UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

(Mark One)



xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934



For the quarterly period ended June 30,
2012



oTransition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934



For the transition period from __________________
to ______________________.



Commission file number 0-26285



CNS Response, Inc.

(Exact name of registrant as specified in
its charter)



|Delaware                        | 87-0419387         
|------------------------------- | -------------------
|(State or other jurisdiction of | (I.R.S. Employer   
|incorporation or organization)  | Identification No.)



85 Enterprise, Suite 410
Aliso Viejo, CA 92656

(Address of principal executive offices)
(Zip Code)



(949) 420-4400

(Registrant’s telephone number, including
area code)



(Former name, former
address, former fiscal year, if changed since last report)



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 Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).

YesxNoo



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 filer | £                                            | Accelerated filer         | £
|----------------------- | -------------------------------------------- | ------------------------- | -
|Non-accelerated filer   | o(Do not check if smaller reporting company) | Smaller reporting company | S



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 issuer had 1,874,175 shares of common stock, par value $0.001 per share, issued and outstanding.











CNS RESPONSE, INC.



INDEX to form 10-Q





|         |                                                                                                                                     | Page
|-------- | ----------------------------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                                     |     
|PART I   | FINANCIAL INFORMATION                                                                                                               | 3   
|         |                                                                                                                                     |     
|Item 1.  | Financial Statements                                                                                                                | 3   
|         |                                                                                                                                     |     
|         | Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended June 30, 2012 and 2011         | 3   
|         |                                                                                                                                     |     
|         | Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and September 30, 2011                                        | 4   
|         |                                                                                                                                     |     
|         | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011                          | 5   
|         |                                                                                                                                     |     
|         | Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficiency for the nine months ended June 30, 2012 and 2011 | 6   
|         |                                                                                                                                     |     
|         | Notes to Unaudited Condensed Consolidated Financial Statements                                                                      | 7   
|         |                                                                                                                                     |     
|Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                               | 29  
|         |                                                                                                                                     |     
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                                                          | 48  
|         |                                                                                                                                     |     
|Item 4.  | Controls and Procedures                                                                                                             | 48  
|         |                                                                                                                                     |     
|PART II  | OTHER INFORMATION                                                                                                                   | 49  
|         |                                                                                                                                     |     
|Item 1.  | Legal Proceedings                                                                                                                   | 49  
|         |                                                                                                                                     |     
|Item 1A. | Risk Factors                                                                                                                        | 49  
|         |                                                                                                                                     |     
|Item 2.  | Unregistered Sales of Equity Security and Use of Proceeds.                                                                          | 50  
|         |                                                                                                                                     |     
|Item 6.  | Exhibits                                                                                                                            | 50  



2







PART I
FINANCIAL INFORMATION



Item 1. Financial Statements



CNS
RESPONSE, INC.



UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                |  | For the three months ended June 30, |            |   | For the nine months ended June 30, |  
|----------------------------------------------- |  | ----------------------------------- | ---------- | - | ---------------------------------- | -
|                                                |  | 2012                                |            |   | 2011                               |  
|REVENUES                                        |  |                                     |            |   |                                    |  
|Neurometric information services                |  | $                                   | 32,800     |   |                                    | $
|Clinical services                               |  |                                     | 158,000    |   |                                    |  
|                                                |  |                                     | 190,800    |   |                                    |  
|                                                |  |                                     |            |   |                                    |  
|OPERATING EXPENSES                              |  |                                     |            |   |                                    |  
|Cost of neurometric services revenues           |  |                                     | 35,500     |   |                                    |  
|Research                                        |  |                                     | 66,300     |   |                                    |  
|Product development                             |  |                                     | 200,900    |   |                                    |  
|Sales and marketing                             |  |                                     | 226,000    |   |                                    |  
|General and administrative                      |  |                                     | 916,700    |   |                                    |  
|                                                |  |                                     |            |   |                                    |  
|Total operating expenses                        |  |                                     | 1,445,400  |   |                                    |  
|                                                |  |                                     |            |   |                                    |  
|OPERATING LOSS                                  |  |                                     | (1,254,600 | ) |                                    |  
|                                                |  |                                     |            |   |                                    |  
|OTHER INCOME (EXPENSE):                         |  |                                     |            |   |                                    |  
|Interest expense, net                           |  |                                     | (767,400   | ) |                                    |  
|Financing fees                                  |  |                                     | -          |   |                                    |  
|Offering costs                                  |  |                                     | (781,400   | ) |                                    |  
|Gain (Loss) on derivative liabilities           |  |                                     | 6,419,700  |   |                                    |  
|Total other income (expense)                    |  |                                     | 4,870,900  |   |                                    |  
|                                                |  |                                     |            |   |                                    |  
|INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |  |                                     | 3,616,300  |   |                                    |  
|Income taxes                                    |  |                                     | 1,100      |   |                                    |  
|NET INCOME (LOSS)                               |  | $                                   | 3,615,200  |   |                                    | $
|                                                |  |                                     |            |   |                                    |  
|NET INCOME (LOSS) PER SHARE:                    |  |                                     |            |   |                                    |  
|Basic (Note 7)                                  |  | $                                   | 1.93       |   |                                    | $
|Diluted (Note 7)                                |  | $                                   | 0.51       |   |                                    | $
|                                                |  |                                     |            |   |                                    |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:            |  |                                     |            |   |                                    |  
|Basic                                           |  |                                     | 1,874,175  |   |                                    |  
|Diluted                                         |  |                                     | 7,100,407  |   |                                    |  



The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.



3







CNS
RESPONSE, INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                             |  | Unaudited As of June 30, |             |   | As of September 30, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ------------------- | -
|                                                                                                                                                                             |  | 2012                     |             |   | 2011                |  
|ASSETS                                                                                                                                                                       |  |                          |             |   |                     |  
|CURRENT ASSETS:                                                                                                                                                              |  |                          |             |   |                     |  
|Cash                                                                                                                                                                         |  | $                        | 20,400      |   |                     | $
|Accounts receivable (net of allowance for doubtful accounts of $20,200 (unaudited) as of June 30, 2012 and $20,300 September 30, 2011 respectively)                          |  |                          | 33,400      |   |                     |  
|Prepaids and other receivables                                                                                                                                               |  |                          | 77,400      |   |                     |  
|Deferred offering costs                                                                                                                                                      |  |                          | -           |   |                     |  
|Total current assets                                                                                                                                                         |  |                          | 131,200     |   |                     |  
|Furniture & equipment                                                                                                                                                        |  |                          | 24,200      |   |                     |  
|Other assets                                                                                                                                                                 |  |                          | 29,900      |   |                     |  
|TOTAL ASSETS                                                                                                                                                                 |  | $                        | 185,300     |   |                     | $
|                                                                                                                                                                             |  |                          |             |   |                     |  
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                                                     |  |                          |             |   |                     |  
|                                                                                                                                                                             |  |                          |             |   |                     |  
|CURRENT LIABILITIES                                                                                                                                                          |  |                          |             |   |                     |  
|Accounts payable (including amounts due to related parties of $237,600 (unaudited) as of June 30, 2012 and $156,000 as of September 30, 2011)                                |  | $                        | 2,986,900   |   |                     | $
|Accrued liabilities                                                                                                                                                          |  |                          | 129,200     |   |                     |  
|Accrued compensation (including $398,600 (unaudited) and $189,200 to related parties as of June 30, 2012 and September 30, 2011 respectively)                                |  |                          | 630,000     |   |                     |  
|Accrued consulting fees (including $72,000 (unaudited) and $45,000 to related parties as of June 30, 2012 and September 30, 2011 respectively)                               |  |                          | 92,000      |   |                     |  
|Accrued interest                                                                                                                                                             |  |                          | 865,400     |   |                     |  
|Derivative liability                                                                                                                                                         |  |                          | 6,553,000   |   |                     |  
|Promissory Note                                                                                                                                                              |  |                          | 200,000     |   |                     |  
|Senior secured convertible promissory notes-related party (net of discounts $0 (unaudited) and $155,700  as of June 30, 2012 and September 30, 2011 respectively)            |  |                          | 3,023,900   |   |                     |  
|Subordinated secured convertible promissory notes-related party (net of discounts $0 (unaudited) and $1,105,200 as of June 30, 2012 and September 30, 2011 respectively)     |  |                          | 2,500,000   |   |                     |  
|Subordinated secured convertible promissory notes-related party (net of discounts $916,700 (unaudited) and $0 as of June 30, 2012 and September 30, 2011 respectively)       |  |                          | 1,083,300   |   |                     |  
|Unsecured convertible promissory notes-related party (net of discounts $60,000 (unaudited) and $0 as of June 30, 2012 and September 30, 2011 respectively)                   |  |                          | 30,000      |   |                     |  
|Current portion of long-term debt                                                                                                                                            |  |                          | 5,700       |   |                     |  
|Total current liabilities                                                                                                                                                    |  |                          | 18,099,400  |   |                     |  
|                                                                                                                                                                             |  |                          |             |   |                     |  
|LONG-TERM LIABILITIES                                                                                                                                                        |  |                          |             |   |                     |  
|Capital lease                                                                                                                                                                |  |                          | 6,100       |   |                     |  
|Total long-term liabilities                                                                                                                                                  |  |                          | 6,100       |   |                     |  
|TOTAL LIABILITIES                                                                                                                                                            |  |                          | 18,105,500  |   |                     |  
|                                                                                                                                                                             |  |                          |             |   |                     |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                |  |                          | -           |   |                     |  
|                                                                                                                                                                             |  |                          |             |   |                     |  
|STOCKHOLDERS' DEFICIENCY                                                                                                                                                     |  |                          |             |   |                     |  
|Common stock, $0.001 par value; authorized 100,000,000 shares; 1,874,175 and 1,871,352 shares issued and outstanding as of June 30, 2012 and September 30, 2011 respectively |  |                          | 1,900       |   |                     |  
|Additional paid-in capital                                                                                                                                                   |  |                          | 31,824,700  |   |                     |  
|Accumulated deficit                                                                                                                                                          |  |                          | (49,746,800 | ) |                     |  
|Total stockholders' deficiency                                                                                                                                               |  |                          | (17,920,200 | ) |                     |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                                               |  | $                        | 185,300     |   |                     | $



The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.



4







CNS RESPONSE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS



|                                                                            |  | For the nine months ended June 30, |           
|--------------------------------------------------------------------------- |  | ---------------------------------- | ----------
|                                                                            |  | 2012                               |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                        |  |                                    |           
|Net loss                                                                    |  | $                                  | (7,510,300
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                    |           
|Depreciation and amortization                                               |  |                                    | 14,000    
|Amortization of discount on bridge notes issued                             |  |                                    | 2,991,900 
|Stock-based compensation                                                    |  |                                    | 1,010,700 
|Issuance of warrants for financing services                                 |  |                                    | 56,800    
|Gain on derivative liability valuation                                      |  |                                    | (918,000  
|Non-cash interest expense                                                   |  |                                    | 480,900   
|Changes in operating assets and liabilities                                 |  |                                    |           
|Accounts receivable                                                         |  |                                    | 21,000    
|Prepaids and other current assets                                           |  |                                    | (5,300    
|Accounts payable and accrued liabilities                                    |  |                                    | 1,270,400 
|Deferred compensation                                                       |  |                                    | 344,100   
|Security deposit                                                            |  |                                    | 4,600     
|Net cash used in operating activities                                       |  |                                    | (2,239,200
|                                                                            |  |                                    |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                                    |           
|Acquisition of furniture & equipment                                        |  |                                    | (4,300    
|Acquisition of intellectual property                                        |  |                                    | (21,200   
|Net cash used in operating activities                                       |  |                                    | (25,500   
|                                                                            |  |                                    |           
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |  |                                    |           
|Repayment of note                                                           |  |                                    | -         
|Repayment of leases                                                         |  |                                    | (4,500    
|New equipment lease                                                         |  |                                    | -         
|Net proceeds from promissory notes                                          |  |                                    | 200,000   
|Net proceeds from bridge notes                                              |  |                                    | 1,995,300 
|Prepaid offering costs                                                      |  |                                    | -         
|Proceeds from exercise of warrants                                          |  |                                    | 900       
|Net cash provided by financing activities                                   |  |                                    | 2,191,700 
|                                                                            |  |                                    |           
|Net increase (decrease) in cash                                             |  |                                    | (73,000   
|Cash, beginning of period                                                   |  |                                    | 93,400    
|Cash, end of period                                                         |  | $                                  | 20,400    
|                                                                            |  |                                    |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                           |  |                                    |           
|Cash paid during the period for:                                            |  |                                    |           
|Interest                                                                    |  | $                                  | 6,800     
|Income taxes                                                                |  | $                                  | 2,000     
|Fair value of intellectual property                                         |  | $                                  | 20,000    
|Non-cash financing activities:                                              |  |                                    |           
|Shares issued for accounts payable                                          |  | $                                  | -         



The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.



5







CNS RESPONSE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY



|For the nine months ended June 30, 2012          |  | Common Stock |           |  | Additional Paid-in |   |       | Accumulated |  |   |            | 
|------------------------------------------------ |  | ------------ | --------- |  | ------------------ | - | ----- | ----------- |  | - | ---------- | 
|                                                 |  | Shares       |           |  | Amount             |   |       | Capital     |  |   | Deficit    | 
|BALANCE – September 30, 2011                     |  |              | 1,871,352 |  |                    | $ | 1,900 |             |  | $ | 30,813,100 | 
|Stock-based compensation                         |  |              | -         |  |                    |   | -     |             |  |   | 1,010,700  | 
|Stock issued for warrant exercise                |  |              | 2,823     |  |                    |   | -     |             |  |   | 900        | 
|Net loss for the nine months ended June 30, 2012 |  |              | -         |  |                    |   | -     |             |  |   | -          | 
|Balance at June 30, 2012                         |  |              | 1,874,175 |  |                    | $ | 1,900 |             |  | $ | 31,824,700 | 



|For the nine months ended June 30, 2011                   |  | Common Stock |           |  | Additional Paid-in |   |       | Accumulated |  |   |            | 
|--------------------------------------------------------- |  | ------------ | --------- |  | ------------------ | - | ----- | ----------- |  | - | ---------- | 
|                                                          |  | Shares       |           |  | Amount             |   |       | Capital     |  |   | Deficit    | 
|BALANCE – September 31, 2010                              |  |              | 1,867,690 |  |                    | $ | 1,900 |             |  | $ | 29,163,700 | 
|Stock-based compensation                                  |  |              | -         |  |                    |   | -     |             |  |   | 1,225,400  | 
|Stock issued for consulting services paid in-lieu of cash |  |              | 3,123     |  |                    |   | -     |             |  |   | 44,000     | 
|Net loss for the nine months ended June 30, 2011          |  |              | -         |  |                    |   | -     |             |  |   | -          | 
|Balance at June 30, 2011                                  |  |              | 1,870,813 |  |                    | $ | 1,900 |             |  | $ | 30,433,100 | 



The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.



6







CNS RESPONSE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS



|1. | NATURE OF OPERATIONS
|-- | --------------------



Organization and Nature of Operations



CNS Response, Inc.
(the “Company”) was incorporated in Delaware on March 20, 1987, under the name Age Research, Inc.   Prior
to January 16, 2007, CNS Response, Inc. (then called Strativation, Inc.) existed as a “shell company” with nominal
assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge.  On
January 16, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response,
Inc., a California corporation formed on January 11, 2000 (“CNS California”), and CNS Merger Corporation, a California
corporation and the Company’s wholly-owned subsidiary (“MergerCo”) pursuant to which the Company agreed to acquire
CNS California in a merger transaction wherein MergerCo would merge with and into CNS California, with CNS California being the
surviving corporation (the “Merger”). On March 7, 2007, the Merger closed, CNS California became a wholly-owned subsidiary
of the Company, and on the same date the corporate name was changed from Strativation, Inc. to CNS Response, Inc.



The Company is a web-based
neuroinformatic company that utilizes a patented system that provides data to psychiatrists and other physicians/prescribers to
enable them to make a more informed decision when treating a specific patient with mental, behavioral and/or addictive disorders.  The
Company also intends to identify, develop and commercialize new indications of approved drugs and drug candidates for this patient
population.



In addition, as a result
of its acquisition of Neuro-Therapy Clinic, Inc. (“NTC”) on January 15, 2008, the Company provides behavioral health
care services.  NTC is a center for highly-advanced testing and treatment of neuropsychiatric problems, including learning,
attentional and behavioral challenges, mild head injuries, as well as depression, anxiety, bipolar and all other common psychiatric
disorders. Through this acquisition, the Company expects to advance neurophysiology data collection, beta-test planned technological
advances in PEER Online, advance physician training in PEER Online and investigate practice development strategies associated with
PEER Online.



On April 2, 2012,
the Company announced that on March 30, 2012 it had filed a Certificate of Amendment to its Amended and Restated Certificate of
Incorporation (the “Amendment”) to (i) effect a 1-for-30 reverse stock split (“reverse split”) of its
common stock, par value $0.001 per share (the “Common Stock”), effective at 5:00 p.m. Pacific Time on April 2, 2012
(the “Effective Time”), and (ii) simultaneously therewith reduce the number of authorized shares of Common Stock available
for issuance under the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of
Incorporation”), from 750 million to 100 million. Because the Amendment did not reduce the number of authorized shares of
Common Stock in the same proportion as the reverse split, the effect of the Amendment was to increase the number of shares of
Common Stock available for issuance relative to the number of shares issued and outstanding.



At the Effective Time,
immediately and without further action by the Company’s stockholders, every 30 shares of the Company’s Common Stock
issued and outstanding immediately prior to the Effective Time were automatically combined into one share of Common Stock. In the
event the reverse split left a stockholder with a fraction of a share, the number of shares due to that stockholder was rounded
up. Further, any options, warrants and rights outstanding as of the Effective Time that were subject to adjustment were adjusted
in accordance with the terms thereof. These adjustments included, without limitation, changes to the number of shares of Common
Stock that would be obtained upon exercise or conversion of these securities, and changes to the applicable exercise or purchase
price. As a result of the reverse split, a “D” was placed on the Common Stock’s ticker symbol for 20 business
days.



Going Concern Uncertainty



The accompanying unaudited
condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America which contemplate continuation of the company as a going concern. The Company has a limited operating
history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties
frequently encountered in the operation of a new business. These risks include the ability to obtain adequate financing on a timely basis, the failure to develop or supply technology or
services to meet the demands of the marketplace, the failure to attract
and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and
national economies.



The
Company is unable to pay its obligations as they become due and it is in arrears on paying every one
of its creditors.  If the Company is not able to raise additional funds immediately and reach
some accommodations with our creditors, it will likely be required to cease operations. We are insolvent and
need additional funds immediately to continue our operations. The Company’s continued operating losses and limited
capital raise substantial doubt about its ability to continue as a going concern, and it needs to raise substantial
additional funds in order to continue to conduct its business.   To date, the Company has financed its cash
requirements primarily from debt and equity financings.  It will be necessary for the Company to raise additional
funds immediately to continue its operations and will need substantial additional funds before the Company can increase
demand for its PEER Online services (formerly known as rEEG services). Until it can generate a sufficient amount of revenues
to finance its cash requirements, which it may never do, the Company has to finance future cash needs primarily through
public or private equity offerings, debt financings, borrowings or strategic collaborations. The Company’s liquidity
and capital requirements depend on several factors, including the rate of market acceptance of its services, the future
profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in
this Quarterly Report.  The Company continues to explore additional sources of capital but there is substantial
doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit
it to continue operations. The Company has so far been unsuccessful in consummating the public offering of securities it has
been pursuing this year. The accompanying financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.



7







CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Basis of Presentation



All share and per share numbers presented
have been retroactively adjusted to reflect the 1-for-30 reverse stock split of the common stock on April 2, 2012 and a simultaneous
reduction in authorized shares to 100,000,000.



