTES



In February 2012, we entered into a subscription agreement with
five accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased an aggregate principal amount
of $525,000 of 5% Original Issue Discount Unsecured Convertible Debentures for an aggregate purchase price of $500,000 (the “Debenture”).
These subscriptions represent the completion of the $1,000,000 securities offering that was initiated and priced in November 2011
(see above).



The Debentures bear interest at 20% per annum and matured on
April 20, 2012. The Debentures will be convertible at the option of the holders at any time into shares of our common stock, at
a conversion price equal to $0.0779, subject to adjustment. In connection with the subscription agreement, the Purchasers received
warrants to purchase 3,369,707 shares of our common stock (the “Warrants”). The Warrants are exercisable for a period
of five years from the date of issuance at an exercise price of $0.11 per share, subject to adjustment. Each Purchaser may exercise
such Purchaser’s Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered
pursuant to an effective registration statement. In the event the Purchasers exercise the Warrants on a cashless basis, we will
not receive any proceeds. The conversion price of the Debenture and the exercise price of the Warrants are subject to customary
adjustment provisions for stock splits, stock dividends, recapitalizations and the like.



Until December 31, 2012, upon any proposed issuance by us of
our Common Stock or Common Stock Equivalents (or a combination thereof as defined in the subscription agreement) for cash consideration
(the “Subsequent Financing”), a Purchaser may elect, in its sole discretion, to exchange all or some of the Debenture
then held by such Purchaser for any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis, provided, however,
this right shall not apply with respect to (i) an Exempt Issuance (as defined in the Debenture) or (ii) an underwritten public
offering of our common stock.



Each Purchaser has contractually agreed to restrict its ability
to exercise the Warrant and convert the Debenture such that the number of shares of our common stock held by the Purchaser and
its affiliates after such conversion or exercise does not exceed 4.99% of our then issued and outstanding shares of common stock.



The full principal amount of the Debenture is due upon a default
under the terms of the Debenture. The Debenture is a general unsecured debt obligation of ours arising other than in the ordinary
course of business which constitutes a direct financial obligation of the Company.



A FINRA registered broker-dealer was engaged as placement agent
in connection with the transaction.  We paid the placement agent a cash fee in the amount of $50,000 (representing an
8% sales commission and a 2% unaccountable expense allowance) and issued the placement agent or its designees warrants to purchase
an aggregate of 815,774 shares of common stock at $0.11 per share. The warrants issued to the placement agent may be exercised
on a cashless basis. In the event the placement agent exercises the warrants on a cashless basis, we will not receive any proceeds.



At June 30, 2012, the outstanding principal balance on these
note was $525,000 and was in default and the interest payable on these notes totaled $38,370.



19





LAW FIRM NOTE



On March 22, 2012, we entered into a Promissory Note with our
corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm. The Promissory
Note has a maturity date of December 31, 2012 and bears interest at five percent per annum.  The note is convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $0.08 per share.  This ability of the holder to convert
became exercisable upon the next amendment of the Articles of Incorporation increasing the authorized shares of our common stock
to a number greater than 250,000,000.  As that increase in the authorized number of shares of our common stock was approved
by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June
30, 2012.



At June 30, 2012, the outstanding principal balance on this
note was $75,000 and the interest payable on this note totaled $1,042.



NOTE 6. EQUITY TRANSACTIONS





On April 5, 2012, we completed a unit subscription agreement
with one accredited investor (the “Purchaser”)  pursuant to which the Purchaser purchased an additional $200,000
for an aggregate amount of $500,000 (the "Subscription Amount") of units (the "Units" and each a "Unit"),
with each Unit consisting of (i) one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price
per share of $0.08, of the Registrant and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall
equal (a) fifty percent of the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise
price of $0.125 per Warrant Share, (each, a “Warrant” and collectively, the “Warrants”). Based on the foregoing,
Units consisting of 2,500,000 shares of Common Stock and Warrants to purchase 1,250,000 shares of Common Stock were issued on April
5, 2012.



The Warrants are exercisable for a period of seven years from
the date of issuance at an exercise price of $0.125, subject to adjustments for stock splits, stock dividends, recapitalizations
and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are
not then registered pursuant to an effective registration statement. In the event the Purchaser exercises the Warrant on a cashless
basis, we will not receive any proceeds.  There are no registration rights with respect to the Warrants or the Warrant
Shares.



On June 19, 2012, we completed a unit subscription agreement
with seven accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased $592,000 of
units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par value
$0.001 per share (the “Common Stock”) at a price per share of $0.072 of the Registrant and (ii) a warrant to purchase
such number of shares of Common Stock of the Company as shall equal (a) fifty percent of the Subscription Amount divided by
(b) $0.072 (the "Warrant Shares") at an exercise price of $0.108 per Warrant Share, (each, a “Warrant” and
collectively, the “Warrants”).



On June 26, 2012, we completed a unit subscription agreement
with one accredited investor (the “Purchaser”)  pursuant to which the Purchaser purchased $10,000 of units
(the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par value $0.001
per share (the “Common Stock”) at a price per share of $0.072, of the Registrant and (ii) a warrant to purchase such
number of shares of Common Stock of the Company as shall equal (a) fifty percent of the Subscription Amount divided by (b)
$0.072 (the "Warrant Shares") at an exercise price of $0.107 per Warrant Share, (each, a “Warrant” and collectively,
the “Warrants”).