Basis of Consolidation



The unaudited condensed
consolidated financial statements of CNS Response, Inc. (“CNS,” “we,” “us,” “our”
or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
and include all the accounts of CNS and its wholly owned subsidiaries CNS California and NTC. Certain information and note disclosures,
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial position
as of June 30, 2012 and our operating results, cash flows, and changes in stockholders’ equity for the interim periods presented.
The September 30, 2011 balance sheet was derived from our audited consolidated financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial
statements and the related notes should be read in conjunction with our audited consolidated financial statements and notes for
the year ended September 30, 2011 which are included in our current report on Form 10-K, filed with the Securities and Exchange
Commission on December 22, 2011.



The preparation of
financial statements in accordance with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
and revenues and expenses in the financial statements. Examples of estimates subject to possible revision based upon the outcome
of future events include, among others, recoverability of long-lived assets and goodwill, stock-based compensation, the allowance
for doubtful accounts, the valuation of equity instruments, use and other taxes. In the opinion of management, these unaudited
condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments, except as otherwise
indicated) necessary for fair presentation for the periods presented as required by regulation S-X, Rule 10-01. Actual results
could differ from those estimates.



The results of operations
for the nine months ended June 30, 2012 are not necessarily indicative of the results that may be expected for future periods or
for the year ending September 30, 2012.



Offering Costs



The Company applies
ASC topic 505-10, “Costs of an Equity Transaction”, for recognition of offering costs. In accordance with ASC 505-10,
the Company treats incremental direct costs incurred to issue shares classified as equity, as a reduction of the proceeds. Direct
costs incurred before shares classified as equity are issued, are classified as an asset until the stock is issued. Indirect costs
such as management salaries or other general and administrative expenses and deferred costs of an aborted offering are expensed.



Long-Lived Assets and Intangible Assets



Property and equipment
and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the
assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment
charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible
assets with finite lives are amortized on a straight-line basis over their useful lives of ten years. No impairments of property
and equipment or intangible assets were recorded during the nine months ended June 30, 2012 and 2011.



Derivative Liabilities



The Company applies
ASC Topic 815-40, “Derivatives and Hedging,” which provides a two-step model to determine whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception in ASC 815-10-15-74.
This standard triggers liability accounting on all instruments and embedded features exercisable at strike prices based on future
equity-linked instruments issued at a lower rate.  Using the criteria in ASC 815, the Company determines which instruments
or embedded features that require liability accounting and records the fair values as a derivative liability. The changes in the
values of the derivative liabilities are shown in the accompanying consolidated statements of operations as “gain (loss)
on change in fair value of derivative liabilities.”



8







CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Effective September
30, 2011 the Company, together with holders of each of a majority in aggregate principal amount outstanding of the October Notes
and the January Notes (see Note 3) agreed to extend the maturity date of all the notes to October 1, 2012. The October Notes originally
had maturity dates ranging from October 1, 2011 through November 11, 2011 and the January Notes originally had maturity dates starting
from January 20, 2012 to April 25, 2012. The notes were also intended to be amended to include a mandatory conversion provision
under which all these notes would automatically be converted upon the closing of a public offering by the Company of shares of
its common stock and/or other securities with gross proceeds to the Company of at least $10 million. Furthermore, the January Notes
were amended to have a second-position security interest in all the assets of the Company, but remain subordinated to the October
Notes. The interest rate on all these notes remained unchanged at 9% per annum. Subsequently, upon the issuance of 2011 Bridge
Notes in October, 2011, at a conversion price of $3.00 and the associated warrants to purchase common stock at an exercise price
of $3.00, the ratchet provision in the October Notes and January Notes was triggered, with the result that the conversion price
of such notes was lowered from $9.00 to $3.00, and the exercise price of the associated warrants was lowered from $9.00 to $3.00
per share, and the number of shares underlying such notes and warrants was proportionately increased. Using the Black Scholes model,
we valued the January Notes and the October Notes with their extended maturity dates as of September 30, 2011 and compared that
value with the value of these notes with their original maturity dates. The difference of the two valuation calculations of $1,968,000
was booked to Other Expenses as a loss on extinguishment of debt charge. As of September 30, 2011 the derivative liability was
$4,801,200, which was comprised of the warrant liability of $2,193,900 and the debt conversion option liability of $2,607,300.
As of June 30, 2012 the derivative liability was $6,553,000, which was comprised of the warrant liability of $4,503,400 and the
debt conversion option liability of $2,049,600.



Fair Value of Financial Instruments



ASC 825-10 (formerly
SFAS 107, “Disclosures about Fair Value of Financial Instruments”) defines financial instruments and requires disclosure
of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable,
other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization.



The Company also analyzes
all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity”), ASC 815-10 (formerly SFAS No 133, “Accounting
for Derivative Instruments and Hedging Activities”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”).



The Company adopted
ASC 820-10 (formerly SFAS 157, “Fair Value Measurements”) which defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels
are defined as follow:



·Level 1   inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities
in active markets.



·Level 2   inputs to the valuation methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full
term of the financial instruments.



·Level 3   inputs to the valuation methodology are unobservable and significant to the fair value.



9







CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



The Company’s
warrant liability is carried at fair value totaling $4,503,400 and $2,193,900, as of June 30, 2012, and September 30, 2011, respectively.  The
Company’s conversion option liability is carried at fair value totaling $2,049,600 and $2,607,300 as of June 30, 2012 and
September 30, 2011, respectively.  The Company used Level 2 inputs for its valuation methodology for the warrant liability
and conversion option liability as their fair values were determined by using the Black-Scholes option pricing model using the
following assumptions:





|                        |  |  | June 30, 2012 |  
|----------------------- |  |  | ------------- | -
|Annual dividend yield   |  |  | -             |  
|Expected life (years)   |  |  | 0.25-3.5      | %
|Risk-free interest rate |  |  | 0.09%-0.41    | %
|Expected volatility     |  |  | 56.4%-128.8   | %





|                                           |  | Carrying Value |            |  | Fair Value Measurements at |  
|------------------------------------------ |  | -------------- | ---------- |  | -------------------------- | -
|                                           |  | As of          |            |  | June 30, 2012              |  
|                                           |  | June 30,       |            |  | Using Fair Value Hierarchy |  
|                                           |  | 2012           |            |  | Level 1                    |  
|Liabilities                                |  |                |            |  |                            |  
|Warrant liability                          |  | $              | 4,503,400  |  |                            | $
|Senior secured convertible promissory note |  |                | 3,023,900  |  |                            |  
|Subordinated convertible promissory note   |  |                | 3,583,300  |  |                            |  
|Unsecured convertible promissory note      |  |                | 30,000     |  |                            |  
|Conversion option liability                |  |                | 2,049,600  |  |                            |  
|Total                                      |  | $              | 13,190,200 |  |                            | $



For the nine months
ending June 30, 2012 the Company recognized a gain of $918,000 on the change in fair value of derivative liabilities.  For
the nine months ending June 30, 2011 the Company recognized a gain of $4,753,100 on change in fair value of derivative liabilities.
As at June 30, 2012 the Company did not identify any other assets or liabilities that are required to be presented on the balance
sheet at fair value in accordance with ASC 825-10.



Recent Accounting Pronouncements



In December 2011, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-12, Comprehensive Income (Topic
220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive
Income in Accounting Standards Update (“ASU”) No. 2011-05, in order to defer only those changes in ASU 2011-05 that
relate to the presentation of reclassification adjustments. The amendments are being made to allow the FASB time to re-deliberate
whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive
income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU
2011-05 not affected by this ASU are effective for fiscal years beginning after December 15, 2011. The Company does not expect
the adoption of the standard update to impact its consolidated financial position or results of operations, as it only requires
a change in the format of presentation.



In July 2011, the FASB
issued ASU 2011-07: Health Care Entities (Topic 954) — Presentation and Disclosure of Patient Service Revenue, Provision
for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. This update was issued to provide greater
transparency relating to accounting practices used for net patient service revenue and related bad debt allowances by health care
entities. Some health care entities recognize patient service revenue at the time the services are rendered regardless of whether
the entity expects to collect that amount or has assessed the patient’s ability to pay. These prior accounting practices
used by some health care entities resulted in a gross-up of patient service revenue and the provision for bad debts, causing difficulty
for outside users of financial statements to make accurate comparisons and analyses of financial statements among entities. ASU
2011-07 requires certain healthcare entities to change the presentation of the statement of operations, reclassifying the provision
for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue and
also requires enhanced quantitative and qualitative disclosures relevant to the entity’s policies for recognizing revenue
and assessing bad debts. This update is not designed and will not change the net income reported by healthcare entities. This update
is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect that
this update will have any material impact on its consolidated financial position or results of operations.



In June 2011, FASB
issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive
income guidance. This accounting update eliminates the option to present the components of other comprehensive income (loss) as
part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income (loss) in either a single
continuous statement of comprehensive income (loss) which contains two sections, net income (loss) and other comprehensive income
(loss), or in two separate but consecutive statements. This update is effective for fiscal years beginning after December 15, 2011.
The Company does not expect the adoption of the standard update to impact its consolidated financial position or results of operations,
as it only requires a change in the format of presentation.



10







CNS RESPONSE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|3. | CONVERTIBLE DEBT AND EQUITY FINANCINGS
|-- | --------------------------------------



2010, 2011 & 2012 Private Placement
Transactions



During 2010, 2011
and 2012 we entered into a series of Note and Warrant Purchase Agreements as described in detail below. On September 26, 2010,
the Company’s Board approved an approximate aggregate offering amount of $3 million in secured convertible promissory notes
(the “October Notes”) to be issued by January 31, 2011, including for the exchange of Bridge Notes and Deerwood Notes
(as defined below) and interest on those notes. October Notes in the aggregate principal amount of $3,023,900 and warrants to purchase
503,998 (ratchet and reverse split adjusted) shares of common stock were issued by November 12, 2010.



On November 23, 2010
the Company’s Board approved an approximate aggregate offering amount of $5 million in subordinated convertible promissory
notes (the “January Notes”) to be issued by July 31, 2011. From January 20, 2011 through to April 25, 2011, the Company
issued January Notes in an aggregate principal amount of $2,500,000 and warrants to purchase 416,674 (ratchet and reverse split
adjusted) shares of common stock.



On September 30, 2011
the Company’s Board approved an approximate aggregate offering amount of $2 million in subordinated convertible promissory
notes (the “2011 Bridge Notes”) to be issued by April 1, 2012. From October 18, 2011 through January 31, 2012, the
Company issued 2011 Bridge Notes in an aggregate principal amount of $2,000,000 and warrants to purchase 666,673 shares of common
stock.



On February 29, 2012,
we raised $90,000 through the sale of a subordinated unsecured convertible bridge note (the “Unsecured Note”)
and a warrant to purchase 30,000 shares of common stock at an exercise price of $3.00 per share. The terms of the February Note
and warrant are substantially similar to the 2011 Bridge Notes and warrants except that the February Note is not secured.



The securities issued
under the 2010, 2011 and 2012 Note and Warrant Purchase Agreements are summarized in the following table and notes:



|                                                                               |  |  |     |   |                       |           | As
    of June 30, 2012 |   |           |                  |  |   |                        
|------------------------------------------------------------------------------ |  |  | --- | - | --------------------- | --------- | ----------------------- | - | --------- | ---------------- |  | - | -----------------------
|Note Type and Investor                                                         |  |  |     |   | Amended
 Due
    Date |           | Balance($)              |   |           | Discount
    ($) |  |   | Carrying
    
Value ($)
|Senior Secured 9% Notes Convertible
    at $3.00 (the “October Notes”)(14)(16) |  |  |     |   |                       |           |                         |   |           |                  |  |   |                        
|                                                                               |  |  |     |   |                       |           |                         |   |           |                  |  |   |                        
|John Pappajohn                                                                 |  |  | (1  | ) |                       | 10/1/2012 |                         | $ | 761,700   |                  |  | $ | -                      
|Deerwood Partners, LLC                                                         |  |  | (2  | ) |                       | 10/1/2012 |                         |   | 256,100   |                  |  |   | -                      
|Deerwood Holdings, LLC                                                         |  |  | (2  | ) |                       | 10/1/2012 |                         |   | 256,100   |                  |  |   | -                      
|SAIL Venture Partners,
    LP                                                  |  |  | (2  | ) |                       |           |                         |   | -         |                  |  |   | -                      
|SAIL Venture Partners,
    LP                                                  |  |  | (3  | ) |                       | 10/1/2012 |                         |   | 250,000   |                  |  |   | -                      
|Fatos Mucha                                                                    |  |  | (10 | ) |                       | 10/1/2012 |                         |   | 100,000   |                  |  |   | -                      
|Andy Sassine                                                                   |  |  | (4  | ) |                       | 10/1/2012 |                         |   | 500,000   |                  |  |   | -                      
|JD Advisors                                                                    |  |  | (10 | ) |                       | 10/1/2012 |                         |   | 150,000   |                  |  |   | -                      
|Queen Street Partners                                                          |  |  | (10 | ) |                       | 10/1/2012 |                         |   | 100,000   |                  |  |   | -                      
|BGN Acquisitions                                                               |  |  | (2  | ) |                       | 10/1/2012 |                         |   | 250,000   |                  |  |   | -                      
|PyxisLong/Short Fund
    Healthcare Fund                                       |  |  | (5  | ) |                       | 10/1/2012 |                         |   | 400,000   |                  |  |   | -                      
|Monarch Capital: Placement
    Agent Warrants                                  |  |  | (6  | ) |                       |           |                         |   | -         |                  |  |   | -                      
|Monarch
    Capital: Placement Agent Warrants                                  |  |  | (6  | ) |                       |           |                         |   | -         |                  |  |   | -                      
|Total
    Senior Secured Convertible Promissory (October) Notes                |  |  |     |   |                       | 10/1/2012 |                         | $ | 3,023,900 |                  |  | $ | -                      



|Subordinated Secured 9% Notes Convertible
    at 
$3.00 (the “January Notes”) (15)(16) |  |  |     |   |                   |           |            |   |           |              |  |   |                     |  |  |                  |           |  |                          
|-------------------------------------------------------------------------------------- |  |  | --- | - | ----------------- | --------- | ---------- | - | --------- | ------------ |  | - | ------------------- |  |  | ---------------- | --------- |  | -------------------------
|                                                                                       |  |  |     |   | Amended
 Due Date |           | Balance($) |   |           | Discount ($) |  |   | Carrying
 Value ($) |  |  | Warrants
 Issued |           |  | Warrant
 Expiration
 Date
|Meyer Proler
    MD                                                                    |  |  | (7  | ) |                   | 10/1/2012 |            | $ | 50,000    |              |  | $ | -                   |  |  | $                | 50,000    |  |                          
|William F. Grieco                                                                      |  |  | (10 | ) |                   | 10/1/2012 |            |   | 100,000   |              |  |   | -                   |  |  |                  | 100,000   |  |                          
|Edward L. Scanlon                                                                      |  |  | (10 | ) |                   | 10/1/2012 |            |   | 200,000   |              |  |   | -                   |  |  |                  | 200,000   |  |                          
|Robert Frommer Family
    Trust                                                        |  |  | (8  | ) |                   | 10/1/2012 |            |   | 50,000    |              |  |   | -                   |  |  |                  | 50,000    |  |                          
|Paul Buck                                                                              |  |  | (9  | ) |                   | 10/1/2012 |            |   | 50,000    |              |  |   | -                   |  |  |                  | 50,000    |  |                          
|Andy Sassine                                                                           |  |  | (4  | ) |                   | 10/1/2012 |            |   | 200,000   |              |  |   | -                   |  |  |                  | 200,000   |  |                          
|SAIL Venture Partners,
    LP                                                          |  |  | (3  | ) |                   | 10/1/2012 |            |   | 187,500   |              |  |   | -                   |  |  |                  | 187,500   |  |                          
|SAIL 2010 Co-Investment
    Partners, LP                                               |  |  | (3  | ) |                   | 10/1/2012 |            |   | 62,500    |              |  |   | -                   |  |  |                  | 62,500    |  |                          
|Pyxis Long/Short
    Healthcare     Fund                                               |  |  | (5  | ) |                   | 10/1/2012 |            |   | 400,000   |              |  |   | -                   |  |  |                  | 400,000   |  |                          
|Monarch Capital: Placement
    Agent Warrants                                          |  |  | (6  | ) |                   | 10/1/2012 |            |   | -         |              |  |   | -                   |  |  |                  | -         |  |                          
|Rajiv Kaul                                                                             |  |  | (10 | ) |                   | 10/1/2012 |            |   | 100,000   |              |  |   | -                   |  |  |                  | 100,000   |  |                          
|Meyer Proler MD                                                                        |  |  | (7  | ) |                   | 10/1/2012 |            |   | 50,000    |              |  |   | -                   |  |  |                  | 50,000    |  |                          
|SAIL Venture Partners,
    LP                                                          |  |  | (3  | ) |                   | 10/1/2012 |            |   | 250,000   |              |  |   | -                   |  |  |                  | 250,000   |  |                          
|SAIL 2010 Co-Investment
    Partners, LP                                               |  |  | (3  | ) |                   | 10/1/2012 |            |   | 250,000   |              |  |   | -                   |  |  |                  | 250,000   |  |                          
|John M Pulos                                                                           |  |  | (10 | ) |                   | 10/1/2012 |            |   | 150,000   |              |  |   | -                   |  |  |                  | 150,000   |  |                          
|SAIL Venture Partners,
    LP                                                          |  |  | (3  | ) |                   | 10/1/2012 |            |   | 125,000   |              |  |   | -                   |  |  |                  | 125,000   |  |                          
|SAIL 2010 Co-Investment
    Partners, LP                                               |  |  | (3  | ) |                   | 10/1/2012 |            |   | 125,000   |              |  |   | -                   |  |  |                  | 125,000   |  |                          
|Cummings Bay Capital
    LP                                                            |  |  | (5  | ) |                   | 10/1/2012 |            |   | 150,000   |              |  |   | -                   |  |  |                  | 150,000   |  |                          
|Monarch Capital: Placement
    Agent Warrants                                          |  |  | (6  | ) |                   |           |            |   | -         |              |  |   | -                   |  |  |                  | -         |  |                          
|Antaeus
    Capital: Placement Agent Warrants                                          |  |  | (11 | ) |                   |           |            |   | -         |              |  |   | -                   |  |  |                  | -         |  |                          
|Total
    Subordinated Secured Convertible Promissory (January) Notes                  |  |  |     |   |                   | 10/1/2012 |            | $ | 2,500,000 |              |  | $ | -                   |  |  | $                | 2,500,000 |  |                          



11







|                                                                                         |  |  |     |   |          |                    | As
    of June 30, 2012 |   |           |                  |  |   |                        
|---------------------------------------------------------------------------------------- |  |  | --- | - | -------- | ------------------ | ----------------------- | - | --------- | ---------------- |  | - | -----------------------
|Subordinated Secured 9% Notes Convertible
    
at $3.00 (the “2011  Bridge Notes”)  (17) |  |  |     |   |          |                    |                         |   |           |                  |  |   |                        
|                                                                                         |  |  |     |   | Due Date |                    | Balance($)              |   |           | Discount
    ($) |  |   | Carrying

    Value ($)
|John Pappajohn                                                                           |  |  | (1  | ) |          | 10/17/2012         |                         |   | 250,000   |                  |  |   | (72,900                
|Jordan Family, LLC                                                                       |  |  | (10 | ) |          | 10/30/2012         |                         |   | 20,000    |                  |  |   | (6,700                 
|Larry Hopfenspirger                                                                      |  |  | (10 | ) |          | 11/09/2012         |                         |   | 60,000    |                  |  |   | (22,500                
|John Pappajohn                                                                           |  |  | (1  | ) |          | 11/09/2012         |                         |   | 250,000   |                  |  |   | (93,800                
|Zanett Opportunity Fund, Ltd                                                             |  |  | (12 | ) |          | 11/16/2012         |                         |   | 250,000   |                  |  |   | (93,700                
|John Pappajohn                                                                           |  |  | (1  | ) |          | 12/26/2012         |                         |   | 250,000   |                  |  |   | (125,000               
|Monarch Capital: Placement Agent Warrants                                                |  |  | (6  | ) |          |                    |                         |   | -         |                  |  |   | -                      
|Edward L. Scanlon                                                                        |  |  | (10 | ) |          | 01/08/2013         |                         |   | 100,000   |                  |  |   | (50,000                
|John Pagnucco                                                                            |  |  | (10 | ) |          | 01/12/2013         |                         |   | 50,000    |                  |  |   | (27,100                
|Larry Hopfenspirger                                                                      |  |  | (10 | ) |          | 01/24/2013         |                         |   | 30,000    |                  |  |   | (16,300                
|Gene Salkind, MD                                                                         |  |  | (10 | ) |          | 01/25/2013         |                         |   | 50,000    |                  |  |   | (27,100                
|AlphaNorth Offshore, Inc                                                                 |  |  | (13 | ) |          | 01/25/2013         |                         |   | 500,000   |                  |  |   | (270,800               
|Aubrey W. Baillie                                                                        |  |  | (10 | ) |          | 01/26/2013         |                         |   | 100,000   |                  |  |   | (58,300                
|Zanett Opportunity Fund, Ltd                                                             |  |  | (12 | ) |          | 01/26/2013         |                         |   | 40,000    |                  |  |   | (23,300                
|BMO Nesbitt Burns                                                                        |  |  | (10 | ) |          | 01/29/2013         |                         |   | 50,000    |                  |  |   | (29,200                
|Monarch Capital: Placement Agent Warrants                                                |  |  | (6  | ) |          |                    |                         |   | -         |                  |  |   | -                      
|Innerkip Placement Agent Warrants                                                        |  |  | (19 | ) |          |                    |                         |   | -         |                  |  |   | -                      
|Total Subordinated Secured
    Convertible Promissory (2011 Bridge) Notes                |  |  |     |   |          | 10-2012 to 01-2013 |                         |   | 2,000,000 |                  |  | $ | (916,700               
|Total Subordinated Secured
    Convertible Promissory Notes                              |  |  |     |   |          |                    |                         |   | 4,500,000 |                  |  | $ | (916,700               
|                                                                                         |  |  |     |   |          |                    |                         |   |           |                  |  |   |                        
|Unsecured 9% Notes
    Convertible at $3.00 (the “Unsecured Note”) (18)                  |  |  |     |   |          |                    |                         |   |           |                  |  |   |                        
|Zanett Opportunity Fund, Ltd                                                             |  |  | (12 | ) |          | 02/28/2013         |                         |   | 90,000    |                  |  |   | (60,000                
|Total
    Unsecured Convertible Promissory Notes                                         |  |  |     |   |          |                    |                         | $ | 90,000    |                  |  | $ | (60,000                
|Total                                                                                    |  |  |     |   |          |                    |                         | $ | 7,613,900 |                  |  | $ | (976,700               



| | (1) | Mr. John Pappajohn is a Director of the Company. On June 3, 2010, we entered into a Bridge Note
and Warrant Purchase Agreement with John Pappajohn to purchase two secured promissory notes (each, a “Bridge Note”)
in the aggregate principal amount of $500,000, with each Bridge Note in the principal amount of $250,000 maturing on December 2,
2010.  On June 3, 2010, Mr. Pappajohn loaned the Company $250,000 in exchange for the first Bridge Note (there were no
warrants issued in connection with this first note) and on July 25, 2010, Mr. Pappajohn loaned the Company $250,000 in exchange
for the second Bridge Note.  In connection with his purchase of the second Bridge Note, Mr. Pappajohn received a warrant
to purchase up to 8,334 shares of our common stock.  The exercise price of the warrant (subject to anti-dilution adjustments,
including for issuances of securities at prices below the then-effective exercise price) was $15.00 per share. Pursuant to a separate
agreement that we entered into with Mr. Pappajohn on July 25, 2010, we granted him a right to convert his Bridge Notes into shares
of our common stock at a conversion price of $15.00.  The conversion price was subject to customary anti-dilution adjustments,
but would never be less than $9.00. Each Bridge Note accrued interest at a rate of 9% per annum.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On October 1, 2010, we
entered into a Note and Warrant Purchase Agreement (the “October Purchase Agreement”) with  Mr. Pappajohn,
pursuant to which we issued to Mr. Pappajohn October Notes in the aggregate principal amount of $761,700 and warrants to
purchase up to 126,949 shares of common stock. The Company received $250,000 in gross proceeds from the issuance of October
Notes in the aggregate principal amount of $250,000 and related warrants to purchase up to 41,667 shares. We also issued
October Notes in the aggregate principal amount of $511,700, and related warrants to purchase up to 85,282 shares, to Mr.
Pappajohn in exchange for the cancellation of the two Bridge Notes originally issued to him on June 3, 2010 and July 25, 2010
in the aggregate principal amount of $500,000 (and accrued and unpaid interest on those notes) and a warrant to purchase up
to 8,334 shares originally issued to him on July 25, 2010. The transaction closed on October 1, 2010.



On October 18, 2011, the
Company entered into a new note and warrant purchase agreement in connection with a $2 million bridge financing (the
“2011 Bridge Financing”), with  Mr. Pappajohn.  Pursuant to the agreement, the Company issued
subordinated secured convertible notes (the “2011 Bridge Notes”) in the aggregate principal amount of $250,000
and warrants to purchase 83,334 shares of common stock to Mr. Pappajohn for gross proceeds to the Company of $250,000.



12







The new note and warrant purchase
agreement initially provided for the issuance and sale of 2011 Bridge Notes in the aggregate principal amount of up to $2,000,000,
and warrants to purchase a number of shares corresponding to 50% of the number of shares issuable on conversion of the 2011 Bridge
Notes, in one or multiple closings to occur no later than April 1, 2012. On November 11, 2011, the Company entered into an Amended
and Restated Note and Warrant Purchase Agreement (the “2011 Bridge Financing Purchase Agreement”) in connection with
the Bridge Financing, which amended and restated the October agreement in that it increased the warrant coverage from 50% to 100%.  In
addition, each holder’s option to redeem or convert their 2011 Bridge Note at the closing of the Qualified Offering (defined
below) can now only be amended, waived or modified with the consent of the Company and that holder.



On each of November 10, 2011 and
December 27, 2011, the Company issued a 2011 Bridge Note in the aggregate principal amount of $250,000 and warrants to purchase
83,334 shares of common stock to Mr. Pappajohn for gross proceeds to the Company of $250,000. The combined aggregate amount for
these two 2011 Bridge Financings was $500,000 and warrants to purchase 166,668 shares of common stock for gross proceeds to the
Company of $500,000.





| | (2) | Dr. George Kallins is a Director of the Company and together with his wife controls Deerwood Partners, LLC and Deerwood Holding,
LLC. He is also the General Partner of BGN Acquisitions Ltd. LP.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





On July 5, 2010 and August 20,
2010, we issued unsecured promissory notes (each, a “Deerwood Note”) in the aggregate principal amount of $500,000
to Deerwood Partners LLC and Deerwood Holdings LLC, with each investor purchasing two notes in the aggregate principal amount
of $250,000.   The Deerwood Notes were to mature on December 15, 2010.  We received $250,000 in gross proceeds
from the issuance of the first two notes on July 5, 2010 and another $250,000 in gross proceeds from the issuance of the second
two notes on August 20, 2010.   In connection with the August 20, 2010 transaction, each of the two investors also
received a warrant to purchase up to 2,500 shares of our common stock at an exercise price (subject to anti-dilution adjustments,
including for issuances of securities at prices below the then-effective exercise price) of $16.80 per share.



SAIL Venture Partners L.P. (“SAIL”)
issued unconditional guaranties to each of the Deerwood investors, guaranteeing the prompt and complete payment when due of all
principal, interest and other amounts under each Deerwood Note.  SAIL’s general partner is SAIL Venture Partners, LLC.
At the time of issuance, our director David Jones was a managing member of SAIL Venture Partners, LLC, and he remains a limited
partner of SAIL.  The obligations under each guaranty were independent of our obligations under the Deerwood Notes and separate
actions could be brought against the guarantor.  We entered into an oral agreement to indemnify SAIL and grant to SAIL a security
interest in our assets in connection with the guaranties. In addition, on August 20, 2010, we granted SAIL warrants to purchase
up to an aggregate of 3,334 shares of common stock at an exercise price (subject to anti-dilution adjustments, including for issuances
of securities at prices below the then-effective exercise price) of $16.80 per share.



Each Deerwood Note accrued interest
at a rate of 9% per annum and was convertible into shares of our common stock at a conversion price of $15.00.  The conversion
price was subject to customary anti-dilution adjustments, but would never be less than $9.00.



On November 3, 2010, Deerwood
Partners LLC, Deerwood Holdings LLC and BGN Acquisition Ltd. LP, executed the October Purchase Agreement. In connection therewith,
we issued October Notes in the aggregate principal amount of $762,200 and warrants to purchase up to 92,895 shares of common stock,
as follows: (a) We received $250,000 in gross proceeds from the issuance to BGN Acquisition Ltd., LP, of October Notes in the aggregate
principal amount of $250,000 and related warrants to purchase up to 41,667 shares. (b) We also issued October Notes in the aggregate
principal amount of $512,200, and related warrants to purchase up to 51,228 shares, to Deerwood Holdings LLC and Deerwood Partners
LLC, in exchange for the cancellation of the Deerwood Notes originally issued on July 5, 2010 and August 20, 2010 in the aggregate
principal amount of $500,000 (and accrued and unpaid interest on those notes) and warrants to purchase an aggregate of up to 5,000
shares originally issued on August 20, 2010. The related guaranties and oral indemnification and security agreement that had been
entered into in connection with the Deerwood Notes were likewise terminated. SAIL, of which our director David Jones is a senior
partner, issued unconditional guaranties to each of the Deerwood investors, guaranteeing the prompt and complete payment when due
of all principal, interest and other amounts under the October Notes issued to such investors. The obligations under each guaranty
are independent of our obligations under the October Notes and separate actions may be brought against the guarantor. In connection
with its serving as guarantor, we granted SAIL warrants to purchase up to an aggregate of 34,152 shares of common stock. The warrants
to purchase 3,334 shares of common stock previously granted to SAIL on August 20, 2010 were canceled.



| | (3) | Mr. Dave Jones is the Chairman of the Board of the Company and is a former managing member of the
general partner of SAIL, of which SAIL 2010 Co-Investment Partners, L.P. is an affiliate.  Mr. Jones remains a limited partner
of SAIL.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | (4) | Mr. Andy Sassine is an accredited investor and has become a beneficial owner of more than 5% of
our outstanding common stock.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



| | (5) | Pyxis Long/Short Healthcare Fund (FKA Highland Long/Short Healthcare Fund) is affiliated with
                                                             Cummings                                                              Bay Capital
                                                             LP. Both                                                                                              individually and in
                                                             the                                                              aggregate with Cummings Bay
                                                             Capital LP,                                                                               Pyxis Long/Short Healthcare Fund
                                                             has become the beneficial
                                                             owner of more than 5% of our outstanding common stock.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









13









| | (6) | Monarch Capital Group LLC (“Monarch”) acted as non-exclusive placement agent with respect
to the October 12, 2010 placement of October Notes in the aggregate principal amount of $100,000 and related warrants, pursuant
to an engagement agreement, dated September 30, 2010, between the Company and Monarch. Under the engagement agreement, in return
for its services as non-exclusive placement agent, Monarch was entitled to receive (a) a cash fee equal to 10% of the gross proceeds
raised from the sale of October Notes to investors introduced to the Company by Monarch; (b) a cash expense allowance equal to
2% of the gross proceeds raised from the sale of October Notes to such investors; and (c) five-year warrants (the “2010 Placement
Agent Warrants”) to purchase common stock of the Company equal to 10% of the shares issuable upon conversion of October Notes
issued to such investors. In connection with the closings of October 12, 2010 and November 11, 2010 Monarch received a cash fee
of $60,000 and a cash expense allowance of $10,000 and, on October 25, 2010, received 2010 Placement Agent Warrants to purchase
16,668 shares of the Company’s common stock at an exercise price of $3.00 per share.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Monarch has also acted as non-exclusive
placement agent with respect to the placement of January Notes in the aggregate principal amount of $550,000 and related warrants,
pursuant to an engagement agreement, dated January 19, 2011 which has the same terms as the September 30, 2010 agreement between
the Company and Monarch. In connection with acting as nonexclusive placement agent with respect to January Notes in the aggregate
principal amount of $550,000 and related warrants, Monarch received aggregate cash fees of $55,000 and an aggregate cash expense
allowance of $11,000 and five-year warrants (the “2011 Placement Agent Warrants”) to purchase an aggregate of up to
18,334 shares of the Company’s common stock at an exercise price of $3.00 per share. The 2011 Placement Agent Warrants have
an exercise price equal to 110% of the conversion price of the January Notes and an exercise period of five years. The terms of
the 2011 Placement Agent Warrants, except for the exercise price and period, are identical to the terms of the warrants related
to the January Notes.



Monarch has acted as non-exclusive
placement agent with respect to the placement of certain of the abovementioned January Notes in the aggregate principal amount
of $200,000 and related warrants, pursuant to an engagement agreement, dated January 19, 2011 which has the same terms as the above
mentioned September 30, 2010 agreement between the Company and Monarch. In connection with acting as nonexclusive placement agent
with respect to two January Notes dated April 5, 2011 and April 25, 2011 in the aggregate principal amount of $200,000 and related
warrants, Monarch received aggregate cash fees of $20,000 and an aggregate cash expense allowance of $4,000 and 2011 Placement
Agent Warrants to purchase an aggregate of up to 6,667 shares of the Company’s common stock at an exercise price of $3.00
per share.



Monarch has also acted as non-exclusive
placement agent with respect to the placement of 2011 Bridge Notes in the aggregate principal amount of $160,000 and related warrants,
pursuant to an engagement agreement, dated October 20, 2011 which has the same terms as the September 30, 2010 agreement between
the Company and Monarch except that placement agent warrants have the same exercise price and term as the investor warrants. In
connection with acting as nonexclusive placement agent with respect to 2011 Bridge Notes dated December 16, 2011 and January 30,
2012 in the aggregate principal amount of $160,000 and related warrants, Monarch received aggregate cash fees of $16,000 and an
aggregate cash expense allowance of $3,200 and five-year warrants to purchase an aggregate of up to 5,334 shares of the Company’s
common stock at an exercise price of $3.00 per share.



| | (7) | Dr. Meyer Proler is an accredited investor who provides medical consulting services to the Company.
| | --- | ---------------------------------------------------------------------------------------------------



| | (8) | The Robert Frommer Family Trust is an accredited investor, the trustee of which is the father-in-law
of the Company’s Chief Executive Officer, George Carpenter.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------





| | (9) | Mr. Paul Buck is the Chief Financial Officer of the Company.
| | --- | ------------------------------------------------------------



| | (10) | All these investors are accredited.
| | ---- | -----------------------------------





| | (11) | Antaeus Capital, Inc. acted as non-exclusive placement agent with respect to the placement of January
Notes in the aggregate principal amount of $150,000 and related warrants, pursuant to an engagement agreement, dated April 15,
2011, between the Company and Antaeus. Under the engagement agreement, in return for its services as non-exclusive placement agent,
Antaeus is entitled to receive (a) a cash fee equal to 10% of the gross proceeds raised from the sale of January Notes to investors
introduced to the Company by Antaeus; and (b) 2011 Placement Agent Warrants to purchase the Company’s common stock equal
to 10% of the gross amount of securities sold to such investors. In connection with acting as nonexclusive placement agent with
respect to January Notes in the aggregate principal amount of $150,000 and related warrants, Antaeus received aggregate cash fees
of $15,000 and 2011 Placement Agent Warrants to purchase an aggregate of up to 5,000 shares of the Company’s common stock
at an exercise price of $3.00 per share.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12) | On November 17, 2011, Zanett Opportunity Fund, Ltd., a
Bermuda corporation for which McAdoo Capital, Inc. is the investment manager, purchased 2011 Bridge Notes in the aggregate principal
amount of $250,000 and warrants to purchase 83,334 shares of common stock for cash payments aggregating $250,000.  Mr.
McAdoo is the president and owner of McAdoo Capital, Inc. On November 21, 2011, the Board of Directors elected Zachary McAdoo
to the Board.  Mr. McAdoo also serves as Chairman of the Board’s Audit Committee.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  | On January 27, 2012 we issued Zanett an additional 2011
Bridge Note in the aggregate amount of $40,000 and a warrant to purchase 13,334 shares of common stock for gross proceeds to the
company of $40,000.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On February 29, 2012 we issued Zanett a subordinated unsecured
promissory note (“Unsecured Note”) in the aggregate principal amount of $90,000 and a warrant to purchase 30,000 shares
of common stock for gross proceeds to the Company of $90,000. The terms of the Unsecured Notes and related warrants are substantially
similar to the terms of the 2011 Bridge Notes and related warrants, except that the Unsecured Notes are not secured by our assets.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14







| | (13) | On January 25, 2012, AlphaNorth Offshore, Inc. purchased a 2011 Bridge Note in the aggregate principal
amount of $500,000 and warrants to purchase 166,667 shares of common stock for cash payments aggregating $500,000. Mr. Steven Palmer
is the President and CEO of AlphaNorth Asset Management and is the portfolio manager of AlphaNorth Offshore, Inc. Innerkip Capital
Management (see below) received a finder’s fee and warrants in association with this transaction.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (14) | The October Notes: The October Purchase Agreement provides for the issuance and sale of October
Notes, for cash or in exchange for outstanding convertible notes, in the aggregate principal amount of up to $3,000,000 plus an
amount corresponding to accrued and unpaid interest on any exchanged notes, and warrants to purchase a number of shares corresponding
to 50% of the number of shares issuable on conversion of the October Notes. The agreement provides for multiple closings, but mandates
that no closings may occur after January 31, 2011. The October Purchase Agreement also provides that the Company and the holders
of the October Notes will enter into a registration rights agreement covering the registration of the resale of the shares underlying
the October Notes and the related warrants.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The October Notes mature one year
from the date of issuance (subject to earlier conversion or prepayment), earn interest equal to 9% per year with interest payable
at maturity, and are convertible into shares of common stock of the Company at a conversion price of $9.00. The conversion price
is subject to adjustment upon (i) the subdivision or combination of, or stock dividends paid on, the common stock; (ii) the issuance
of cash dividends and distributions on the common stock; (iii) the distribution of other capital stock, indebtedness or other non-cash
assets; and (iv) the completion of a financing at a price below the conversion price then in effect. The October Notes are furthermore
convertible, at the option of the holder, into securities to be issued in subsequent financings at the lower of the then-applicable
conversion price or price per share payable by purchasers of such securities. The October Notes can be declared due and payable
upon an event of default, defined in the October Notes to occur, among other things, if the Company fails to pay principal and
interest when due, in the case of voluntary or involuntary bankruptcy or if the Company fails to perform any covenant or agreement
as required by the October Note.



Our obligations under the terms
of the October Notes are secured by a security interest in the tangible and intangible assets of the Company, pursuant to a Security
Agreement, dated as of October 1, 2010, by and between the Company and John Pappajohn, as administrative agent for the holders
of the October Notes. The agreement and corresponding security interest terminate if and when holders of a majority of the aggregate
principal amount of October Notes issued have converted their October Notes into shares of common stock.



The warrants related to the October
Notes expire seven years from the date of issuance and are exercisable for shares of common stock of the Company at an exercise
price of $9.00. Exercise price and number of shares issuable upon exercise are subject to adjustment (1) upon the subdivision or
combination of, or stock dividends paid on, the common stock; (2) in case of any reclassification, capital reorganization or change
in capital stock and (3) upon the completion of a financing at a price below the exercise price then in effect. Any provision of
the October Notes or related warrants can be amended, waived or modified upon the written consent of the Company and holders of
a majority of the aggregate principal amount of such notes outstanding. Any such consent will affect all October Notes or warrants,
as the case may be, and will be binding on all holders thereof.