During the three months ended June 30, 2012, we issued 10,086,552
shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full conversion of principal
and interest of several notes payable in an aggregate amount of $762,467 at an average conversion price of $0.08 per share based
upon the conversion formulae in the respective notes.



During the three months ended June 30, 2012, we issued 116,000
shares of restricted common stock to settle past due accrued interest that we recorded as non-cash interest expense of $11,846.



During the three months ended June 30, 2012, we issued 1,412,894
restricted shares of common stock to service providers for investor relations valued at $124,182 based upon the fair value of the
shares issued. The average issuance price on the restricted share issuances was approximately $0.09 per share.









20





During the three months ended June 30, 2012, we issued 10,202,552
shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full conversion of principal
and interest of several convertible notes payable in an aggregate amount of $774,312 at an average conversion price of $0.08 per
share based upon the conversion formulae in the respective notes.



During the three months ended June 30, 2012, we issued 1,412,894
restricted shares of common stock to service providers for investor relations valued at $124,182 based upon the fair value of the
shares issued. The average issuance price on the restricted share issuances was approximately $0.09 per share.



NOTE 7. ACCRUED LIQUIDATED DAMAGES



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 we will become
obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated.



We have entered into registration payment arrangements in connection
with certain financing arrangements, pursuant to which we raised an approximate aggregate amount of $2,020,000, that require us
to register the shares of common stock underlying the convertible debt and warrants issued in these financing transactions. Under
these agreements we are liable for liquidated damages to the investors if we fail to file and/or maintain effective registration
statements covering the specified underlying shares of common stock as noted below:



| | • | With respect to a $1,000,000 financing agreement – damages accrue at a rate of 1% - 1.5% per month until such time as the underlying shares of common stock would have been eligible for sale under Rule 144.                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | With respect to financing agreements totaling $715,000 – damages accrue at a rate of 2% per month, subject to an aggregate maximum liquidated damages amount of $150,000.                                                                                                   
| | • | With respect to equity investments totaling $305,000 – damages accrue at a rate of 2% per month until the expiration dates of warrants issued in connection with this financing, which range from December 31,2010 through February 8, 2011 and are payable in common stock.



Since we have either failed to file, or failed to maintain the
registration obligations under these agreements, as of June 30, 2012 we have accrued estimated aggregate liquidated damages of
$437,800 in connection with the liquidated damage provisions of these agreements, which we believe represents our maximum exposure
under these provisions.  Accordingly, we do not expect to accrue any further liquidated damages in connection with these
agreements.  The actual amount of liquidated damages paid, if any, may differ from our estimates as it is our intention
to negotiate with the investors the settlement of liquidated damages due and, as such, the ultimate amounts we may actually pay
may be less than the amount currently accrued.



NOTE 8. OTHER CURRENT LIABILITIES



At June 30, 2012 and March 31, 2012, our other current liabilities
were comprised of the following items:



|                                |  | June 30,
2012 |           | March 31,
2012
|------------------------------- |  | ------------- | --------- | --------------
|Accrued interest                |  | $             | 861,248   |               
|Accrued legal fees              |  |               | 179,465   |               
|Deferred rent                   |  |               | 5,891     |               
|Other                           |  |               | 114,977   |               
|Total other current liabilities |  | $             | 1,161,581 |               



21





As of the date of this report, various promissory and convertible
notes payable in the aggregate principal amount of $2,390,500 (as identified in Notes 4 and 5 above) have reached maturity and
are past due. We are continually reviewing other financing arrangements to retire all past due notes. At June 30, 2012, we had
accrued interest in the amount of $768,709 associated with these defaulted notes in accrued liabilities payable (see Notes 4 and
5).



NOTE 9. FAIR VALUE MEASUREMENTS





We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES"
(“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial
recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring
basis for any period reported.





ASC 820 requires that assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial
and non-financial assets based on the following fair value hierarchy:



Level 1: Quoted market prices in active markets for identical
assets or liabilities.



Level 2: Observable market based inputs or unobservable inputs
that are corroborated by market data.



Level 3: Unobservable inputs that are not corroborated by market
data.



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.



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.



Our fair value measurements at the June 30, 2012 reporting date
are classified based on the valuation technique level noted in the table below:





|Description            |  | June 30,
        2012 |           |  | Quoted Prices
        in Active Markets for
        (Level 1) |   |    | Significant Other Observable
        (Level 2) |  |   | Significant
        Unobservable
        (Level 3) | 
|---------------------- |  | --------------------- | --------- |  | ------------------------------------------------------------- | - | -- | ---------------------------------------------- |  | - | -------------------------------------------------- | 
|Derivative Liabilities |  | $                     | 2,874,472 |  |                                                               | $ | -- |                                                |  | $ | --                                                 | 
|Total Assets           |  | $                     | 2,874,472 |  |                                                               | $ | -- |                                                |  | $ | --                                                 | 













22





The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, in connection with our warrant and embedded conversion option derivative
instruments utilizing the Binomial Lattice option pricing model:





|                        | Three Months Ended June 30, 2012
|----------------------- | --------------------------------
|Risk free interest rate | 0.09% - 0.60%                   
|Average expected life   | 0.02 – 4.2 years                
|Expected volatility     | 76.0% - 102.0%                  
|Expected dividends      | None                            