The October Notes were subsequently
amended as detailed in (16) below and in the paragraph following (19).





| | (15) | The January Notes: The 2011 Note and Warrant Purchase Agreement (the “January Purchase Agreement”) provides for
the issuance and sale of January Notes in the aggregate principal amount of up to $5,000,000, and warrants to purchase a number
of shares corresponding to 50% of the number of shares issuable on conversion of the January Notes, in one or multiple closings
to occur no later than July 31, 2011. The January Purchase Agreement also provides that the Company and the holders of the January
Notes will enter into a registration rights agreement covering the registration of the resale of the shares underlying the January
Notes and the related warrants.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The terms of the January Notes
are identical to the terms of the October Notes, except that (i) the January Notes are subordinated in all respects to the Company’s
obligations under the October Notes and the related guaranties issued to certain investors by SAIL and (ii) the Company is not
subject to a restrictive covenant to the use of proceeds from the sale of the January Notes only for current operations.  Initially,
the January Notes were not secured by any of the Company’s assets. The terms of the new warrants are identical to the terms
of the warrants issued in connection with the October Notes.



The January Notes were subsequently
amended as detailed in (16) below and in the paragraph following (19).



| | (16) | Amendment of the October Notes and the January Notes: On October 11, 2011, we, with the consent
of holders of a majority in aggregate principal amount outstanding (the “Majority Holders”) of our outstanding January
Notes, amended all of the January Notes to extend the maturity of such notes until October 1, 2012.  Pursuant to the
terms of the amendment, which was effective as of September 30, 2011, the January Notes would receive a second position security
interest in the assets of the Company (including its intellectual property).  The Majority Holders of the January Notes
also consented to the terms of a new $2 million bridge financing (the “2011 Bridge Financing”) and to granting the
investors in such financing a second position security interest in the assets of the Company (including its intellectual property)
that is pari passu with the second position security interest received by the holders of the January Notes. The amendment was also
intended to add a mandatory conversion provision to the terms of the January Notes.  Under that provision, the January
Notes would be automatically converted upon the closing of a public offering by the Company of shares of its common stock and/or
other securities with gross proceeds to the Company of at least $10 million (the “Qualified Offering”).  If
the public offering price were less than the conversion price then in effect, the conversion price would be adjusted to match the
public offering price (the “Qualified Offering Price”).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15







On October 12, 2011, the Company,
with the consent of the Majority Holders of its October Notes, amended all of the October Notes to extend the maturity of such
notes until October 1, 2012.  The Majority Holders of the October Notes also consented to the terms of the Bridge Financing
and to granting the investors in such financing as well as the holders of the Company’s January Notes a second position security
interest in the assets of the Company (including its intellectual property).  The guaranties that had been issued in
2010 to certain October Note investors by SAIL were extended accordingly. The amendment, which was effective as of September 30,
2011, was also intended to add the same mandatory conversion and conversion price adjustment provisions to the terms of the October
Notes as were added to the terms of the January Notes.



Pursuant to the agreements amending
the October Notes and January Notes (the “Amendment and Conversion Agreements”), the exercise price of the warrants
that were issued in connection with the October Notes and the January Notes (the “Outstanding Warrants”) would be adjusted
to match the Qualified Offering Price, if such price were lower than the exercise price then in effect. The Company agreed to issue
to each holder of the October Notes and January Notes, as consideration for the above, warrants to purchase a number of shares
of common stock equal to 30% of the number of shares of common stock to be received by each holder upon conversion of their notes
at the closing of the Qualified Offering (the “Consideration Warrants”).  The Consideration Warrants would
be issued after the Qualified Offering and would have the same terms as the Outstanding Warrants, as amended.



As a result of the issuance of
2011 Bridge Notes (mentioned below) at a conversion price of $3.00 and the associated warrants to purchase common stock at an exercise
price of $3.00, the ratchet provision in the October Notes and January Notes was triggered, with the result that the conversion
price of such notes was lowered from $9.00 to $3.00, the exercise price of the associated warrants was lowered from $9.00 to $3.00
per share, and the number of shares underlying such notes and warrants was proportionately increased.



The Amended and Restated Security
Agreement, dated as of September 30, 2011, between the Company and Paul Buck, as administrative agent for the secured parties (the
“Amended and Restated Security Agreement”), which replaces the existing security agreement from 2010, and the corresponding
security interest terminate (1) with respect to the October Notes, if and when holders of a majority of the aggregate principal
amount of October Notes issued have converted their notes into shares of common stock and, (2) with respect to the January Notes
and the 2011 Bridge Notes (defined below), if and when holders of a majority of the aggregate principal amount of January Notes
and 2011 Bridge Notes (on a combined basis) have converted their notes.



The Company evaluated the Amendment
and Conversion Agreements, effective September 30, 2011 and the October Purchase Agreement, effective September 30, 2010, under
ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments
to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification
of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and
the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses
or gains. The Company noted the change in terms per the Amendment and Conversion Agreements and the October Purchase Agreement,
met the criteria for substantial modification under ASC 470, and accordingly treated the modification as extinguishment of the
original convertible notes, replaced by the new convertible notes under the modified terms. The Company recorded a loss on extinguishment
of debt of $1,968,000 and $1,094,300 for the years ended September 30, 2011 and 2010, respectively.



| | (17) | The 2011 Bridge Notes: The 2011 Bridge Financing Purchase
Agreement provides for the issuance and sale of 2011 Bridge Notes (including the notes issued in October 2011) in the aggregate
principal amount of up to $2,000,000, and warrants to purchase a number of shares corresponding to 100% of the number of shares
issuable on conversion of the Bridge Notes, in one or multiple closings to occur no later than April 1, 2012. The 2011 Bridge
Financing Purchase Agreement also provides that the Company and the holders of the 2011 Bridge Notes will enter into a registration
rights agreement covering the registration of the resale of the shares underlying the 2011 Bridge Notes and the related warrants.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2011 Bridge Notes mature one
year from the date of issuance (subject to earlier conversion or prepayment), earn interest equal to 9% per year with interest
payable at maturity, are convertible into shares of common stock of the Company at a conversion price of $3.00, are secured by
a second position security interest in the Company’s assets that is pari passu with the interest recently granted to the
holders of the January Notes, are subordinated in all respects to the Company’s obligations under its October Notes and the
related guaranties issued to certain investors by SAIL Venture Partners, L.P. and are pari passu to the obligations under the January
Notes.  The second position security interest is governed by the Amended and Restated Security Agreement.



The conversion price of the 2011
Bridge Notes is subject to adjustment upon (1) the subdivision or combination of, or stock dividends paid on, the common stock;
(2) the issuance of cash dividends and distributions on the common stock; (3) the distribution of other capital stock, indebtedness
or other non-cash assets; and (4) the completion of a financing at a price below the conversion price then in effect.  At
the closing of a public offering by the Company of shares of its common stock and/or other securities with gross proceeds to the
Company of at least $10 million (the “Qualified Offering”), each 2011 Bridge Note will be either redeemed or converted
(in whole or in part) at a conversion price equal to the lesser of the public offering price or the conversion price then in effect,
with the choice between redemption and conversion being at the sole option of the holder. The 2011 Bridge Notes can be declared
due and payable upon an event of default, defined in the 2011 Bridge Notes to occur, among other things, if the Company fails to
pay principal and interest when due, in the case of voluntary or involuntary bankruptcy or if the Company fails to perform any
covenant or agreement as required by the 2011 Bridge Note or materially breaches any representation or warranty in the 2011 Bridge
Note or the 2011 Bridge Financing Purchase Agreement.



16







The warrants related to the 2011
Bridge Notes expire five years from the date of issuance and are exercisable for shares of common stock of the Company at an exercise
price of $3.00. Exercise price and number of shares issuable upon exercise are subject to adjustment (1) upon the subdivision or
combination of, or stock dividends paid on, the common stock; (2) in case of any reclassification, capital reorganization or change
in capital stock and (3) upon the completion of a financing at a price below the exercise price then in effect (including the Qualified
Offering), except that subsequent to the Qualified Offering, the exercise price will not be adjusted for any further financings.  The
warrants contain a cashless exercise provision.



With the exception of each holder’s
option to redeem or convert their 2011 Bridge Note at the closing of the Qualified Offering, any provision of the 2011 Bridge Notes
or related warrants can be amended, waived or modified upon the written consent of the Company and holders of a majority of the
aggregate principal amount of such notes outstanding. Any such majority consent will affect all 2011 Bridge Notes or warrants,
as the case may be, and will be binding on the Company and all holders of the 2011 Bridge Notes or warrants.  Each holder’s
option to redeem or convert the 2011 Bridge Note at the closing of the Qualified Offering cannot be amended, waived or modified
without the written consent of the Company and such holder and such amendment, waiver or modification will be binding only on the
Company and such holder.



The Amended and Restated Security
Agreement and the corresponding security interest terminate (1) with respect to the October Notes, if and when holders of a majority
of the aggregate principal amount of October Notes issued have converted their notes into shares of common stock and (2) with respect
to the January Notes and 2011 Bridge Notes, if and when holders of a majority of the aggregate principal amount of January Notes
and 2011 Bridge Notes (on a combined basis) have converted their notes.



| | (18) | The Unsecured Bridge Note: the terms of this note are identical to the 2011 Bridge Note described above, except that this note
is not secured. There was only one note of this type issued to the Zanett Opportunity Fund as described in (12) above
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (19) | Innerkip Capital Management, Inc. (“Innerkip”),
a Toronto-based exempt market dealer registered with the Ontario Securities Commission (OSC), acted as non-exclusive placement
agent with respect to the placement of 2011 Bridge Notes issued during January 2012, in the aggregate principal amount of $650,000
and related warrants, pursuant to a Finder’s Agreement which was formalized and dated February 13, 2012, between the Company
and Innerkip. Under the Finder’s Agreement, in return for its services as non-exclusive placement agent, Innerkip is entitled
to receive (a) a cash fee equal to 7% of the gross proceeds raised from the sale of 2011 Bridge Notes to investors, originated
in Canada, introduced to the Company by Innerkip and (b) five-year warrants, which are identical to the investor warrants associated
with the 2011 Bridge Financing, to purchase common stock of the Company equal to 7% of the shares issuable upon conversion of
2011 Bridge Notes issued to such investors. In connection with the January 2012 closings, Innerkip received a cash fee of $45,500
and was issued warrants to purchase 15,167 shares of the Company’s common stock at an exercise price of $3.00 per share.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On June 9,
2012, the Board approved the terms of the 2012 Conversion Agreements dated June 12, 2012. Under these agreements, all holders
of October Notes, January Notes, the Unsecured Note and holders of $1.86 million of $2 million of the 2011 Bridge Notes
as described above agreed to automatically convert their notes to equity upon a qualified offering with gross proceeds of
at least $3 million, at which time they would be issued an additional consideration warrant for every two shares they are
issued upon the conversion to equity of their note (including accrued and unpaid interest thereon). The form of the warrant
would be the same as the warrants that would be offered to the investors in the qualified offering. Furthermore, the October
and January note holders would also receive an additional 50% warrant coverage on the principal amount of (but not accrued
and unpaid interest on) their note. The form of these warrants will be similar to their original warrants as amended. The
2011 Conversion Agreement also provides for the amendment of the warrants issued to the note holders whereby the ratchet
provision of the warrants would be amended to provide for a one-time ratchet adjustment of the exercise price to the
per-share offering price in the qualified offering in the event that the exercise price is greater than the offering price in
the qualified offering. Holders of 2011 Bridge Notes in the aggregate principal amount of $140,000 did not deliver the
requisite consent, and such notes would therefore remain outstanding after any Qualified Offering, assuming that the Company
succeeds in consummating the Qualified Offering, as to which there is currently substantial doubt. When executed by the
holders, the 2012 Conversion Agreement superseded the Amendment and Conversion Agreements of September 2011 and the
Agreements to Convert and Amend of June 2011, which both anticipated that the October and January notes would automatically
convert to equity upon the raising of $10 million in a qualified offering. The June 12, 2012 agreements also superseded a
substantially similar Conversion Agreement dated May 4, 2012, which anticipated the conversion of the notes to equity upon a
qualified offering with gross proceeds of at least $5 million. The Company is currently exploring the further amendment of
the October Notes, January Notes, Unsecured Notes and 2011 Bridge Notes, which amendment may supersede the 2012 Conversion
Agreements in whole or in part.



As of June 30, 2012 outstanding senior secured
convertible promissory notes (October Notes) were $3,023,900 (including $23,900 corresponding to accrued and unpaid interest on
the exchanged notes) and debt discount was $0. During the nine months ended June 30, 2012 the Company amortized $155,700 of the
debt discount.



As of June 30, 2012 outstanding subordinated
secured convertible promissory notes (January Notes) were $2,500,000 and debt discount was $0. During the nine months ended June
30, 2012 the Company amortized $1,105,200 of the debt discount.



As of June 30, 2012 outstanding subordinated
secured convertible promissory notes (2011 Bridge Notes) were $2,000,000 and debt discount was $916,700. During the nine months
ended June 30, 2012 the Company amortized $1,083,300 of the debt discount.



17







As of June 30, 2012 outstanding subordinated
unsecured convertible promissory notes (Unsecured Bridge Notes) were $90,000 and debt discount was $60,000. During the nine months
ended June 30, 2012 the Company amortized $30,000 of the debt discount.



The combined outstanding
senior secured, subordinated secured and subordinated unsecured convertible promissory notes as of June 30, 2012 were $7,613,900
and debt discounts were $976,700. During the nine months ended June 30, 2012 the Company amortized $2,374,200 of the debt discount.



In connection with
our now withdrawn application to list our securities on the TSXV and the contemplated public offering of securities in Canada and
the United States, we entered into agreements on June 3, 2011 with holders of 100% of our 2010 Placement Agent Warrants and 2011
Placement Agent Warrants initially issued to Monarch Capital Group LLC and Antaeus Capital, Inc. They have all agreed to amend
such warrants to remove full ratchet anti-dilution protection from the terms of the warrants. This amendment is conditioned on
the closing of the proposed offering, provided that the proposed offering yields gross proceeds to the Company of at least $10
million, and is effective immediately prior to the closing of the proposed offering. As consideration for this amendment, we expect
to issue warrants to purchase an aggregate of 11,667 shares of our common stock to such holders (after adjustment for the anti-dilution
ratchet), with each holder receiving a warrant to purchase a number of shares of common stock corresponding to 25% of the number
of shares issuable upon exercise of their placement agent warrants.



In September 2011,
it was determined that proceeding with the contemplated public offering of securities in Canada and listing on the TSXV was not
viable due to the highly volatile market conditions at that time and the decision was made to terminate the offering.



|4. | STOCKHOLDERS’ DEFICIENCY
|-- | ------------------------



Common and Preferred Stock



As of June 30, 2012,
the Company is authorized to issue 100,000,000 shares of common stock at par value of $0.001 per share and the number of shares
issued and outstanding was 1,874,175.



As of June 30, 2012,
CNS California is authorized to issue 100,000,000 no par value shares of two classes of stock, 80,000,000 of which was designated
as common shares and 20,000,000 of which was designated as preferred shares.



As of June 30, 2012,
Colorado CNS Response, Inc. is authorized to issue 1,000,000 no par value shares of common stock.



As of June 30, 2012,
Neuro-Therapy Clinic, Inc., a wholly-owned subsidiary of Colorado CNS Response, Inc., is authorized to issue ten thousand (10,000)
shares of common stock, no par value per share.



On April 25, 2011 we
issued 3,123 shares of common stock as payment in lieu of cash for an aggregate amount of $44,000 owed to two vendors who had provided
consulting services to the Company. These shares were issued to these vendors, who were also accredited investors, at $14.10 per
share. This was based on the quoted closing price of the Company’s stock on March 11, 2011, which was the date that our Board
approved this stock issuance.



Stock-Option Plan



On August 3, 2006,
CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the
issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory
stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered
by the board of directors. A total of 333,334 shares of stock were initially reserved for issuance under the 2006 Plan.



The 2006 Plan
initially provided that in any calendar year, no eligible employee or director shall be granted an award to purchase more than
100,000 shares of stock. The option price for each share of stock subject to an option shall be (i) no less than the fair market
value of a share of stock on the date the option is granted, if the option is an ISO, or (ii) no less than 85% of the fair market
value of the stock on the date the option is granted, if the option is a NSO; provided, however, if the option is an ISO granted
to an eligible employee who is a 10% shareholder, the option price for each share of stock subject to such ISO shall be no less
than 110% of the fair market value of a share of stock on the date such ISO is granted. Stock options have a maximum term of ten
years from the date of grant, except for ISOs granted to an eligible employee who is a 10% shareholder, in which case the maximum
term is five years from the date of grant. ISOs may be granted only to eligible employees.



On March 3, 2010, the
Board of Directors approved an amendment to the 2006 Plan which increased the number of shares reserved for issuance under the
2006 Plan from 333,334 to 666,667 shares of stock.  The amendment also increased the limit on shares issued within a
calendar year to any eligible employee or director from 100,000 to 133,333 shares of stock.  The amendment was approved
by shareholders at the annual meeting held on April 27, 2010.



On March 11, 2011,
the Board of Directors also approved an additional grant of 15,834 options to staff members of the Company.  The options
will vest equally over a 48 month period.  The effective grant date for these accredited investors was March 11, 2011
and the exercise price of $14.10 per share was based on the quoted closing share price of the Company’s stock on March 11,
2011.



18







On March 22, 2012,
our Board of Directors approved the CNS Response, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”),
and approved the grant of options to purchase 42,670 shares of common stock pursuant to such plan at an exercise price of $3.00
per share, including options to purchase 8,334 shares to each of our directors Zachary McAdoo and Maurice DeWald. The 2012 Plan
will be submitted for approval to our stockholders at our 2012 Annual Meeting of Stockholders.  Absent stockholder approval,
the options will be cancelled and the 2012 Plan will not become effective.



Stock-based compensation
expense is recognized over the employees’ or service provider’s requisite service period, generally the vesting period
of the award. Stock-based compensation expense included in the accompanying statements of operations for the three months ended
June 30, 2012 and 2011 is as follows:



|                                      |  | For the three months ended June 30, |        
|------------------------------------- |  | ----------------------------------- | -------
|                                      |  | 2012                                |        
|Cost of Neurometric Services revenues |  | $                                   | 2,500  
|Research                              |  |                                     | 24,000 
|Product Development                   |  |                                     | 19,000 
|Sales and marketing                   |  |                                     | 49,500 
|General and administrative            |  |                                     | 245,200
|Total                                 |  | $                                   | 340,200



|                                      |  | For the nine months ended June 30, |          
|------------------------------------- |  | ---------------------------------- | ---------
|                                      |  | 2012                               |          
|Cost of Neurometric Services revenues |  | $                                  | 7,600    
|Research                              |  |                                    | 75,200   
|Product Development                   |  |                                    | 53,600   
|Sales and marketing                   |  |                                    | 147,400  
|General and administrative            |  |                                    | 726,900  
|Total                                 |  | $                                  | 1,010,700



Total unrecognized
compensation as of June 30, 2012 amounted to $1,999,900.



A summary of stock
option activity is as follows:



|                                  |  | Number of Shares |         |   | Weighted Average Exercise Price |  
|--------------------------------- |  | ---------------- | ------- | - | ------------------------------- | -
|Outstanding at September 30, 2011 |  |                  | 524,201 |   |                                 | $
|Granted                           |  |                  | -       |   |                                 |  
|Exercised                         |  |                  | -       |   |                                 |  
|Forfeited                         |  |                  | (339    | ) |                                 |  
|Outstanding at December 31, 2011  |  |                  | 523,862 |   |                                 | $
|Granted                           |  |                  | 42,670  |   |                                 |  
|Exercised                         |  |                  | -       |   |                                 |  
|Forfeited                         |  |                  | -       |   |                                 |  
|Outstanding at March 31, 2012     |  |                  | 566,532 |   |                                 | $
|Granted                           |  |                  | -       |   |                                 |  
|Exercised                         |  |                  | -       |   |                                 |  
|Forfeited                         |  |                  | -       |   |                                 |  
|Outstanding at June 30, 2012      |  |                  | 566,532 |   |                                 | $



19







Following is a summary
of the status of options outstanding at June 30, 2012:



|Exercise Price |       |  | Number of Shares |  |         | Weighted Average Contractual Life |  |  | Weighted Average Exercise Price | 
|-------------- | ----- |  | ---------------- |  | ------- | --------------------------------- |  |  | ------------------------------- | 
|               |       |  |                  |  |         |                                   |  |  |                                 | 
|$              | 3.00  |  |                  |  | 42,670  |                                   |  |  | 10 years                        | 
|$              | 3.60  |  |                  |  | 28,648  |                                   |  |  | 10 years                        | 
|$              | 3.96  |  |                  |  | 32,928  |                                   |  |  | 10 years                        | 
|$              | 9.00  |  |                  |  | 4,525   |                                   |  |  | 10 years                        | 
|$              | 12.00 |  |                  |  | 28,535  |                                   |  |  | 10 years                        | 
|$              | 14.10 |  |                  |  | 15,495  |                                   |  |  | 10 years                        | 
|$              | 15.30 |  |                  |  | 1,373   |                                   |  |  | 10 years                        | 
|$              | 16.50 |  |                  |  | 270,775 |                                   |  |  | 10 years                        | 
|$              | 17.70 |  |                  |  | 953     |                                   |  |  | 10 years                        | 
|$              | 24.00 |  |                  |  | 4,667   |                                   |  |  | 10 years                        | 
|$              | 26.70 |  |                  |  | 32,297  |                                   |  |  | 10 years                        | 
|$              | 28.80 |  |                  |  | 11,767  |                                   |  |  | 10 years                        | 
|$              | 32.70 |  |                  |  | 83,790  |                                   |  |  | 10 years                        | 
|$              | 36.00 |  |                  |  | 8,109   |                                   |  |  | 5 years                         | 
|               | Total |  |                  |  | 566,532 |                                   |  |  |                                 | 



We have entered into
agreements on June 3, 2011 with the majority of our option holders pursuant to which holders of options to purchase an aggregate
of 439,689 shares of our common stock, at exercise prices ranging from $3.00 per share to $36.00 per share, have agreed to amend
their options to permit exercise only in cash and to limit the period during which the options may be exercised post-termination
to 90 days (for employees) and twelve months (for consultants).



We have agreed to freeze
any further grants or exercises of securities under the 2006 Plan and adopt the 2012 plan, subject to approval by our stockholders,
which we expect to seek at a meeting of stockholders.





Warrants to Purchase Common Stock



The warrant activity for the nine months
ending June 30, 2012 and year ending September 30, 2011 respectively are described as follows:





|Warrants |  |  | Exercise Price |  |  | Issued, Surrendered or Expired in Connection With:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- |  |  | -------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|716,810  |  |  |                |  |  | Warrants outstanding at October 1, 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |  |  |                |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|111,100  |  |  | $9.00          |  |  | These warrants were issued to eight investors who purchased notes for $2,222,220 pursuant to the October Purchase Agreement described in note 3.  These investors included three directors of the Company, Mr. David Jones, Mr. John Pappajohn and Dr. George Kallins, each of whom purchased notes for $250,000 ($750,000 in aggregate) either directly or through an entity that they control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |  |  |                |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5,558    |  |  | $9.90          |  |  | These warrants were issued to Monarch Capital who acted as placement agents in raising $500,000 from two investors who purchase notes pursuant to the October Purchase agreement described in note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |  |  |                |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |  |  |                |  |  | These warrants were issued to 12 investors who purchased notes for $2,500,000 pursuant to the January Purchase Agreement described in note 3.  Of the 12 accredited investors during the January 2011 through April 2011 period, eight have previous relationships with the Company as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|138,897  |  |  | $9.00          |  |  | 1) A January Note in the principal amount of $50,000, and a warrant to purchase 2,778 shares were issued to the Company’s Chief Financial Officer, Paul Buck. 2) Three January Notes in aggregate principal amount of $562,500, and warrants to purchase 31,251 shares were issued to SAIL Venture Partners, LP, of which David Jones, a director of the Company, is a senior partner of the general partner. 3) Three January Notes in aggregate principal amount of $437,500, and warrants to purchase 24,307 shares were issued to SAIL 2010 Co-Investment Partners, L.P., an entity likewise affiliated with Mr. Jones. 4) Two January Notes in aggregate principal amount of $100,000, and a warrant to purchase 5,556shares were issued to Meyer Proler MD who first invested in 2006 and provides medical consulting services to the Company. 5) A January Note in the principal amount of $400,000 and a warrant to purchase 22,223 shares were issued to Pyxis Long /Short Healthcare fund which first invested in the company in October. 6) A January Note in the principle amount of $150,000 and a warrant to purchase 8,334 shares were issued to Cummings Bay Capital LP which has the same fund manager as the Pyxis Long/Short Healthcare Fund which first invested Company in October 2010. 7) A January Note in the principal amount of $200,000 and a warrant to purchase 11,112 shares were issued to Andy Sassine who had first invested in the Company in October 2010. 8) A January Note in the principal amount of $50,000 and a warrant to purchase 2,778 shares were issued to a trust, the trustee of which is the father-in-law of the Company’s Chief Executive Officer, George Carpenter. 9) Four January Notes in aggregate amount of $550,000 were issued to new accredited investors together with warrants to purchase 30,558 shares.





20







|10,002    |  |  | $9.90           |  |  | These warrants were issued Monarch Capital who acted as placement agents in raising $750,000 from three investors who purchased January Notes pursuant to the January Purchase Agreement described in Note 3 and Antaeus Capital, Inc. who acted as placement agent in raising $150,000 from one investor who purchased January Notes pursuant to the Note and Warrant Purchase agreement described in Note 3.                                                      
|--------- |  |  | --------------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(1,412)   |  |  | $0.30           |  |  | Warrants expired                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(565)     |  |  | $0.30           |  |  | Warrants were surrendered in a net issue exercise: 539 shares were issued in lieu of cash.                                                                                                                                                                                                                                                                                                                                                                          
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|980,390   |  |  |                 |  |  | Warrants outstanding at September 30, 2011                                                                                                                                                                                                                                                                                                                                                                                                                          
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|613,782   |  |  | $3.00           |  |  | As a result of the issuance of 2011 Bridge Notes at a conversion of $3.00 and associated warrants to purchase common stock at an exercise price of $3.00, the ratchet provision in the October and January Notes was triggered with the resultant adjustment in the number of shares convertible at the lowered conversion price of $3.00 down from $9.00 and the consequential adjustment in the number of warrants issued to the October and January Note Holders.
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31,112    |  |  | $3.00           |  |  | As mentioned above the ratchet provision in the issued placement agent warrants was also triggered with the resultant adjustment in the number of warrants being issued to the placement agents.                                                                                                                                                                                                                                                                    
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2,823)   |  |  | $0.30           |  |  | Warrants were surrendered in a cash exercise for 2,823 shares.                                                                                                                                                                                                                                                                                                                                                                                                      
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |  |  |                 |  |  | These warrants were issued to 4 investors who purchased notes for $1,080,000 pursuant to the 2011 Bridge Purchase Agreement described in note 3.  Of the 4 accredited investors during the October 2011 through December 2011 period, three have had prior relationships with the Company as follows:                                                                                                                                                               
|          |  |  |                 |  |  | 1)    Three 2011 Bridge Notes in aggregate principal amount of $750,000, and warrants to purchase 250,002 shares were issued to John Pappajohn, a director of the Company.                                                                                                                                                                                                                                                                                          
|360,003   |  |  | $3.00           |  |  | 2)    Two 2011 Bridge Notes in aggregate amount of $80,000 were issued to accredited investors, who had previously invested in the Company, together with warrants to purchase 26,667 shares.                                                                                                                                                                                                                                                                       
|          |  |  |                 |  |  | 3)    A 2011 Bridge Note in the principal amount of $250,000, and a warrant to purchase 83,334 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who was subsequently appointed a director of the Company.                                                                                                                                                                                                               
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2,667     |  |  | $3.00           |  |  | These warrants were issued to Monarch Capital who acted as placement agents in raising $80,000 from two investors who purchased 2011 Bridge Notes pursuant to the 2011 Bridge Note January Purchase Agreement described in Note 3.                                                                                                                                                                                                                                  
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(87,574)  |  |  | $0.30 to $54.36 |  |  | Warrants expired                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|1,897,557 |  |  |                 |  |  | Warrants outstanding at December 31, 2011                                                                                                                                                                                                                                                                                                                                                                                                                           
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |  |  |                 |  |  | These warrants were issued to 8 investors who purchased notes for $920,000 pursuant to the 2011 Bridge Purchase Agreement described in note 3 and a $90,000 unsecured bridge note.  Of the 8 accredited investors during the January 2012 through March 2012 period, four have had prior relationships with the Company as follows:                                                                                                                                 
|          |  |  |                 |  |  | 1)    Three 2011 Bridge Notes in aggregate amount of $180,000 were issued to accredited investors, who had previously invested in the Company, together with warrants to purchase 60,001 shares.                                                                                                                                                                                                                                                                    
|336,670   |  |  | $3.00           |  |  | 2)    A 2011 Bridge Note in the principal amount of $40,000, and a warrant to purchase 13,334 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who is a director of the Company.                                                                                                                                                                                                                                        
|          |  |  |                 |  |  | 3)    A unsecured Bridge Note in the principal amount of $90,000, and a warrant to purchase 30,000 shares were issued to the Zanett Opportunity Fund, an entity affiliated with Zachary McAdoo, who is a director of the Company.                                                                                                                                                                                                                                   
|          |  |  |                 |  |  | 4)    Four 2011 Bridge Notes in aggregate amount of $700,000 and a warrant to purchase 233,335 shares were issued to four new investors to the company.                                                                                                                                                                                                                                                                                                             
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2,667     |  |  | $3.00           |  |  | These warrants were issued to Monarch Capital who acted as placement agents in raising $80,000 from two investors who purchased 2011 Bridge Notes pursuant to the Bridge Note January Purchase Agreement described in Note 3.                                                                                                                                                                                                                                       



21









|15,167    |  |  | $3.00           |  |  | These warrants were issued to Innerkip Capital Management who acted as placement agents in raising $650,000 from three investors who purchased 2011 Bridge Notes pursuant to the 2011 Bridge Note January Purchase Agreement described in Note 3.
|--------- |  |  | --------------- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  
|(57,791)  |  |  | $1.80           |  |  | Warrants expired                                                                                                                                                                                                                                 
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  
|2,194,270 |  |  |                 |  |  | Warrants outstanding at March 31, 2012                                                                                                                                                                                                           
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  
|(29,830)  |  |  | $43.20 to $54.0 |  |  | Warrants expired                                                                                                                                                                                                                                 
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  
|2,164,440 |  |  |                 |  |  | Warrants outstanding at June 30, 2012                                                                                                                                                                                                            
|          |  |  |                 |  |  |                                                                                                                                                                                                                                                  



At June 30, 2012, there were warrants outstanding
to purchase 2,164,440 shares of the Company’s common stock. The exercise price of the outstanding warrants range from
$3.00 to $9.90 with a weighted average exercise price of $4.35.  The warrants expire at various times starting 2012 through
2018.



5.           RELATED
PARTY TRANSACTIONS





As at June
30, 2011, accrued consulting fees included $27,000 due to Dr. Henry Harbin, a director of the company in accordance with a 12
month consulting agreement, the first term of which ended on December 31, 2010.  The agreement was automatically renewed
for an additional 12 month term effective January 1, 2011 and automatically renewed for a third 12 month term effective
January 1, 2012.  For the six-month period ended March, 2011 two payments totaling $18,000 were made to Dr. Harbin in
connection with the consulting agreement. As at June 30, 2012 we had accrued consulting fees of $72,000 for Dr. Harbin.



On October 1, 2010,
the Company entered into the October Purchase Agreement with John Pappajohn to purchase a secured promissory note in the principal
amount of $250,000. Additionally, the Company entered into the October Purchase Agreement with SAIL Venture Partners, LP, of which
our Director, David Jones, is a senior partner of the general partner, to purchase an October Note in the principal amount of $250,000. 
For further detail, please refer to the section 2010, 2011 & 2012 Private Placement Transactions in Note 3 above.



On November 3, 2010,
the Company entered into the October Purchase Agreement with BGN Acquisitions Ltd. LP, of which our Director, Dr. George Kallins,
is the general partner, to purchase a secured promissory note in the principal amount of $250,000.  For further detail, please refer
to the section 2010, 2011 & 2012 Private Placement Transactions in Note 3 above.





On November 24, 2010
the Board of Directors, excluding Mr. Pappajohn, resolved to ratify an engagement agreement with Equity Dynamics, Inc. a company
owned by Mr. Pappajohn, to provide financial advisory services to assist the Company with the Company’s fund raising efforts. 
These efforts have included advice and assistance with the preparation of Private Placement Memoranda, investor presentations,
financing strategies, identification of potential and actual investors, and introductions to placement agents and investment bankers.
The engagement agreement calls for a retainer fee of $10,000 per month starting February 1, 2010.  As of June 30, 2011 the
Company had accrued $290,000 for the services provided by Equity Dynamics of which $155,000 has been paid, leaving $135,000 due
and outstanding as at June 30, 2012.  The initial term of the agreement was for 12 months from its initiation and can be cancelled
by either party, with or without cause, with 30 days written notice. On March 22, 2012, the Board ratified the extension of the
engagement agreement through January 2012.





On February 15, 2011,
pursuant to the January Purchase Agreement, we issued to Mr. Paul Buck, Chief Financial Officer of the Company, an Unsecured Note
in the aggregate principal amount of $50,000 and related warrants to purchase up to 2,778 shares. Also on this date the Company
pursuant to the January Purchase Agreement, issued an Unsecured Note in the aggregate principal amount of $50,000 and a warrant
to purchase 2,778 shares to a trust, the trustee of which is the father-in-law of the Company’s Chief Executive Officer,
George Carpenter. For further detail, please refer
to the section 2010, 2011 & 2012 Private Placement Transactions in Note 3 above.



On February 23, 2011,
an Unsecured Note in the aggregate principal amount of $200,000 and a warrant to purchase 11,112 shares of common stock was issued
to Mr. Andy Sassine (an accredited investor who had previously invested in the Company and as a result of this purchase became
a beneficial owner of more than 5% of our outstanding common stock). For further detail, please refer
to the section 2010, 2011 & 2012 Private Placement Transactions in Note 3 above.



On February 28, 2011,
pursuant to the January Purchase Agreement, we issued to SAIL Venture Partners, LP January Notes in the aggregate principal amount
of $187,500 and warrants to purchase up to 10,417 shares of common stock.  Additionally, we issued to SAIL 2010 Co-Investment
Partners, L.P., an affiliate of SAIL Venture Partners, LP January Notes in the aggregate principal amount of $62,500 and warrants
to purchase up to 3,473 shares of common stock.  We received $187,500 from SAIL Venture Partners, LP and $62,500 from SAIL
2010 Co-Investment Partners, L.P. for an aggregate total of $250,000 in gross proceeds.  Our Director, David Jones, is a senior
partner of the general partner of SAIL Venture Partners, LP.  Also on February 28, 2011, pursuant to the 2011 Purchase Agreement,
we issued an Unsecured Note in the aggregate principal amount of $400,000, and a warrant to purchase 22,223 shares of common stock
to Pyxis Long/Short Healthcare Fund (which had previously invested in the Company and as a result of this purchase became a
beneficial owner of more than 5% of our outstanding common stock). For further detail, please refer
to the section 2010, 2011 & 2012 Private Placement Transactions in Note 3 above.



22







On April 15,
2011, pursuant to the January Purchase Agreement, we issued to SAIL Venture Partners, LP additional January Notes in the aggregate
principal amount of $250,000 and warrants to purchase up to 13,889 shares of common stock.  Additionally, we issued to SAIL
2010 Co-Investment Partners, L.P. January Notes in the aggregate principal amount of $250,000 and warrants to purchase up to 13,889
shares of common stock.  We received $250,000 from each of SAIL Venture Partners, LP and SAIL 2010 Co-Investment Partners,
L.P. for an aggregate total of $500,000 in gross proceeds.



On April 25, 2011,
pursuant to the January Purchase Agreement, we issued to SAIL Venture Partners, LP further January Notes in the aggregate principal
amount of $125,000 and warrants to purchase up to 6,945 shares of common stock and issued to SAIL 2010 Co-Investment Partners,
L.P. January Notes in the aggregate principal amount of $125,000 and warrants to purchase up to 6,945 shares of common stock. 
We received $125,000 from each of SAIL Venture Partners, LP and SAIL 2010 Co-Investment Partners, L.P. for an aggregate total of
$250,000 in gross proceeds.  Also on April 25, 2011, pursuant to the 2011 Purchase Agreement, we issued an Unsecured Note
in the aggregate principal amount of $150,000, and a warrant to purchase 8,334 shares of common stock to Cummings Bay Healthcare
Fund which has the same fund manager as the Pyxis Long/Short Healthcare Fund (which had previously invested in the Company and
as a result of that prior purchase had already become a beneficial owner of more than 5% of our outstanding common stock).



On October 11, 2011,
the Company, with the consent of holders of a majority in aggregate principal amount outstanding (the “Majority Holders”)
of its subordinated unsecured convertible notes (the “January Notes”) amended all of the January Notes to, among other
things, extend the maturity of such notes until October 1, 2012.



On October 12, 2011,
the Company, with the consent of the Majority Holders of its senior secured convertible notes (the “October Notes”),
amended all of the October Notes to, among other things, extend the maturity of such notes until October 1, 2012.  These amendments
are further described in Note 3 - Convertible Debt and Equity Financings - 2010, 2011 & 2012 Private Placement Transactions
.



Pursuant to the agreements
amending the October Notes and January Notes (the “Amendment and Conversion Agreements”), the exercise price of the
warrants that were issued in connection with the October Notes and the January Notes (the “Outstanding Warrants”) will
be adjusted to match the Qualified Offering Price, if such price is lower than the exercise price then in effect. The Company agreed
to issue to each holder of the October Notes and January Notes, as consideration for the above, warrants to purchase a number of
shares of common stock equal to 30% of the number of shares of common stock to be received by each holder upon conversion of their
notes at the closing of the Qualified Offering (the “Consideration Warrants”).  The Consideration Warrants
would be issued after the Qualified Offering and would have the same terms as the Outstanding Warrants, as amended.



On October 18, 2011,
CNS Response, Inc. issued 2011 Bridge Notes in the aggregate principal amount of $250,000 and warrants to purchase 41,667 shares
of common stock to Mr. Pappajohn for gross proceeds to the Company of $250,000. On November 11, 2011 the terms of the corresponding
purchase agreement were amended and restated to provide for the issuance of warrants to purchase a number of shares corresponding
to 100% of the number of shares issuable on conversion of the 2011 Bridge Notes. Consequently, the shares underlying the warrants
issued to Mr. Pappajohn on October 18, 2011 were increased to 83,334 shares of common stock.



On November 11, 2011,
the Company issued Mr. Pappajohn additional 2011 Bridge Notes in the aggregate principal amount of $250,000 and warrants to purchase
83,334 shares of common stock for gross proceeds to the Company of $250,000 as part of the 2011 Bridge Financing.  Again
on December 27, 2011, the Company issued Mr. Pappajohn additional 2011 Bridge Notes in the aggregate principal amount of $250,000
and warrants to purchase 83,334 shares of common stock for gross proceeds to the Company of $250,000 as part of the 2011 Bridge
Financing.  As of December 27, 2011, the Company has  issued 2011 Bridge Notes in the aggregate principal amount
of $750,000 and warrants to purchase 250,002 shares of common stock to Mr. Pappajohn for gross proceeds to the Company of $750,000.



On November 17, 2011,
Zanett Opportunity Fund, Ltd. (“Zanett”), a Bermuda corporation for which McAdoo Capital, Inc. is the investment manager,
purchased 2011 Bridge Note in the aggregate principal amount of $250,000 and warrants to purchase 83,334 shares of common stock
for cash payments aggregating $250,000.  Mr. McAdoo is the president and owner of McAdoo Capital, Inc. On November 21,
2011, the Board of Directors elected Zachary McAdoo to the Board.  Mr. McAdoo also serves as Chairman of the Board’s
Audit Committee.



On January 29, 2012,
Zanett purchased a 2011 Bridge Note in the aggregate principal amount of $40,000 and warrants to purchase 13,334 shares of common
stock for a cash payment aggregating $40,000.  Additionally on February 29, 2012, the Zanett purchased an Unsecured Bridge
Note in the aggregate principal amount of $90,000 and warrants to purchase 30,000 shares of common stock for a cash payment aggregating
$90,000.