The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the three months ended June 30, 2012:







|                       |  | April 1, 2012 |           | Recorded New Derivative Liabilities |  | Change in estimated fair value recognized in results of operations |   | Reclassification of Derivative Liability to Paid  in capital |  | June 30, 2012
|---------------------- |  | ------------- | --------- | ----------------------------------- |  | ------------------------------------------------------------------ | - | ------------------------------------------------------------ |  | -------------
|                       |  |               |           |                                     |  |                                                                    |   |                                                              |  |              
|Derivative liabilities |  | $             | 3,588,615 |                                     |  | $                                                                  | – |                                                              |  | $            







The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the three months ended June 30, 2011:



|                       |  | April 1, 2011 |           | Recorded New Derivative Liabilities |  | Change in estimated fair value recognized in results of operations |         | Reclassification of Derivative Liability to Paid in capital |  | June 30, 2011
|---------------------- |  | ------------- | --------- | ----------------------------------- |  | ------------------------------------------------------------------ | ------- | ----------------------------------------------------------- |  | -------------
|                       |  |               |           |                                     |  |                                                                    |         |                                                             |  |              
|Derivative liabilities |  |               | 2,002,896 |                                     |  | $                                                                  | 939,136 |                                                             |  | $            









The fair value of derivative liabilities that we recorded in
the three months ended June 2010 was related to the restructuring of the Amended and Restated Convertible Notes (see Note 5) and
was based upon an independent valuation report.



23





NOTE 10. STOCK COMPENSATION



The following tables summarize share-based compensation expenses
relating to shares and options granted and the effect on basic and diluted loss per common share during the three months ended
June 30, 2012 and 2011:



|                                                           |  | June 30, 2012 |         | June 30, 2011
|---------------------------------------------------------- |  | ------------- | ------- | -------------
|Vesting of Stock Options                                   |  | $             | 52,794  |              
|Incremental fair value of option Modifications             |  |               | 19,838  |              
|Vesting Expense Associated with CEO Restricted Stock Grant |  |               | 96,667  |              
|Direct Stock Grants                                        |  |               | –       |              
|Total Stock-Based Compensation Expense                     |  | $             | 169,299 |              
|                                                           |  |               |         |              
|Basic and diluted loss per common share                    |  | $             | (0.00   | )            





All of the stock-based compensation expense recorded during
the three months ended June 30, 2012 and 2011, which totaled $169,299 and $224,031, respectively, is included in payroll and related
expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during
the three months ended June 30, 2012 had no impact on basic and diluted loss per common share and the stock-based compensation
expense recorded during the three months ended June 30, 2011 also had no impact on basic and diluted loss per common share .



In March 2012, our Chief Executive Officer and our Chief Financial
Officer agreed to suspend the exercise of up to 12,588,243 of their stock options, which allowed us to utilize the shares underlying
those stock options in capital raising activities while we presented our stockholders with a proposal to increase the number of
authorized shares from 250,000,000 to 500,000,000. That proposal was approved by our stockholders at our Special Stockholders’
Meeting on June 4, 2012. Following that approval we extended their stock options by the 70 days, which equaled the number of days
that they had unreserved their shares. We valued the change in fair value of their vested stock options due to this extension,
and based on the change in fair value, recorded an increase to our stock based compensation expense in the quarter ended June 30,
2012 of $19,838. For their unvested options, we recorded an increase to fair value of $5,100, which will be expensed over the remaining
vesting period of those options.





We review share-based compensation on a quarterly basis for
changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting
the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments for the three months ended June 30, 2012 was insignificant.



The expected volatility is based on the historic volatility.
The expected life of options granted is based on the "simplified method" as described in the SEC's guidance due to changes
in the vesting terms and contractual life of current option grants compared to our historical grants.



We did not issue any stock option grants in the three months
ended June 30, 2012 nor in the three months ended June 30, 2011.



Options outstanding that have vested and are expected to vest
as of June 30, 2012 are as follows:



|                 |  | Number of Shares |            | Weighted Average Exercise Price |  | Weighted Average Remaining Contractual Term in Years
|---------------- |  | ---------------- | ---------- | ------------------------------- |  | ----------------------------------------------------
|                 |  |                  |            |                                 |  |                                                     
|Vested           |  |                  | 17,478,690 |                                 |  | $                                                   
|Expected to vest |  |                  | 1,950,003  |                                 |  | $                                                   
|Total            |  |                  | 19,428,693 |                                 |  |                                                     



24









A summary of stock option activity during the three months ended
June 30, 2012 is presented below:



|                                            |  | Amount |            |  | Range of Exercise
        Price |   |              | Weighted Average
        Exercise
        Price | 
|------------------------------------------- |  | ------ | ---------- |  | ------------------------------- | - | ------------ | ----------------------------------------------- | 
|Stock options outstanding at March 31, 2012 |  |        | 19,428,693 |  |                                 | $ | 0.21 - $0.41 |                                                 | 
|Exercised                                   |  |        | --         |  |                                 | $ | --           |                                                 | 
|Issued                                      |  |        | --         |  |                                 | $ | --           |                                                 | 
|Cancelled/Expired                           |  |        | --         |  |                                 | $ | --           |                                                 | 
|Stock options outstanding at June 30, 2012  |  |        | 19,428,693 |  |                                 | $ | 0.21 - $0.41 |                                                 | 
|Stock options exercisable at June 30, 2012  |  |        | 17,478,690 |  |                                 | $ | 0.21 - $0.41 |                                                 | 



At June 30, 2012, there was approximately $670,915 of unrecognized
compensation cost related to share-based payments, including our Chief Executive Officer’s restricted stock grant, which
is expected to be recognized over a weighted average period of 1.12 years.



On June 30, 2012, our stock options had a negative intrinsic
value since the closing price on that date of $0.09 per share was below the weighted average exercise price of our stock options





NOTE 11.  WARRANTS



A summary of warrant activity during the three months ended
June 30, 2012 is presented below:



|                                       |  | Amount |            |  | Range of Exercise
        Price |   |             | Weighted Average
        Exercise
        Price | 
|-------------------------------------- |  | ------ | ---------- |  | ------------------------------- | - | ----------- | ----------------------------------------------- | 
|Warrants outstanding at March 31, 2012 |  |        | 59,807,849 |  |                                 | $ | 0.10 - 0.25 |                                                 | 
|Exercised                              |  |        | --         |  |                                 | $ | --          |                                                 | 
|Issued                                 |  |        | 7,048,481  |  |                                 | $ | 0.107-0.125 |                                                 | 
|Cancelled/Expired                      |  |        | --         |  |                                 | $ | --          |                                                 | 
|Warrants outstanding at June 30, 2012  |  |        | 66,856,330 |  |                                 | $ | 0.10 - 0.25 |                                                 | 
|Warrants exercisable at June 30, 2012  |  |        | 66,856,330 |  |                                 | $ | 0.10 - 0.25 |                                                 | 



The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models
at, and during the three months ended June 30, 2012:



|Risk free interest rate | 0.86% - 1.56%
|----------------------- | -------------
|Average expected life   | 6.5 years    
|Expected volatility     | 91.5 – 94.3% 
|Expected dividends      | None         



NOTE 12. DARPA CONTRACT AND RELATED REVENUE RECOGNITION



As discussed in Note 1, we entered into a government contract
with DARPA on September 30, 2011 and commenced work on such contract in October 2011. Only the base year (year one contract)
is effective for the parties. Years two through five are subject to DARPA exercising their option to enter into contracts
for those years.  The year one contract contains eight milestones of which five have been achieved during the fiscal
year ended March 31, 2012. In June 2012, we invoiced the US Government for the sixth milestone under our DARPA contract in the
amount of $216,747 and received that payment. The details of that milestone were as follows:



Milestone 2.2.2.3 - Perform preliminary quantitative real time
PCR to measure viral load, and specific DNA or RNA targets. The milestone payment was $216,747. Management considers this milestone
to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able to measure viral load of one or more targets as part of our submission for approval. The
report was accepted by the contracting officer's representative and the invoice was submitted thereafter.



25





NOTE 13. COMMITMENTS AND CONTINGENCIES



LEGAL MATTERS





From time to time, claims are made against us in the ordinary
course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or
more products or engaging in other activities.



The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. Other than as mentioned here,
we are not presently a party to any pending or threatened legal proceedings.



On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands
company ("Gemini"), filed a complaint against the Company in the Supreme Court of the State of New York, County of New
York, , entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012 (the "Complaint"). In
the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's common stock.
The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to Gemini
on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal
and interest under the note into shares of the Company's common stock.   Complaint also includes allegations that the
Company has failed to issue shares upon the presentation of an exercise notice under a warrant originally issued to Gemini on November
22, 2010. The Company's answer to the Complain is due on August 17, 2012.  The Company believes, among other things, that
Gemini’s claims are barred because it received and accepted a payment the Company made in full settlement of Gemini’s
claims against the Company and Gemini was informed that acceptance of the payment would settle and discharge the disputed claim.
The Company does not believe that additional shares are due to Gemini under either the note or the warrant due to, among other
things, a share issuance limitation agreed to by both Gemini and the Company. The Company intends to vigorously defend the lawsuit.





LEASES



In October 2009, we entered into two new leases for office and
laboratory space. The terms of the new leases are three years and two years, respectively, and the initial base lease payments
are $6,475 per month and $2,917 per month, respectively.



NOTE 14. SUBSEQUENT EVENTS





Management has evaluated events subsequent to June 30, 2012
through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange
Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.



In July 2012, we issued 461,409 shares of common stock to the
holder of a $25,000 October & November 2009 10% Convertible Note (See Note 5) in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and
one-half of a stock purchase warrant on June 29, 2012 (See Note 6). As part of that structure, the noteholder also received seven
year warrants to purchase 230,705 share of common stock at a price of $0.107 per share.



In July 2012, we issued 142,666 shares to a noteholder that
were a one-time “true-up” issuance related to a conversion that was made in the June 2012 period. This “true-up”
issuance was per the terms of the agreement and reflected the price per share that noteholder received in their share liquidation.
This issuance brought their effective overall conversion price down from $0.07 per share to $0.06 per share.



In August 2012, we issued 946,887 shares of common stock to
the holders of two convertible notes for the conversion of $55,000 of principal for an overall conversion rate of $0.06 per share
per the conversion formulae in the convertible notes.



In July 2012, we filed a registration statement on Form S-8
for the purpose of registering 5,000,000 common shares issuable under the 2010 Stock Plan under the Securities Act of 1933.