The Amended and Restated
Security Agreement, dated as of September 30, 2011, between the Company and Paul Buck, as administrative agent for the secured
parties (the “Amended and Restated Security Agreement”), which replaces the security agreement from 2010, and the corresponding
security interest terminate (1) with respect to the October Notes, if and when holders of a majority of the aggregate principal
amount of October Notes issued have converted their notes into shares of common stock and, (2) with respect to the January Notes
and notes to be issued in the 2011 Bridge Financing (the “2011 Bridge Notes”), if and when holders of a majority of
the aggregate principal amount of January Notes and 2011 Bridge Notes (on a combined basis) have converted their notes.



The terms of the October Notes, January
Notes, 2011 Bridge Notes and Unsecured Note and all related warrants, as well as details of the transactions in which they were
issued, are described above in the section 2010, 2011 & 2012 Private Placement Transactions in Note 3.



23







On April 26, 2012 and
on May 25, 2012 we received two short-term, interest free loans of $100,000 each from John Pappajohn for the purpose of funding
offering costs and other sundry operating expenses. These loans are evidenced by two demand notes and repayment of these notes
scheduled to occur if and when we consummate the next financing.



6.           REPORTABLE SEGMENTS



The Company operates
in two business segments:  referenced neurometric information services and clinical services.  Neurometric
Information Services provides data, in the form of a PEER Report, to psychiatrists and other physicians/prescribers to enable them
to make a more informed decision when treating a specific patient with mental, behavioral and/or addictive disorders.  Clinic
operates NTC, a full service psychiatric practice.



The following tables
show operating results for the Company’s reportable segments, along with reconciliation from segment gross profit (loss)
from operations, the most directly comparable measure in accordance with generally accepted accounting principles in the United
States, or GAAP:



|                           |  | Three months ended June 30, 2012 |           
|-------------------------- |  | -------------------------------- | ----------
|                           |  | Reference Neurometric            |           
|Revenues                   |  | $                                | 38,000    
|                           |  |                                  |           
|Operating expenses:        |  |                                  |           
|Cost of revenues           |  |                                  | 35,500    
|Research                   |  |                                  | 66,300    
|Product Development        |  |                                  | 200,900   
|Sales and marketing        |  |                                  | 223,200   
|General and administrative |  |                                  | 660,300   
|Total operating expenses   |  |                                  | 1,186,200 
|                           |  |                                  |           
|Loss from operations       |  | $                                | (1,148,200



|                           |  | Three months ended June 30, 2011 |           
|-------------------------- |  | -------------------------------- | ----------
|                           |  | Reference Neurometric            |           
|Revenues                   |  | $                                | 33,200    
|                           |  |                                  |           
|Operating expenses:        |  |                                  |           
|Cost of revenues           |  |                                  | 37,800    
|Research                   |  |                                  | 77,700    
|Product Development        |  |                                  | 104,100   
|Sales and marketing        |  |                                  | 333,200   
|General and administrative |  |                                  | 780,600   
|Total operating expenses   |  |                                  | 1,333,400 
|                           |  |                                  |           
|Loss from operations       |  | $                                | (1,300,200



|                           |  | Nine months ended June 30, 2012 |           
|-------------------------- |  | ------------------------------- | ----------
|                           |  | Reference Neurometric           |           
|Revenues                   |  | $                               | 113,200   
|                           |  |                                 |           
|Operating expenses:        |  |                                 |           
|Cost of revenues           |  |                                 | 110,700   
|Research                   |  |                                 | 203,400   
|Product Development        |  |                                 | 476,200   
|Sales and marketing        |  |                                 | 813,600   
|General and administrative |  |                                 | 2,257,300 
|Total operating expenses   |  |                                 | 3,861,200 
|                           |  |                                 |           
|Loss from operations       |  | $                               | (3,748,000



24







|                           |  | Nine months ended June 30, 2011 |           
|-------------------------- |  | ------------------------------- | ----------
|                           |  | Reference Neurometric           |           
|Revenues                   |  | $                               | 106,000   
|                           |  |                                 |           
|Operating expenses:        |  |                                 |           
|Cost of revenues           |  |                                 | 110,300   
|Research                   |  |                                 | 408,100   
|Product Development        |  |                                 | 364,800   
|Sales and marketing        |  |                                 | 895,400   
|General and administrative |  |                                 | 2,381,100 
|Total operating expenses   |  |                                 | 4,159,700 
|                           |  |                                 |           
|Loss from operations       |  | $                               | (4,053,700



The following table includes selected segment financial information
as of June 30, 2012, related to total assets:



|             |  | Reference  Neurometric |         |  | Clinic |   |        | Total | 
|------------ |  | ---------------------- | ------- |  | ------ | - | ------ | ----- | 
|Total assets |  | $                      | 145,000 |  |        | $ | 40,300 |       | 



25







7.          LOSS PER SHARE



In accordance with
ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per Share”), basic net income (loss) per share is computed
by dividing the net income (loss) to common stockholders for the period by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted
average number of common and dilutive common equivalent shares outstanding during the period.  For the three months and
nine months ended June 30, 2012 and 2011, the Company has excluded all common equivalent shares from the calculation of diluted
net loss per share as such securities are anti-dilutive.



A summary of the net
income and shares used to compute net income (loss) per share for the three months ended June 30, 2012 and 2011 are as follows:



|                                                                                                       |  | For the Three Months ended June 30, |          
|------------------------------------------------------------------------------------------------------ |  | ----------------------------------- | ---------
|                                                                                                       |  | 2012                                |          
|Net income for computation of basic net profit per share                                               |  | $                                   | 3,615,200
|Net income for computation of dilutive net income profit per share                                     |  | $                                   | 3,615,200
|                                                                                                       |  |                                     |          
|Basic net loss per share                                                                               |  | $                                   | 1.93     
|                                                                                                       |  |                                     |          
|Diluted net income loss per share                                                                      |  | $                                   | 0.51     
|                                                                                                       |  |                                     |          
|Basic weighted average shares outstanding                                                              |  |                                     | 1,874,175
|Dilutive common equivalent shares                                                                      |  |                                     | 5,226,232
|Diluted weighted average common shares                                                                 |  |                                     | 7,100,407
|                                                                                                       |  |                                     |          
|Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share: |  |                                     |          
|Convertible debt                                                                                       |  |                                     | -        
|Warrants                                                                                               |  |                                     | -        
|Options                                                                                                |  |                                     | -        



A summary of the net
loss and shares used to compute the loss per share for the nine months ended June 30, 2012 and 2011 are as follows:



|                                                                                                       |  | For the Nine months ended June 30, |           
|------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ----------
|                                                                                                       |  | 2012                               |           
|Net loss for computation of basic net loss per share                                                   |  | $                                  | (7,510,300
|Net loss for computation of dilutive net income loss per share                                         |  | $                                  | (7,510,300
|                                                                                                       |  |                                    |           
|Basic net loss per share                                                                               |  | $                                  | (4.01     
|                                                                                                       |  |                                    |           
|Diluted net loss per share                                                                             |  | $                                  | (4.01     
|                                                                                                       |  |                                    |           
|Basic weighted average shares outstanding                                                              |  |                                    | 1,873,902 
|Dilutive common equivalent shares                                                                      |  |                                    | -         
|Diluted weighted average common shares                                                                 |  |                                    | 1,873,902 
|                                                                                                       |  |                                    |           
|Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share: |  |                                    |           
|Convertible debt                                                                                       |  |                                    | 2,206,186 
|Warrants                                                                                               |  |                                    | 1,909,184 
|Options                                                                                                |  |                                    | 525,206   



26







8.           COMMITMENTS AND CONTINGENT LIABILITIES



Litigation



From time to time,
the Company may be involved in litigation relating to claims arising out of the Company’s operations in the ordinary course
of business. Other than as set forth below, the Company is not currently party to any legal proceedings, the adverse outcome of
which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect
on the Company’s results of operations or financial position.



Since June of 2009,
the Company has been involved in litigation against Leonard J. Brandt, a stockholder, former director and the Company’s former
Chief Executive Officer (“Brandt”) in the Delaware Chancery Court and the United States District Court for the Central
District of California.  At the conclusion of a two-day trial that commenced December 1, 2009, the Chancery Court entered
judgment for the Company and dismissed with prejudice Brandt's action brought pursuant to Section 225 of the Delaware General Corporation
Law, which sought to oust the incumbent directors other than Brandt.  The Chancery Court thereby found that the purported
special meeting of stockholders convened by Brandt on September 4, 2009 was not valid and that the directors purportedly elected
at that meeting are not entitled to be seated.  On January 4, 2010, Brandt filed an appeal with the Supreme Court of the State
of Delaware in relation to the case.  On April 20, 2010, the Delaware Supreme Court affirmed the ruling of the Chancery Court.



The Chancery Court
also denied an injunction sought by Mr. Brandt to prevent the voting of shares issued by the Company in connection with the Company’s
bridge financing in June 2009, and securities offering in August 2009, and dismissed Brandt's claims regarding those financings
and stock issuances.  On January 4, 2010, Brandt also filed an appeal in relation to this ruling with the Delaware Supreme
Court which, on April 20, 2010, affirmed the ruling of the Chancery Court.



The Chancery Court
also dismissed with prejudice another action brought by Mr. Brandt, in which he claimed he had not been provided with information
owed to him.



In July 2009, the Company
filed an action in the United States District Court for the Central District of California against Mr. Brandt and certain others. 
The Company’s complaint alleged a variety of violations of federal securities laws, including anti-fraud based claims under
Rule 14a-9, solicitation of proxies in violation of the filing and disclosure dissemination requirements of Regulation 14A, and
material misstatements and omissions in and failures to promptly file amendments to Schedule 13D.  Mr. Brandt and the other
defendants filed counterclaims against us, alleging violations of federal securities laws relating to alleged actions and statements
taken or made by the Company or the Company’s officers and directors in connection with Mr. Brandt’s proxy and consent
solicitations.  On March 10, 2010, the Company dismissed the Company’s claims against EAC, and EAC dismissed its claims
against the Company and Mr. Carpenter.  On April 10, 2010, Mr. Brandt's attorneys moved to withdraw from representing Mr.
Brandt in the case.  On July 7, 2010, Mr. Brandt moved to dismiss his counterclaims against the Company and the Company consented
to dismiss its complaint against Mr. Brandt.  On July 13, 2010, all of the Company’s claims and Mr. Brandt’s counterclaims
in such action were dismissed.



On April 11, 2011,
Brandt and his family business partnership Brandt Ventures, GP, filed an action in the Superior Court for the State of California,
Orange County against CNS Response, Inc., one of its stockholders, SAIL Venture Partner, LP, and Mr. David Jones, a member of the
board of directors, alleging breach of a promissory note agreement entered into by Brandt Ventures, GP and the Company and alleging
that Mr. Brandt was wrongfully terminated as CEO in April, 2009 for which he is seeking approximately $170,000 of severance. The
plaintiffs seek rescission of a $250,000 loan made by Brandt Ventures, GP to the Company which was converted into common stock
in accordance with its terms, restitution of the loan amount and compensatory and punitive damages for Mr. Brandt’s termination.
The Company was served with a summons and complaint in the action on July 19, 2011. On November 1, 2011, Mr. Brandt filed an amended
complaint amending their claims and adding new claims against the same parties. On March 12, 2012, the court sustained demurrers
to certain of the counts against each defendant. On March 22, 2012, Mr. Brandt filed a second amended complaint that modifies certain
of his claims, but does not add new claims. The Company believes the second amended complaint, like the prior complaints, is devoid
of any merit. The Company is aggressively defending the action. The action is captioned Leonard J. Brandt and Brandt Ventures,
GP v. CNS Response, Inc., Sail Venture Partners and David Jones, case no. 30-2011-00465655-CU-WT-CJC.



The Company has expended
substantial resources to pursue the defense of legal proceedings initiated by Mr. Brandt.  The Company does not know whether
Mr. Brandt will institute additional claims against the Company and the defense of any such claims could involve the expenditure
of additional resources by the Company.



Lease Commitments



On December 30, 2009
the Company entered a three year lease, commencing February 1, 2010 and terminating on January 31, 2013 for its new Headquarters
and Neurometric Information Services business premises located at 85 Enterprise, Aliso Viejo, California 92656.  The 2,023
square foot facility has an average cost for the lease term of $3,600 per month.  The remaining lease obligation totals $29,000:
being $12,400 and $16,600 for fiscal years 2012 and 2013 respectively.



27







The Company leases
space for its Clinical Services operations under an operating lease.  The original lease terminated on February 28, 2010 and
a 37 month extension to the lease was negotiated commencing April 1, 2010 and terminating April 30, 2013. The 3,542 square foot
facility has an average cost for the lease term of $5,100 per month. The remaining lease obligation totals $55,300: being $16,500
and $38,800 for fiscal years 2012 and 2013 respectively.



The Company incurred
rent expense of $27,900 and $22,500 for the three months ended June 30, 2012 and 2011 respectively and $82,800 and $75,700 for
the nine months ended June 30, 2012 and 2011 respectively.



On November 8, 2010
we entered into a financial lease to acquire EEG equipment costing $15,900.  The term of the lease is 48 months ending October
2014 and the monthly payment is $412. As of June 30, 2012 the remaining lease obligation is $11,100: being $1,300, $4,900 and $4,900
for fiscal years 2012, 2013 and 2014 respectively.



9.          SUBSEQUENT EVENTS



Events subsequent to
June 30, 2012 have been evaluated through the date these financial statements were issued, to determine whether they should be
disclosed to keep the financial statements from being misleading.  The following events have occurred since June 30,
2012.





On July 12, 2012, the
Company was served a new complaint filed in Delaware Chancery Court on June 25, 2012 by Leonard Brandt, the Company’s
founder, former CEO and Chairman of the Board, captioned Leonard Brandt v. CNS Response, Inc., case no. 7652-VCG.  Brandt
hereby seeks indemnification for certain legal expenses and losses that he claims to have incurred defending himself
in suits or cross-suits brought by the Company in 2009 while Brandt remained a member of the board of directors, pursuant
to the Company’s Articles of Incorporation and By-Laws and the Delaware Corporate Code.  Brandt
seeks indemnification and reimbursement in an amount in excess of $500,000, alleged damages in excess of $500,000, interest and
legal fees. The Company believes that the complaint is without merit and the Company is aggressively defending the action.



The Company
continues to explore sources of capital and further amendments to its outstanding notes.



28







Item 2.     Management’s Discussion
and Analysis of Financial Condition and Results of Operations



The information
contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended
September 30, 2011 and presumes that readers have access to, and will have read, the “Management's Discussion and Analysis
or Plan of Operation” and other information contained in such Form 10-K. The following discussion and analysis also should
be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere
in this Form 10-Q.



This discussion
summarizes the significant factors affecting the condensed consolidated operating results, financial condition and liquidity and
cash flows of CNS Response, Inc. for the three and nine months ended June 30, 2012 and 2011.  Except for historical information,
the matters discussed in this management's discussion and analysis or plan of operation and elsewhere in this Quarterly Report
on Form 10-Q, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that include information relating to future events,
future financial performance, strategies, expectations, competitive environment, regulation and availability of resources.  These
forward-looking statements include, without limitation, statements regarding: proposed new products or services; our statements
concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for
our business, financial and operating results and future economic performance; statements of management’s goals and objectives;
trends affecting our financial condition, results of operations or future prospects; our financing plans or growth strategies;
and other similar expressions concerning matters that are not historical facts.  Words such as “may,” “will,”
“should,” “could,” “would,” “predicts,” “potential,” “continue,”
“expects,” “anticipates,” “future,” “intends,” “plans,” “believes”
and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.



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



| | · | our limited capital and inability to raise additional funds to support operations and capital expenditures;
| | - | -----------------------------------------------------------------------------------------------------------



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



| | · | our inability to gain widespread acceptance of our PEER Reports;
| | - | ----------------------------------------------------------------



| | · | our inability to prevail in convincing the FDA that our rEEG or PEER Online service does not constitute a medical device and should not be subject to regulation;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the possible imposition of fines or penalties by FDA for alleged violations of its rules or regulations;
| | - | --------------------------------------------------------------------------------------------------------



| | · | our inability to successfully compete against existing and future competitors;
| | - | ------------------------------------------------------------------------------



| | · | our inability to manage and maintain the growth of our business;
| | - | ----------------------------------------------------------------



| | · | our inability to protect our intellectual property rights; and
| | - | --------------------------------------------------------------



| | · | other factors discussed under the headings “Risk Factors” and “Business” in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



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



Overview



We are a cloud-based
neurometric company focused on analysis, research, development and the commercialization of a patented platform which allows psychiatrists
and other physicians to exchange outcome data referenced to electrophysiology.  With this information, physicians can
make more informed decisions when treating individual patients with behavioral (psychiatric and/or addictive) disorders. Our secondary
Clinical Services business, operated by our wholly-owned subsidiary, Neuro-Therapy Clinic (“NTC”), is a full service
psychiatric clinic.



29







Neurometric Information
Services



Because of the lack
of objective neurophysiology data available to physicians, the underlying pathology and physiology of behavioral disorders such
as depression, bipolar disorder, eating disorder, addiction, anxiety disorders and attention deficit hyperactivity disorder (ADHD)
can rarely be analyzed effectively by treating physicians.  Doctors are ordinarily forced to make prescription decisions
based only on symptomatic factors.  As a result, treatment can often be ineffective, costly and may require multiple
courses of treatment before the effective medications are identified, if at all.



We believe that
our technology offers an improvement over traditional methods for evaluating pharmacotherapy options in patients suffering
from non-psychotic behavioral disorders, because our technology is designed to correlate the success of courses of medication
with the neurophysiological characteristics of a particular patient. Our technology provides medical professionals with
medication sensitivity data for a subject patient based upon the identification and correlation of treatment outcome
information from other patients with similar neurophysiologic characteristics.  This treatment outcome information
is contained in what we believe to be the largest outcomes database for mental health care pharmacotherapy there are now over
34,000 outcomes within the database from over 8,700 unique patients with psychiatric
or addictive problems. We refer to this database as the PEER Online database (it was formerly known as the “CNS
Database”). For each patient in the PEER Online database, we have compiled neurophysiology data from
electroencephalographic (“EEG”) scans, symptoms and outcomes often across multiple treatments from multiple
psychiatrists and other physicians. This patented technology, called PEER OnlineTM (based on a technology known as
“Referenced-EEG®” or “rEEG®”), represents an innovative approach to describing effective
medications for patients suffering from debilitating behavioral disorders.



This technology allows
us to create and provide simple reports (“PEER Outcome Reports” or “PEER Reports”) to medical professionals
that summarize historical treatment success of specific medications for those patients with similar neurometric brain patterns.  PEER
Reports provide neither a diagnosis nor a specific treatment, but like all lab results, provide objective, evidenced-based information
to help the prescriber in their decision-making. With PEER Reports, physicians order a digital EEG for a patient, which is then
referenced to the PEER Online database. By providing this reference correlation, an attending physician can better establish a
treatment strategy with the knowledge of how other patients with similar brain function have previously responded to a myriad of
treatment alternatives. Analysis of this complete data set yielded a platform of neurometric variables that have shown utility
in characterizing patient response to diverse medications. This platform then allows a new patient to be characterized based on
these neurometric variables, and the database to be queried to understand the statistical response of patients with similar brain
patterns to the medications currently in the database.



Our Neurometric Information
Services business is focused on increasing the demand for our PEER Reports. We believe the key factors that will drive broader
adoption of our PEER Reports will be the acceptance by healthcare providers and patients of their benefit, the demonstration of
the cost-effectiveness of using our technology, the reimbursement by third-party payers, the expansion of our sales force and increased
marketing efforts.