On July 24, 2012, we expanded our Board of Directors by an additional
two seats and appointed two new outside directors to fill those seats.

In July 2012, our Board of Directors approved a new Board Compensation
Program (the “New Program”), which modifies and supersedes the 2005 Directors Compensation Program (the “2005
Program”) that was previously in effect. Under the New Program, in which only non-employee Directors may participate, an
eligible Director will receive a grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued
at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the
first day of the fiscal year; however for the new non-employee directors, the exercise price for this initial grant, $0.076 per
share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their
appointment (July 24, 2012). These options will have a term of ten years and will be fully vested upon grant. In addition, each
existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such
grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the date of Mr. Ward's and Mr. Wornham's appointment (July 24, 2012).



At the beginning of each fiscal year, each Director eligible
to participate in the New Program also will receive a grant of $20,000 worth of options valued at the exercise price based on the
average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year. In
addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each committee meeting attended
and $1,000 for each formal Board meeting attended.



The New Program eliminates the following features of the 2005
Program: (1) the annual payment of $10,000 in cash compensation and (2) the granting of options to Directors based on a percentage
of the issued and outstanding common stock of the Registrant.





26





ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



The following discussion of our financial condition and results
of operations should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements
and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that
involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.



FORWARD LOOKING STATEMENTS



All statements, other than statements of historical fact, included
in this Form 10-Q are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended ("the Securities Act"), and Section 21E of the Exchange Act. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance,
or achievements of Aethlon Medical, Inc. ("we", "us" or "the Company") to be materially different
from any future results, performance, or achievements expressed or implied by such forward-looking statements contained in this
Form 10-Q. Such potential risks and uncertainties include, without limitation, completion of our capital-raising activities, FDA
approval of our products, other regulations, patent protection of our proprietary technology, product liability exposure, uncertainty
of market acceptance, competition, technological change, and other risk factors detailed herein and in other of our filings with
the Securities and Exchange Commission. The forward-looking statements are made as of the date of this Form 10-Q, and we assume
no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected
in such forward-looking statements.



THE COMPANY



We are 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 ADAPTTM (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.
Approval to embark on human trials is still needed to reach commercial viability of the Hemopurifier® and approval by the U.S.
Food and Drug Administration ("FDA"). Successful outcomes of human trials will be required by the regulatory agencies
of certain foreign countries where we intend to sell this device. We have submitted an Investigational Device Exemption ("IDE")
to the FDA. 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.



WHERE YOU CAN FIND MORE INFORMATION



We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with the SEC. The reports, information statements and
other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 100 F Street,
N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located
at 8910 University Center Lane, Suite 660, San Diego, CA 92122. Our phone number at that address is (858) 459-7800. Our Web site
is http://www.aethlonmedical.com.



27







RESULTS OF OPERATIONS



THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 2011



Revenues



We recorded government contract revenue of $216,747 in the three
months ended June 30, 2012.  This revenue arose from work performed under our government contract.  On September
30, 2011, we entered into a contract with the United States of America, issued by SPAWAR Systems Center Pacific, pursuant to a
contract award from the Defense Advanced Research Projects Agency (“DARPA”). Under the DARPA award, we have been engaged
to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death
of combat-injured soldiers.  The award from DARPA is a fixed-price contract with potential total payments to us of $6,794,389
over the course of five years, including payments of up to $1,975,047 in the first year. Fixed price contracts require the achievement
of multiple, incremental milestones to receive the full award during each year of the contract.  Under the terms of the
contract, we will perform certain incremental work towards the achievement of specific milestones against which we will invoice
the government for fixed payment amounts.  Assuming all such work is performed according to the contract terms, we will
receive up to $1,975,047 of contract payments during the first twelve months of the contract with the aggregate payment amounts
in years two through five varying between approximately $775,000 and $1.6 million. DARPA has the option to enter into the contract
for years two through five.  Only the contract related to the $1,975,047 has been formally entered into as of the date
of this Form 10-Q filing. The milestones are comprised of planning, engineering and clinical targets, the achievement of which
in some cases will require the participation and contribution of third party participants under the contract.  There
can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction of the government
and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues during any year
of the contract term.  We commenced work under the contract in October 2011.



As of June 30, 2012, we have invoiced for and received six milestone
payments under the DARPA contract totaling $1,574,936.



Operating Expenses





Consolidated operating expenses for the three months ended June
30, 2012 were $1,207,553 in comparison with $1,032,480 for the comparable quarter a year ago.  This increase of $175,073,
or 17.0%, was due to increases in professional fees of $108,927, in general and administrative expenses of $61,984 and in payroll
and related expenses of $4,162.





The $108,927 increase in our professional fees was primarily
due to increases in our legal expenses of $98,896, which increase in turn was related to the Gemini litigation and work on resolving
our DTC chill, in our business development expenses of $15,806.



The $61,984 increase in general and administrative expenses
was primarily due to $61,890 in DARPA-related general and administrative expenses.



The $4,162 increase in payroll and related expenses
was primarily due to a reduction in stock-based compensation of $54,732, which was partially offset by increased payroll of $58,894
due to hiring three additional scientists for work under our DARPA contract. We also recorded a $19,838 non-cash charge related
to the extension of the expiration dates in certain stock options held by our officers in the June 2012 period with no comparable
expense in the June 2011 period.