In addition to its
utility in providing psychiatrists and other physicians/prescribers with medication sensitivity data, our PEER Online technology
provides us with significant opportunities in the area of pharmaceutical development. Our PEER OnlineTM technology, in combination
with the information contained in the PEER Online database, offers the potential to enable the identification of novel uses for
neuropsychiatric medications currently on the market and in late stages of clinical development, as well as in aiding the identification
of neurophysiologic characteristics of clinical subjects that may be successfully treated with neuropsychiatric medications in
the clinical testing stage. We intend to enter into relationships with established drug and biotechnology companies to further
explore these opportunities, although no relationships are currently contemplated. The development of pathophysiological markers
as the new method for identifying the correct patient population to research is being encouraged by both the National Institute
of Mental Health (NIMH) and the Food and Drug Administration (FDA).



Clinical Services



In January 2008, we
acquired our then largest customer, the Neuro-Therapy Clinic, Inc. Upon the completion of the transaction, NTC became a wholly-owned
subsidiary of ours. NTC operates one of the larger psychiatric medication management practices in the state of Colorado, with five
full time and six part time employees including psychiatrists and clinical nurse specialists with prescribing privileges. Daniel
A. Hoffman, M.D. is the medical director at NTC, and, after the acquisition, became our Chief Medical Officer and served as our
President from April 2009 to April 2011.



NTC, having performed
a significant number of PEER Reports, serves as an important resource in our product development, the expansion of our PEER Online
database, production system development and implementation, along with the integration of our PEER Online services into a medical
practice. Through NTC, we also expect to develop marketing and patient acquisition strategies for our Neurometric Information Services
business. Specifically, NTC is learning how to best communicate the advantages of PEER Online to patients and referring physicians
in the local market. We will share this knowledge and developed communication programs learned through NTC with other physicians
using our services, which we believe will help drive market acceptance of our services. In addition, we plan to use NTC to train
practitioners across the country in the uses of PEER Online technology.



We view our Clinical
Services business as secondary to our Neurometric Information Services business, and we have no current plans to expand this business.



30







Working Capital



We are unable to pay our obligations as they become due and we are in arrears on paying every one of our
creditors.  If we are not able to raise additional funds immediately and reach some accommodations with our creditors,
we will likely be required to cease our operations.



Since our
inception, we have generated significant net losses. As of June 30, 2012, we had an accumulated deficit of approximately
$49.7 million, and as of June 30, 2011, our accumulated deficit was approximately $39.5 million. We incurred operating losses
of $4.1 million and $4.5 million for the nine months ended June 30, 2012 and 2011, respectively and incurred net losses of
$7.5 million and $6.2 million for those respective periods. Partly offsetting these net losses were a gain of $0.9 million on
derivative liabilities for the 2012 period as opposed to a $4.75 million gain on derivative liabilities for the 2011 period.
Assuming we are able to continue our operations, we expect our net losses to continue for at least the next couple of years.
We anticipate that a substantial portion of any capital resources and efforts would be focused on the scale-up of our
commercial organization, research, product development and other general corporate purposes, including the payment of legal
fees incurred as a result of our litigation. Research and development projects include the completion of more clinical
trials, including an FDA Investigational Device Exemption (IDE) study with the military (these are necessary to further
validate the efficacy of our products and services relating to our PEER technology across different types of behavioral
disorders); the enhancement of the CNS Database and PEER process; and to a lesser extent, the identification of new
medications that are often combinations of approved drugs.  We anticipate that future research and development
projects would be funded by grants or third-party sponsorship, along with funding by the Company.



As of June 30,
2012, our current liabilities of approximately $18.1 million exceeded our current assets of approximately $0.1 million
by approximately $18.0 million and, assuming we are able to continue our operations, our net losses will continue for
the foreseeable future.  As part of the $18.1 million of current liabilities we have approximately $7.5 million of
secured convertible debt which is discounted to $6.6 million. We have an additional $90,000 of unsecured debt which
is discounted to $7,500. Since June 30, 2012, we have borrowed $200,000 as a short-term, interest free loan from a director
to pay for offering costs associated with our fund raising activities. We will need immediate additional funding to continue
our operations plus substantial additional funding before we can increase the demand for our PEER Online services. 
In addition, we will have to repay the current outstanding notes plus interest starting October 1, 2012.



We are actively
exploring additional sources of capital; however,  there is substantial doubt as to whether additional funding will be
available on acceptable terms, or at all, especially given the economic and market conditions that currently prevail and the
Company’s failure to consummate the public offering of securities it had pursued this year. Even if we were to
raise additional funds, any additional equity funding may result in significant dilution to existing stockholders, and, if we
incur additional debt financing, a substantial additional portion of our operating cash flow may be dedicated to the payment
of principal and interest on such indebtedness, thus limiting the funds available for our business activities. If adequate
funds are not available, it will likely force us to cease operations or would otherwise have a material adverse effect on
our business, financial condition and/or results of operations.



Recent Developments in Fiscal Years
2011 and 2012



Neurometric Services Accomplishments



Optum Approval as
Emerging Technology:   The Company has been involved in a one-year Technology Assessment process with United Healthcare,
the nation’s largest health insurance carrier, reviewing clinical evidence to determine the clinical effectiveness and reimbursement
coverage for our technology. Optum, a unit of United Healthcare Group, approved PEER Outcomes for reimbursement as an Emerging
Technology, determining that it had sufficient evidence based on two randomized controlled trials with statistical significance
and reasonable effect size. The technology is approved for use in pilot programs for selected regions and/or clients.



Depression Efficacy
Study:   Over the last few years, we have been primarily focused on demonstrating the efficacy of PEER Report informed
treatments through multiple clinical trials. The largest of these — the Depression Efficacy Trial — was
a multi-center, randomized, parallel controlled trial completed in 2009 at 12 academic and commercial sites, including Harvard,
Stanford, Cornell, University of California Irvine and Rush. The study began in late 2007 and was completed in September 2009,
screening 465 potential subjects with Treatment-Resistant Depression and ultimately randomizing 114 participants to a 12-week course
of treatment utilizing PEER Reports in the experimental group and a modified STAR*D algorithm in the control group (STAR*D, or
Sequenced Treatment Alternatives to Relieve Depression, was a large, seven-year study sponsored by the National Institute of Mental
Health and completed in 2006). Primary clinical outcome measures included the Quick Inventory of Depression Symptomology (QIDS-16-SR)
and the Quality of Life Enjoyment and Satisfaction Questionnaire (Q-LESQ-SF). Top-line results were consistent with previous trials
of PEER Reports:



| | • | The study found that physicians using PEER Reports significantly outperformed the modified STAR*D
treatment algorithm beginning at week two. The difference, or separation, between PEER Reports and the STAR*D control group was
50 and 100 percent for the study’s two primary endpoints. By contrast, separation between a new treatment and a control group
often averages less than 10 percent in antidepressant studies. Interestingly, separation was achieved early (in week 2) and was
durable, continuing to grow through week 12.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Statistical significance (p < .05) was achieved on all primary and most secondary endpoints.
| | - | --------------------------------------------------------------------------------------------



During 2011 we released
the results of several studies which had been conducted during the year as follows:



31







Commercial Payer
Analysis:   We conducted a retrospective analysis of physician reports and health records of patients who were members
of several of the nation’s largest managed care networks. The results were presented at the 2011 NEI Global Psychopharmacology
Congress and, subsequently, a paper has been published in Neuropsychiatric Disease and Treatment, the journal of the International
Neuropsychiatric Association (“INA”). The paper entitled “Measuring Severe Adverse Events and Medication Selection
Using A “PEER Report” for Non-Psychotic Patients: A Retrospective Chart Review” was authored by Daniel Hoffman
M.D. of our subsidiary Neuro-Therapy Clinic, Charles DeBattista M.D. of the Stanford University School of Medicine, Rob Valuck,
Ph.D. from the University of Colorado Health Sciences Center and Dan Iosifescu of the Mood and Anxiety Disorders Program, Mount
Sinai School of Medicine and Harvard University Faculty. The analysis of 257 evaluable patient records for the period starting
in 2003 through mid-2011 represents cases in which the prescribers utilized PEER Outcome Reports for these patients. The analysis
found that prescribers using the PEER Outcomes reported reduced trial-and-error pharmacotherapy through the following findings:



| | · | 27 patients (11%) actually required no medications at all after the
PEER report.
| | - | --------------------------------------------------------------------------------



Of the remaining patients
who required medications:



| | · | 87% of the patients achieved “much
improved” or “very much improved” on the Clinical Global Improvement standardized outcomes measurement and 71%
showed significant improvement using the Quality of Life Enjoyment and Satisfaction Questionnaire.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 69% of the patients achieved Maximum Medical
Improvement (MMI) in an average of four visits.
| | - | --------------------------------------------------------------------------------------------



| | · | Out of 68 (26%) patients who had reported
suicidality preceding their PEER Outcome Report, nine (4%) reported suicidality during the average two year follow-up period.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Out of 33 patients
who had experienced a severe adverse event on their previous medications, 18 (55%) had PEER Outcome Reports which indicated poor
outcomes for those medications in patients with similar EEG findings, suggesting caution in using those drugs.



Medco Analysis:
  In 2011, the Company signed an agreement with Medco Health Services Inc. to analyze historical PEER Outcome results
in terms of Medco drug and healthcare claims datasets. Approximately 2,200 matching records were analyzed, yielding about 211 patients
for whom 365 days of continuous claim data were available before and after the test. Based on these data, consultants for CNS Response
assessed the performance of physicians before and after testing. Findings include:



| | · | Significant changes in physician prescribing behavior: approximately
92% of physicians receiving PEER Outcome reports changed pharmacotherapy strategies post-test, with over half changing every single
medication.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Increased proportion of generic prescribing: generic utilization increased
32% after receipt of PEER Outcome reports.
| | - | ---------------------------------------------------------------------------------------------------------------------



Medco Research performed
an analysis of this tested group against a control cohort of patients in its database matched by age, sex, disease chronicity and
prescription profile.



| | · | The primary endpoint of the analysis was
to measure impact on healthcare utilization, with a 25% reduction in health care costs experienced for those in the PEER group
versus those in the control cohort. However, because the claim sample size was small (only 29 health care records), the reduction
did not reach statistical significance.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Drug mix: a significantly higher proportion
of older medications were utilized by physicians in the tested group, with generally fewer SSRIs (Selective Serotonin Reuptake
Inhibitors) and Atypical Antipsychotics, and categorical increases in MAOI (Oxidase Inhibitors) and Tricyclic class antidepressants,
and certain stimulants.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Eating Disorders
Study:   In November 2011, we published in Neuropsychiatric Disease and Treatment, the journal of the International
Neuropsychiatric Association (“INA”), a paper entitled “Retrospective Chart Review of a Referenced EEG Database
in Assisting Medication Selection for Treatment of Depression in Patients with Eating Disorders.” The physicians reviewed
two-year pre-treatment data and between two- to five-year follow-up data, found that study patients experienced significantly decreased
depressive symptoms and overall 53 percent fewer hospitalization days, which significantly reduced overall healthcare costs. In
addition, according to the study, the wide variety of medications successfully used to treat study patients suggests there is no
single class of medications for treating eating disorders. Instead, by developing individual treatment regimens, correlated to
a patient’s unique neurophysiology, physicians were able to achieve significant reductions in trial-and-error practice. The
subjects had previously failed an average of 5.7 medications over an average of nine years.



| | · | The study group focused on 22 eating disorders patients with a median
age of 21 years. The average age of onset of eating disorders symptoms was 15.6 years. The primary comorbid diagnosis for each
patient included either major depressive disorder (MDD) for 18 (82%) of the patients or bipolar disorder (BPD) for four (18%) of
the patients. Additionally, 12 individuals were diagnosed with comorbid obsessive-compulsive disorder (OCD), three with attention
deficit disorder (ADHD), five with past alcohol abuse/dependence, six with generalized anxiety disorder (GAD), and one with post-traumatic
stress disorder (PTSD). According to the study:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32







| | o | Not only did most of the patients’ depression and severity scores normalize quickly and significantly, but they also
continued to improve during the two-to-five-year follow-up period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | As early as nine months from starting treatment, 11 patients (50%) reported complete remission of depression symptoms, nine
reported mild depression symptoms, and two remained moderately depressed.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | In total, prior to physician use of PEER Outcome data, 18 patients (82%) had inpatient hospitalizations; only seven (32%) required
hospitalizations in the two- to five-year follow-up period, which resulted in shorter stays and less intensive treatment (e.g.
partial hospitalization versus inpatient).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Polypharmacy Paper:
  We published an additional paper in Neuropsychiatric Disease and Treatment, the journal of the INA entitled “Polypharmacy
or Medication Washout: An Old Tool Revisited”. The paper includes a comparison of the advantages and risks from using medication
washout versus polypharmacy with treatment-resistant patients. Polypharmacy is a common medical practice in which physicians prescribe
additional psychiatric medications on top of previous medications already being used for a patient. This can result in patients
being on too many drugs with the potential for harmful side effects. When done appropriately, washing medications out of select
patients can be valuable in supporting better patient diagnosis and assessing medication needs, and can reduce the risks resulting
from unknown drug interactions. While some patients will still need more than one medication as part of their treatment regimen,
the ultimate goal is to determine which medications are necessary and effective for an individual patient. The paper highlights
previous study findings and current data related to medication washout and polypharmacy, including:



| | · | A recently reported study, Combining Medication to Enhance Depression
Outcomes (CO-MED), funded by the National Institutes of Health, started patients on several antidepressants (with synergistic pharmacological
effects) at the same time. The study findings suggest that for a significant number of patients with major depression, polypharmacy
adds to the side effect burden without an increase in efficacy.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A recent study of 659 depressed patients found that their rate of
cardiovascular problems increased from 8.8 percent to 30.7 percent after only six weeks of polypharmacy.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | According to an Army report released in 2010, between 2006 and 2009,
101 soldiers died as a result of multiple drug toxicity while under the care of the Army’s Wounded Warrior Transition Units.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Use of polypharmacy in the elderly can lead to morbidity and mortality.
As early as 1992, it was reported that psychotropic agents are the most commonly misused drugs in the elderly and are associated
with increased illness severity, hospitalizations, number of physician visits, as well as other issues.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In a study of 2,009 treatment-resistant patients who underwent total
medication washout, only five patients (0.25%) discontinued the washout process due to either rebounding of their original mood
disorder or discontinuation symptoms, while an additional 15 (0.75%) complained of an adverse response but continued the washout.
Most of the adverse events were related to mild or moderate discontinuation symptoms with no mortality or serious morbidity in
the patients’ functioning.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Product Development



Within the past year
significant changes have been made to the Company’s product architecture and database, as well as refinement of its market
focus with physicians and payers. Accordingly, the Company has introduced PEER Online TM as its cloud-based platform for physicians
and the PEER Outcome TM Report as its output. The designation rEEG® will continue to be used in reference to the company’s
original database, but not to its services or output. Significant updates to the outcome database have occurred over the past year,
including:



| | · | Significant expansion from the current database, based on receipt
of hundreds of new patient outcomes from network physicians. With the anticipated addition of approximately 2,000 new subjects
under an Investigational Device Exempt trial with the U.S. Military, the PEER Outcome database has the potential to grow significantly.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Company is upgrading its normative database to improve the robustness
and utility of its findings, using the Neuroguide platform from Applied Neurosciences Inc. In addition to an improved normative
dataset and significantly more variables for characterizing neurophysiology (10 times more than our current database), this platform
offers the opportunity for improved pattern recognition and display of three-dimensional findings from quantitative EEG through
LORETA, a modeling capability which analyzes deeper structures within the brain.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transcranial
Magnetic Stimulation



In November 2011, we acquired a neurometric
platform, and other intellectual property, which may help physicians better understand positive or negative patient response to
Transcranial Magnetic Stimulation (TMS).



33







TMS is a non-invasive outpatient procedure
that uses magnetic fields to stimulate areas of the brain thought to control mood. TMS, which is approved by the U.S. Food and
Drug Administration and offered approximately 300 psychiatrists nationwide, is sometimes used as an alternative treatment for patients
who have failed one or more antidepressants for the treatment of depression. While treatment periods vary by patient, a typical
treatment regime generally involves 20 to 30 treatments over a four to six week period.



The TMS responsivity data, which is based
on an EEG, helps physicians learn how patients with similar EEG patterns responded to TMS, thereby enabling them to more effectively
guide patients most likely to benefit from this treatment and reduce expenditures on patients for whom TMS is not likely to be
an effective solution for their depression.



TMS Response Study:   In
February, results from a study of EEG prediction of TMS responsivity were published by Dr. Martijn Arns in the peer-reviewed journal
Brain Stimulation. “Neurophysiological predictors of non-response to rTMS in depression” presents results of a multi-site
clinical trial (n=90) in the Netherlands using several CNSO variables (iAPF, Theta and P300 amplitude) associated with non-response
to TMS therapy. Use of these combined neurometrics in a discriminant analysis resulted in a reliable identification of non-responders
with low false positive rates. Replication studies are currently being planned in both the Netherlands and the U.S.



PEER Online Patents



We have sixteen issued
patents, of which seven are in the U.S., which cover the process involved in our PEER Online service.  Our fourteen existing patents
are valid until between September 2017 and July 2022. In addition, we believe these patents cover the analytical methodology we
use with any form of neurophysiology measurement including SPECT (Single Photon Emission Computed Tomography), fMRI (Functional
Magnetic Resonance Imaging), PET (Positron Emission Tomography), CAT (Computerized Axial Tomography), and MEG (Magnetoencephalography).
We do not currently have data on the use of such alternate measurements, but we believe they may, in the future, prove to be useful
to guide therapy in a manner similar to referenced-EEG. We have been issued patents in the following countries and regions: Canada
(2 patents), Europe (2 patents), Australia (3 patents), Mexico (1 patent) and Israel (1 patent). We also have filed multiple additional
patent applications for our technology in the U.S., Europe, Canada, Japan and Mexico.



The Company received approval for a distinctly new patent estate, covering internet transmission of neurometric
information. This new allowance under its basic methods patent portfolio, patent number 8239013, covers remote or web-based
transmission of neurometric data.  In the event that use of neurometric data or algorithms becomes widespread, this patent
could make it necessary for major equipment manufacturers to license rights from the Company in order to transmit such information
for use in medication response prediction.



During 2009 and 2011,
we were awarded additional process patents for use of PEER Online technology in drug discovery, including clinical trial and drug
efficacy studies. In addition, we successfully defended our patents by requesting reexamination of a patent issued to Aspect Medical
(now Covidien), resulting in a reduction and narrowing of claims awarded under the previously issued Aspect patents.



CNS Response has also
filed patent applications in the U.S. and Canada related to the company’s acquisition of patient responsivity data for Transcranial
Magnetic Stimulation (TMS).  This would be the Company’s first application for a neurometric predictor of a non-drug
therapy. The Company anticipates using this methodology to help physicians better understand which patients may positively respond
to TMS for treating depression.   The U.S. and Canadian patent applications are entitled "Method for Assessing the
Susceptibility of a Human Individual Suffering from a Psychiatric or Neurological Disorder to Neuromodulation Treatment.”



Trademarks



‘‘Referenced-EEG’’
and ‘‘rEEG’’ are registered trademarks of CNS California in the United States. We will continue to expand
our brand names and our proprietary trademarks worldwide as our operations expand. We have trademarked PEER Online and PEER Outcome
Reports and expect that they will be registered in due course by the United States Patent and Office.



PEER Online Database



The PEER Online database
consists of over 34,000 clinical outcomes for 8,700 unique patients with psychiatric or addictive problems. The PEER Online database
is maintained in two parts:



1. The CNSO Database



The CNSO Database includes
EEG recordings and neurometric data derived from analysis of these recordings. This data is collectively known as the CNSO Data.
CNSO or ‘‘Quantitative EEG’’ is a standard measure that adds modern computer and statistical analyses to
traditional EEG studies. We utilize two separate CNSO databases which provide statistical and normative information in the PEER
Outcome Report process.



2. The Clinical Outcomes Database



The Clinical Outcomes
Database consists of physician provided assessments of the clinical long-term outcomes (average of 405 days) of patients and their
associated medications. The clinical outcomes of patients are recorded using an industry-standard outcome rating scale, the Clinical
Global Impression Improvement scale (‘‘CGI-I’’). The CGI-I requires a clinician to rate how much the patient’s
illness has improved or worsened relative to a baseline state. A patient’s illness is compared to change over time and rated
as: very much improved, much improved, minimally improved, no change, minimally worse, much worse, or very much worse.