Other Expense (Income)



Other expense (income) consist primarily of the change in the
fair value of our derivative liability, other expense and interest expense. Other expense (income) for the three months ended June
30, 2012 were other expense of $25,978 in comparison with other expense of $1,553,421 for the comparable quarter a year ago.









28









Change in Fair Value of Derivative Liability



Both periods include changes in the fair value of derivative
liability. For the three months ended June 30, 2012, the change in the estimated fair value of derivative liability was a gain
of $687,600 and for the three months ended June 30, 2011, the change in estimated fair value was a gain of $491,827.





Interest Expense



Interest expense was $688,645 for the three months ended June
30, 2012 compared to $1,685,914 in the corresponding prior period, a decrease of $997,269. The various components of our interest
expense are shown in the following table:



|                                         |  | Quarter Ended |         | Quarter Ended |  |       
|---------------------------------------- |  | ------------- | ------- | ------------- |  | ------
|                                         |  | 6/30/12       |         | 6/30/11       |  | Change
|Interest Expense                         |  | $             | 192,576 |               |  | $     
|Amortization of Deferred Financing Costs |  |               | 98,051  |               |  |       
|Non-Cash Interest Expense                |  |               | 11,846  |               |  |       
|Amortization of Note Discounts           |  |               | 386,172 |               |  |       
|Total Interest Expense                   |  | $             | 688,645 |               |  | $     



As noted in the above table, the two most significant factors
in the $997,269 decrease in interest expense were (a) the $549,194 reduction in the amortization of debt discounts that was largely
the result of the completion of the discount amortization on the majority of our convertible notes prior and (b) a $526,890 reduction
in our non-cash interest expense that primarily related to a $538,736 adjustment to derivative liabilities that related to the
fair value of the April 2011 convertible notes in the June 2011 period with no comparable expense in the June 2012 period.





Other



The three months ended June 30, 2011 also contained a $360,186 charge relating to the extinguishment
of a convertible note and warrant and to the formation of a new note in that amount of $360,185 as a result of that extinguishment.
The three months ended June 30, 2012 contained a $24,978 loss on debt conversion that related to the conversion of $60,185 of
a note payable to equity.



Net Loss





As a result of the increased expenses noted above, we recorded
a consolidated net loss of approximately $1,017,000 and $2,586,000 for the quarters ended June 30, 2012 and 2011, respectively.



Basic and diluted loss per common share were ($0.01) for the
three month period ended June 30, 2012 compared to ($0.03) for the period ended June 30, 2011.



LIQUIDITY AND CAPITAL RESOURCES



At June 30, 2012, we had a cash balance of $596,058 and a working
capital deficit of $8,531,794. This compares to a cash balance of $143,907 and a working capital deficit of $9,438,279 at March
31, 2012. Between July 1, 2012 and August 10, 2012, we have not raised any funds from private equity or debt transactions. Our
cash at June 30, 2012 plus additional funds raised to date subsequent to June 30, 2012 are not sufficient to meet our funding requirements
during the next twelve months. Significant additional financing must be obtained in order to provide a sufficient source of operating
capital and to allow us to continue to operate as a going concern.





We do not expect revenue from operations will be sufficient
to satisfy our funding requirements in the near term, and accordingly, our ability to continue operations and meet our cash obligations
as they become due and payable is expected to depend for at least the next several years on our ability to sell securities, borrow
funds or a combination thereof. Future capital requirements will depend upon many factors, including progress with pre-clinical
testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, as well as our ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative cash flows and
net losses for the foreseeable future.



29





Should the U.S. Government elect not to exercise the options
for years two through five of our DARPA contract, the effects may be material to us. The loss of revenues from the DARPA contract
would have a material impact on our revenues, operating cash flows and liquidity.



Beyond the immediate future, we currently believe that the following
four areas may generate revenue for us:



| | (1) | Developing future products using the Aethlon ADAPTTM system with drug industry collaborators.  Revenues in this
area could come from product development fees, fees from research, regulatory and manufacturing support or from downstream royalties;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Applying for and winning additional U.S. Government grant or contract income;
| | --- | -----------------------------------------------------------------------------

| | (3) | Licensing or selling our ELLSA research diagnostic tools that identify and quantify exosomes; and
| | --- | -------------------------------------------------------------------------------------------------

| | (4) | Commercializing the Hemopurifier® in India following a successful result in our Hepatitis-C-oriented
clinical trial currently being conducted at the Medanta Medicity Institute (Medicity) in that country. Medicity’s Institutional
Review Board has agreed to allow compassionate usage of the Hemopurifier® for individuals who previously failed or subsequently
relapsed standard-of-care drug regimens. In addition to offering Hemopurifier® therapy to the citizens of India, HCV-infected
individuals from the United States, European Union and other regions of the world may pursue treatment through the expanded access
program at Medicity. Details related to treatment protocol, inclusion criteria, patient approval processes and therapy pricing
are anticipated to be finalized with Medicity later on in 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash Flows



Cash flows from operating, investing and financing activities,
as reflected in the accompanying Condensed Consolidated Statements of Cash Flows, are summarized as follows (in thousands):



|                                |  | (In thousands) For the three months ended
|------------------------------- |  | -----------------------------------------
|                                |  | June 30, 2012                            
|Cash (used in) provided by:     |  |                                          
|Operating activities            |  | $                                        
|Investing activities            |  |                                          
|Financing activities            |  |                                          
|Net increase (decrease) in cash |  | $                                        



NET CASH FROM OPERATING ACTIVITIES. We used cash in our operating
activities due to our losses from operations. Net cash used in operating activities was approximately $320,000 in the three months
ended June 30, 2012 compared to net cash used in operating activities of approximately $540,000 in the three months ended June
30, 2011, a decrease of $220,000.  The $220,000 decrease was primarily due to receipts under our DARPA contract in the
June 2012 period, which were offset for the most part by expenses under that contract.



NET CASH FROM INVESTING ACTIVITIES. During the three months
ended June 30, 2012, we did not have any investing activities.  During the three months ended June 30, 2011, we used
approximately $2,000 in cash for purchases of equipment.



NET CASH FROM FINANCING ACTIVITIES. Net cash generated from
financing activities increased from $540,000 in the three months ended June 30, 2011 to approximately $772,000 in the three months
ended June 30, 2012. Included in net cash provided by financing activities in the 2012 period was $802,000 in proceeds from the
issuance of common stock which was partially offset by approximately $30,000 in repayments of notes payable and related accrued
interest in cash.  In the 2011 period, we received $340,000 in proceeds from the issuance of convertible notes payable
and $200,000 from the collection of notes receivable associated with certain convertible note transactions.





An increase in working capital during the three months ended
June 30, 2012 in the amount of approximately $906,000 changed our negative working capital position to approximately ($8,532,000)
at June 30, 2012 from a negative working capital of approximately ($9,438,000) at March 31, 2012.  The most significant
factors in the increase in working capital noted above were a decrease in current liabilities of approximately $920,000 and an
increase in cash of approximately $452,000, which were partially offset by the collection of accounts receivable of $400,114.





At the date of this filing, we plan to invest significantly
into purchases of our raw materials and into our contract manufacturing arrangement subject to successfully raising additional
capital.



30





CRITICAL ACCOUNTING POLICIES



The preparation of condensed consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires the Company to make a number
of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of expenses during
the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other
factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results
may differ from these estimates under different future conditions.



We believe that the estimates and assumptions that are most
important to the portrayal of our financial condition and results of operations, in that they require the most difficult, subjective
or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting policies
relate to revenue recognition, measurement of stock purchase warrants issued with notes payable, beneficial conversion feature
of convertible notes payable, impairment of intangible assets and long lived assets, stock compensation, and the classification
of warrant obligations, and evaluation of contingencies. We believe estimates and assumptions related to these critical accounting
policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences,
there could be a material impact on our future financial condition or results of operations.



There have been no changes to our critical accounting policies
as disclosed in our Form 10-K for the year ended March 31, 2012.



OFF-BALANCE SHEET ARRANGEMENTS



We have no obligations required to be disclosed herein as off-balance
sheet arrangements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.



As a Smaller Reporting Company as defined by rule 12b-2 of the
Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are
not required to provide the information requested by this item.



ITEM 4. CONTROLS AND PROCEDURES.



DISCLOSURE CONTROLS AND PROCEDURES





Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of a date as of
the end of the period covered by this Quarterly Report.





Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are not effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file
or submit under the Exchange Act and are not effective in ensuring that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



There have been no changes in our internal control over financial
reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.



31





PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.



From time to time, claims are made against us in the ordinary
course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or
more products or engaging in other activities.



The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. Other than as set forth here,
we are not presently a party to any pending or threatened legal proceedings.





On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands
company ("Gemini"), filed a complaint against the Company in the Supreme Court of the State of New York, County of New
York, , entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012 (the "Complaint").  In
the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's common stock.
The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to Gemini
on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal
and interest under the note into shares of the Company's common stock.   Complaint also includes allegations that the
Company has failed to issue shares upon the presentation of an exercise notice under a warrant originally issued to Gemini on November
22, 2010. The Company's answer to the Complain is due on August 17, 2012.  The Company believes, among other things, that
Gemini’s claims are barred because it received and accepted a payment the Company made in full settlement of Gemini’s
claims against the Company and Gemini was informed that acceptance of the payment would settle and discharge the disputed claim.
The Company does not believe that additional shares are due to Gemini under either the note or the warrant due to, among other
things, a share issuance limitation agreed to by both Gemini and the Company. The Company intends to vigorously defend the lawsuit.





ITEM 1A. RISK FACTORS.



As a Smaller Reporting Company as defined by rule 12b-2 of the
Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are
not required to provide the information requested by this item.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.



During the quarter ended June 30, 2012, we issued the following
securities which were not registered under the Securities Act of 1933, as amended, and have not been included previously in a Current
Report on Form 8-K. We did not employ any form of general solicitation or advertising in connection with the offer and sale of
the securities described below. In addition, we believe the purchasers of the securities are "ACCREDITED INVESTORS" for
the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities
were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D promulgated
by the SEC under the Securities Act:





32







On June 19, 2012, we completed a unit subscription agreement
(the "Subscription Agreement") with seven accredited investors (the “Purchasers”)  pursuant to
which the Purchasers purchased $592,000 of units (the "Units" and each a "Unit"), with each Unit consisting
of (i) one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price per share of $0.072, of
the Registrant and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall equal (a) fifty percent
of the Subscription Amount divided by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.108 per Warrant
Share, (each, a “Warrant” and collectively, the “Warrants”).



On June 26, 2012, we completed a unit subscription agreement
(the "Subscription Agreement") with one accredited investor (the “Purchaser”)  pursuant to which
the Purchaser purchased $10,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i)
one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price per share of $0.072, of the Registrant
and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall equal (a) fifty percent of the Subscription
Amount divided by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.107 per Warrant Share, (each, a
“Warrant” and collectively, the “Warrants”).



On April 5, 2012, we completed a unit subscription agreement (the "Subscription Agreement")
with one accredited investor (the “Purchaser”)  pursuant to which the Purchaser purchased an additional $200,000
for an aggregate amount of $500,000 (the "Subscription Amount") of units (the "Units" and each a "Unit"),
with each Unit consisting of (i) one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price
per share of $0.08, of the Registrant and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall
equal (a) fifty percent of the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise
price of $0.125 per Warrant Share (each, a “Warrant” and collectively, the “Warrants”). Based on the foregoing,
Units consisting of 2,500,000 shares of Common Stock and Warrants to purchase 1,250,000 shares of Common Stock were issued on April
5, 2012



The Warrants are exercisable for a period of seven years from
the date of issuance at an exercise price of $0.125, subject to adjustments for stock splits, stock dividends, recapitalizations
and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are
not then registered pursuant to an effective registration statement. In the event the Purchaser exercises the Warrant on a cashless
basis, we will not receive any proceeds.  There are no registration rights with respect to the Warrants or the Warrant
Shares.



During the three months ended June 30, 2012, we issued 10,202,552
shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full conversion of principal
and interest of several convertible notes payable in an aggregate amount of $774,312 at an average conversion price of $0.08 per
share based upon the conversion formulae in the respective notes.



During the three months ended June 30, 2012, we issued 1,412,894
restricted shares of common stock to service providers for investor relations valued at $124,182 based upon the fair value of the
shares issued. The average issuance price on the restricted share issuances was approximately $0.09 per share.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



As of the date of this report, various promissory and convertible
notes payable in the aggregate principal amount of $2,390,500 have reached maturity and are past due. We are continually reviewing
other financing arrangements to retire all past due notes. At June 30, 2012, we had accrued interest in the amount of $781,703
associated with these notes payable.





ITEM 4. MINE SAFETY DISCLOSURES.



We have no disclosure applicable to this item.



ITEM 5. OTHER INFORMATION.



Not applicable



33





ITEM 6.  EXHIBITS.



(a) Exhibits. The following documents are filed as part of this
report:





|3.1  | Articles of Incorporation of Aethlon Medical, Inc., as amended (1)                                                                                                                   
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                      
|3.2  | Bylaws of Aethlon Medical, Inc., as amended*                                                                                                                                         
|     |                                                                                                                                                                                      
|4.1  | Form of Common Stock Purchase Warrant dated March 29/April 5, 2012 (2)                                                                                                               
|     |                                                                                                                                                                                      
|4.2  | Form of Common Stock Purchase Warrant dated June 19, 2012 (3)                                                                                                                        
|     |                                                                                                                                                                                      
|10.1 | Form of Unit Subscription Agreement dated March 29/April 5, 2012 (2)                                                                                                                 
|     |                                                                                                                                                                                      
|10.2 | Form of Unit Subscription Agreement dated June 19, 2012 (3)                                                                                                                          
|     |                                                                                                                                                                                      
|31.1 | Certification of Principal Executive Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002*
|     |                                                                                                                                                                                      
|31.2 | Certification of Principal Financial Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002*
|     |                                                                                                                                                                                      
|32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*                               
|     |                                                                                                                                                                                      
|32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*                               
|     |                                                                                                                                                                                      
|101  | Interactive Data Files (4)                                                                                                                                                           





|        |                                    
|------- | -----------------------------------
|101.INS | XBRL Instance Document             
|101.SCH | XBRL Schema Document               
|101.CAL | XBRL Calculation Linkbase Document 
|101.DEF | XBRL Definition Linkbase Document  
|101.LAB | XBRL Label Linkbase Document       
|101.PRE | XBRL Presentation Linkbase Document









* Filed herewith.



| | (1) | Incorporated by reference to the filing of such exhibit with the Company's Annual Report on Form 10-K for the year ended March
31, 2012.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Incorporated by reference to the filing of such exhibit with the Company’s Current Report on Form 8-K dated April 6,
2012.
| | --- | --------------------------------------------------------------------------------------------------------------------------



| | (3) | Incorporated by reference to the filing of such exhibit with the Company’s Current Report on Form 8-K dated June 27,
2012.                                                                                                                                                                                            
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                       
| | (4) | Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will
furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within
the permitted 30-day grace period granted for the first quarterly period in which detailed footnote tagging is required.



|
|







34







SIGNATURES



Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                      | AETHLON MEDICAL, INC. |                         
|--------------------- | --------------------- | ------------------------
|                      |                       |                         
|Date: August 13, 2012 | By:                   | /s/ JAMES B. FRAKES     
|                      |                       | JAMES B. FRAKES         
|                      |                       | CHIEF FINANCIAL OFFICER 
|                      |                       | CHIEF ACCOUNTING OFFICER
|                      |                       |                         

























35