34







The format of the data
is standardized and that standard is enforced at the time of capture by a software application. Outcome data is input into the
database by the treating physician or in some cases, their office staff. Each Physician has access to his/her own patient data
through the software tool that captures clinical outcome data.



We consider the information
contained in the PEER Online database to be a valuable trade secret and are diligent about protecting such information. The PEER
Online database is stored on a secure server and only a limited number of employees have access to it.



2010, 2011 & 2012 Private Placement
Transactions



From June 3, 2010 through
to November 12, 2010, we raised $3.0 million through the sale of senior secured convertible notes (“October Notes”)
and warrants. Of such amount $1.75 million was purchased by members of our Board of Directors or their affiliate companies.



From January 20, 2011
through to April 25, 2011, we raised $2.50 million through the sale of subordinated convertible notes (“January Notes”)
and warrants. Of such amount, $1.00 million was purchased by members of our Board of Directors or their affiliate companies. These
January Notes have subsequently been amended to add a second position security interest.



From October 12, 2011
through January 30, 2012, we raised an additional $2.00 million through the sale of subordinated secured convertible notes (“2011
Bridge Notes”) and warrants. Of such amount, $1.04 million was purchased by members of our Board of Directors or their affiliate
companies.



On February 29, 2012,
we raised an additional $90,000 through the sale of an unsecured convertible note and warrants. This note was purchased by an affiliate
company of a member of our Board of Directors.



Refer to Note 3.
Convertible Debt and Equity Financings to the Unaudited Condensed Consolidated Financial Statements for details of the abovementioned
transactions.



Critical Accounting Policies and Significant Judgments and
Estimates



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



The following critical
accounting policies reflect our more significant estimates and assumptions used in the preparation of our unaudited condensed consolidated
financial statements.



Revenue Recognition



We have generated limited
revenues since our inception.  Revenues for our Laboratory Service product are recognized when a rEEG Report is delivered
to a client-physician.  For our Clinical Services, revenues are recognized when the services are performed.



Stock-based Compensation
Expense



Stock-based compensation
expense, which is a non-cash charge, results from stock option grants.  Compensation cost is measured at the grant date
based on the calculated fair value of the award.  We recognize stock-based compensation expense on a straight-line basis
over the vesting period of the underlying option. The amount of stock-based compensation expense expected to be amortized in future
periods may decrease if unvested options are subsequently cancelled or may increase if future option grants are made.



Long-Lived Assets and Intangible Assets



Property and equipment
and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the
assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment
charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible
assets with finite lives are amortized on a straight-line basis over their useful lives of ten years. No impairments of property
and equipment or intangible assets were recorded during the nine months ended June 30, 2012 and 2011.



35







Derivative accounting
for convertible debt and warrants



The Company analyzes
all financial instruments with features of both liabilities and equity under ASC 480-10 and ASC 815-10 whereby the Company determines
the fair market carrying value of a financial instrument using the Black-Scholes model and revalues the fair market value on a
quarterly basis. Any changes in carrying value flow through as other income (expense) in the income statement.



Results of Operations for the Three
Months Ended June 30, 2012 and 2011



As earlier described,
we operate in two business segments: Neurometric Information Services and Clinical Services.  Our Neurometric Information
Services business focuses on the delivery of reports ("PEER Reports") that enable psychiatrists and other physician/prescribers
to make more informed, patient-specific decisions when treating individual patients for behavioral (psychiatric and/or addictive)
disorders based on the patient's own physiology. Our Clinical Services business operated by NTC provides full service psychiatric
services.



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



|                                    |  | Three Months Ended June 30, |      
|----------------------------------- |  | --------------------------- | -----
|                                    |  | 2012                        |      
|                                    |  |                             |      
|Revenues                            |  |                             | 100  
|Cost of revenues                    |  |                             | 19   
|Gross profit                        |  |                             | 81   
|Research                            |  |                             | 35   
|Product Development                 |  |                             | 105  
|Sales and marketing                 |  |                             | 118  
|General and administrative expenses |  |                             | 480  
|Operating loss                      |  |                             | (657 
|Other income (expense), net         |  |                             | 2,553
|Net income profit (loss)            |  |                             | 1,895



Revenues



The following table
presents revenues for each of the periods indicated and the corresponding percent change.



|                                         |  | Three Months Ended June 30, |         |  |      |  
|---------------------------------------- |  | --------------------------- | ------- |  | ---- | -
|                                         |  | 2012                        |         |  | 2011 |  
|                                         |  |                             |         |  |      |  
|Neurometric Information Service Revenues |  | $                           | 32,800  |  |      | $
|Clinical Service Revenues                |  |                             | 158,000 |  |      |  
|Total Revenues                           |  | $                           | 190,800 |  |      | $



With respect to our
Neurometric Information Services business the number of third-party paid PEER reports delivered increased from 63 for the three
months ended June 30, 2011, to 83 for the three month ended June 30, 2012, while the average revenue per report decreased from
$400 to $395 for the respective periods. Additionally our Clinical Services operation ordered 21 PEER reports during the three
months ended June 30, 2012. The total numbers of free PEER reports processed were 28 and 37 for the three months ended June 30,
2011 and 2012 respectively.  These free rEEG reports are used for training new psychiatrists, database-enhancement and
compassionate-use purposes.



Clinical Service revenues
decreased by $14,800 for the three months ended June 30, 2012 from the equivalent period in 2011. This is partly due to a decrease
in advertising which brought in fewer patients resulting in a decrease in revenue.



Cost of Revenues



The following tables
present cost of revenues for each of the periods indicated and the corresponding percent change.



|                                                  |  | Three Months Ended  June 30, |        |  |      |  
|------------------------------------------------- |  | ---------------------------- | ------ |  | ---- | -
|                                                  |  | 2012                         |        |  | 2011 |  
|                                                  |  |                              |        |  |      |  
|Cost of Neurometric information services revenues |  | $                            | 35,500 |  |      | $



36







Cost of Neurometric
Information Services revenues consists of payroll, consulting, and other miscellaneous costs.  Consulting costs primarily
represent external costs associated with the processing and analysis of PEER reports and range between $75 and $100 per rEEG Report.



|   |  |                            |  | Three Months Ended June 30, |       
|-- |  | -------------------------- |  | --------------------------- | ------
|   |  | Key Expense Categories     |  | 2012                        |       
|1) |  | Salaries and benefit costs |  | $                           | 26,800
|2) |  | Consulting fees            |  |                             | 7,800 
|3) |  | Other miscellaneous costs  |  |                             | 900   
|   |  | Total Costs of Revenue     |  | $                           | 35,500



The reduction in
Cost of Revenues is due to a reduction of vacation accrual when comparing the three months ended June 30, 2012, with the
corresponding period in 2011.



| | (1) | Salaries and benefits for 2012 period remained substantially consistent with the 2011
                                                                period;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consulting Fees had minimal change from the prior year;
| | --- | -------------------------------------------------------

| | (3) | Other miscellaneous costs stayed constant from the prior year;
| | --- | --------------------------------------------------------------



Research



The following tables
present research expenses for each of the periods indicated and the corresponding percent change.



|                                          |  | Three Months Ended  June 30, |        |  |      |  
|----------------------------------------- |  | ---------------------------- | ------ |  | ---- | -
|                                          |  | 2012                         |        |  | 2011 |  
|                                          |  |                              |        |  |      |  
|Neurometric Information Services Research |  | $                            | 66,300 |  |      | $



Research expenses consist
of payroll costs (including stock-based compensation costs), consulting fees, and other miscellaneous costs.



|   |  |                            |  | Three Months Ended June 30, |       
|-- |  | -------------------------- |  | --------------------------- | ------
|   |  | Key Expense Categories     |  | 2012                        |       
|1) |  | Salaries and benefit costs |  | $                           | 57,600
|2) |  | Consulting fees            |  |                             | 3,000 
|3) |  | Other miscellaneous costs  |  |                             | 5,700 
|   |  | Total Research             |  | $                           | 66,300



Comparing the three months ended June 30,
2012 with the corresponding period in 2011,



| | (1) | Salaries and benefit costs decreased as a result of a decrease in stock-based compensation
                                                                as                                                                 certain
                                                                stock option grants became fully vested and                                                                 consequently no
                                                                further option costs were expensed;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consulting Fees had minimal change from the prior year;
| | --- | -------------------------------------------------------

| | (3) | Other miscellaneous costs decreased due to the decrease in travel;
| | --- | ------------------------------------------------------------------



Product Development



The following tables
present product development expenses for each of the periods indicated and the corresponding percent change.



|                                                     |  | Three Months Ended  June 30, |         |  |      |  
|---------------------------------------------------- |  | ---------------------------- | ------- |  | ---- | -
|                                                     |  | 2012                         |         |  | 2011 |  
|                                                     |  |                              |         |  |      |  
|Neurometric Information Services Product Development |  | $                            | 200,900 |  |      | $



Product development
expenses consist of payroll costs (including stock-based compensation costs), consulting fees, system development costs and other
miscellaneous costs.

37







|   |  |                            |  | Three Months Ended June 30, |        
|-- |  | -------------------------- |  | --------------------------- | -------
|   |  | Key Expense Categories     |  | 2012                        |        
|1) |  | Salaries and benefit costs |  | $                           | 63,600 
|2) |  | Consulting fees            |  |                             | 92,700 
|3) |  | System development costs   |  |                             | 42,100 
|4) |  | Other miscellaneous costs  |  |                             | 2,500  
|   |  | Total Product Development  |  | $                           | 200,900



Comparing the three
months ended June 30, 2012 with the corresponding period in 2011:



(1) Salaries and benefits
for the 2012 period remained substantially consistent with the 2011 period;

(2) Consulting
fees: we utilized the services of a consultant specializing in FDA filings and in designing study protocols and a second consultant
to work on documenting and testing aspects of the PEER Online system upgrades that are in development;

(3) System
development and maintenance cost increased due to programming a major system upgrade using the Neuroguide platform
and upgrading the Physician Portal. In 2011 the EEG Portal was upgraded along with some less costly system upgrades;

(4) Other
miscellaneous costs decreased mainly due to a reduced travel schedule;



Sales and marketing



The following tables
present sales and marketing expenses for each of the periods indicated and the corresponding percent change.



|                                 |  | Three Months Ended  June 30, |         |  |      |  
|-------------------------------- |  | ---------------------------- | ------- |  | ---- | -
|                                 |  | 2012                         |         |  | 2011 |  
|Sales and Marketing              |  |                              |         |  |      |  
|Neurometric Information Services |  | $                            | 223,200 |  |      | $
|Clinical Services                |  |                              | 2,800   |  |      |  
|Total Sales and Marketing        |  | $                            | 226,000 |  |      | $



Sales and marketing
expenses associated with our Neurometric Information Services business consist primarily of payroll and benefit costs, including
stock-based compensation; advertising and marketing; consulting fees and conference and travel expenses.



|   |  |                                 |  | Three Months Ended June 30, |        
|-- |  | ------------------------------- |  | --------------------------- | -------
|   |  | Key Expense Categories          |  | 2012                        |        
|1) |  | Salaries and benefit costs      |  | $                           | 179,100
|2) |  | Advertising and marketing costs |  |                             | -      
|3) |  | Consulting fees                 |  |                             | 30,900 
|4) |  | Conferences and travel costs    |  |                             | 10,200 
|5) |  | Other miscellaneous costs       |  |                             | 3,000  
|   |  | Total Sales and marketing       |  | $                           | 223,200



Comparing the
three months ended June 30, 2012, with the same period in 2011:



| | (1) | Salaries and benefits decreased due to a reduction in vacation expense.
| | --- | -----------------------------------------------------------------------

| | (2) | Advertising and marketing expenses decreased to zero in this quarter. In
                                                                the 2011 quarter we spent $10,000 on a donation to Blue Star Charities for
                                                                Military families;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Consulting expenditures decreased in the 2012 period as we reduced our reliance on marketing
                                                                consultants                                                                 who were predominantly utilized in the 2011
                                                                period;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Conference and travel decreased due to a reduction in travel.
| | --- | -------------------------------------------------------------

| | (5) | Other miscellaneous costs also decreased due to expense cutting efforts.
| | --- | ------------------------------------------------------------------------



For Clinical
Services, Sales and Marketing expenses decreased for the three months ended June 30, 2012, as compared to the prior
year’s period as we scaled back on advertising due to financial constraints.





38









General and administrative







The following tables
present general and administrative expenses for each of the periods indicated and the corresponding percent change.



|                                 |  | Three Months Ended June 30, |         |  |      |  
|-------------------------------- |  | --------------------------- | ------- |  | ---- | -
|                                 |  | 2012                        |         |  | 2011 |  
|General and administrative       |  |                             |         |  |      |  
|Neurometric Information Services |  | $                           | 660,300 |  |      | $
|Clinical Services                |  |                             | 256,400 |  |      |  
|Total General and administrative |  | $                           | 916,700 |  |      | $



General and Administrative
expenses for our Neurometric Information Services business are largely comprised of payroll and benefit costs, including stock
based compensation, legal, other professional and consulting fees, patent costs, marketing and investor relations expenses, conference
and travel and miscellaneous costs, dues and subscriptions, and general administrative and occupancy costs.



|   |  |                                        |  | Three Months Ended June 30, |        
|-- |  | -------------------------------------- |  | --------------------------- | -------
|   |  | Key Expense Categories                 |  | 2012                        |        
|1) |  | Salaries and benefit costs             |  | $                           | 412,500
|2) |  | Legal fees                             |  |                             | 70,500 
|3) |  | Other professional and consulting fees |  |                             | 65,800 
|4) |  | Patent costs                           |  |                             | 19,800 
|5) |  | Marketing and investor relations costs |  |                             | 4,900  
|6) |  | Conference and travel costs            |  |                             | 13,700 
|7) |  | Dues and subscriptions fees            |  |                             | 12,800 
|8) |  | General admin and occupancy costs      |  |                             | 60,300 
|   |  | Total General and administrative costs |  | $                           | 660,300



With respect to our
Neurometric Information Services business, for the three months ended June 30, 2012, compared to the same period in 2011 we
had the following changes:



| | (1) | Payroll and benefit expenses decreased due to a decrease in stock-based compensation as certain stock option grants became
fully vested and were therefore no longer expensed.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Legal
                                                                                                              fees showed a net
                                                                                                              decrease as much of the legal fees related to our public offering efforts and were booked as offering cost in the other
                                                                                                              expense line item, general legal expenses decreased by $111,300. This decrease was offset by $34,400 of lobbying
                                                                                                              costs and $21,400 of litigation costs related to the Brandt lawsuit ( Please
                                                                                                              refer to Note
                                                                                                              8 Commitments and
                                                                                                              Contingent Liabilities
                                                                                                              of the unaudited
                                                                                                              and condensed Consolidated
                                                                                                              Financial Statementsfor details).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Professional and consulting fees had minimal change from the prior year;
| | --- | ------------------------------------------------------------------------

| | (4) | Patent costs remained about the same from the prior period;
| | --- | -----------------------------------------------------------

| | (5) | Marketing and investor relations costs remained about the same for both periods;
| | --- | --------------------------------------------------------------------------------

| | (6) | Conference and travel costs decreased in 2012 while awaiting FDA IDE approval there was reduced need for travel;
| | --- | ----------------------------------------------------------------------------------------------------------------

| | (7) | Dues and subscriptions had minimal change from the prior year;
| | --- | --------------------------------------------------------------

| | (8) | General administrative and occupancy costs remained substantially unchanged in the two respective periods;
| | --- | ----------------------------------------------------------------------------------------------------------





For Clinical Services,
General and Administrative expenses includes all costs associated with operating the Neuro-Therapy Clinic which are: payroll costs,
medical supplies, occupancy costs and other general and administrative support costs.  These costs decreased by $23,700
to $256,400 in the three months ending June 30, 2012, from $280,100 in the 2011 period.  This decrease is due to multiple
factors including: a reduction of staff and benefit costs and a reduction in consulting fees in the current period.



Other income



The following table
presents other non-operating income for each of the periods indicated and the corresponding percent change.



|                                             |  | Three Months Ended  June 30, |           |  |      |  
|-------------------------------------------- |  | ---------------------------- | --------- |  | ---- | -
|                                             |  | 2012                         |           |  | 2011 |  
|                                             |  |                              |           |  |      |  
|Neurometric Information Services income, net |  | $                            | 4,870,900 |  |      | $
|Clinical Services expense                    |  |                              | -         |  |      |  
|Total other income                           |  | $                            | 4,870,900 |  |      | $
|* not meaningful                             |  |                              |           |  |      |  



39











For the three months
ended June 30, 2012 and 2011 net other non-operating income for Neurometric Information Services were as follows:



| | · | For the three months ended June 30, 2012,
we incurred non-cash interest charges totaling $767,400, of which $175,700 was accrued interest on our promissory notes at 9% per
annum; the remaining balance of $589,200 was comprised of warrant discount amortization and warrant and note conversion derivative
liability charges and net interest expense of $2,500;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For the three months ended June 30,
                                                                                                                               2012, we incurred expenses related to offering costs of $781,400 as we expensed $745,300 of capitalized offering costs
                                                                                                                               related to our attempted registered offerings. Of these capitalized offering costs $421,300 related to the three months ended
                                                                                                                               June 30, 2012.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Under ASC 815, all derivative instruments
are required to be measured subsequently at fair value and the change in fair value of non-hedging derivative instrument shall
be recognized currently in earnings. Revaluation of our derivative liabilities for the promissory note conversion feature and associated
warrants for the quarter ended June 30, 2012, resulted in a non-cash gain of $6,419,700. For the prior period ending June 30, 2011,
this was a non-cash gain of $4,498,900 on the valuation of the derivative liabilities. The Company has experienced large changes
in the valuation of derivative liabilities from quarter to quarter as a result of the volatility in its stock price.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net Profit (loss)



The following table
presents net profit for each of the periods indicated and the corresponding percent change.



|                                            |  | Three Months Ended June 30, |           |   | Percent |  
|------------------------------------------- |  | --------------------------- | --------- | - | ------- | -
|                                            |  | 2012                        |           |   | 2011    |  
|                                            |  |                             |           |   |         |  
|Neurometric Information Services net profit |  | $                           | 3,721,600 |   |         | $
|Clinical Services net loss                  |  |                             | (106,400  | ) |         |  
|Total Net Profit                            |  | $                           | 3,615,200 |   |         | $



The net gain for
our Neurometric Information Services business of approximately $3.7 million for the three months ended June 30, 2012 compared
to the $0.9 million gain in the prior year period is primarily due to the non-cash charges in our non-operating expenses
as described above including particularly the non-cash gain resulting from the revaluation of our derivative liabilities. Actual operational losses decreased by $194,500 in the 2012 period due to cost cutting efforts and
the classification of legal fees to offering costs.



For our Clinical Services
the net loss of $106,400 in the three months ended June 30, 2012 decreased by $148,900 compared to the prior year period through
decreased costs primarily  in advertising
and marketing.





Results of Operations for the Nine months
Ended June 30, 2012 and 2011



As described earlier,
we operate in two business segments: Neurometric Information Services and Clinical Services.  Our Neurometric Information
Services business focuses on the delivery of reports ("PEER Reports") that enable psychiatrists and other physician/prescribers
to make more informed, patient-specific decisions when treating individual patients for behavioral (psychiatric and/or addictive)
disorders based on the patient's own physiology. Our Clinical Services business operated by NTC provides full service psychiatric
services.



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



|                                    |  | Nine months Ended  June 30, |       
|----------------------------------- |  | --------------------------- | ------
|                                    |  | 2012                        |       
|                                    |  |                             |       
|Revenues                            |  |                             | 100   
|Cost of revenues                    |  |                             | 19    
|Gross profit                        |  |                             | 81    
|Research                            |  |                             | 35    
|Product Development                 |  |                             | 81    
|Sales and marketing                 |  |                             | 148   
|General and administrative expenses |  |                             | 514   
|Operating loss                      |  |                             | (697  
|Other income (expense), net         |  |                             | (578  
|Net income (loss)                   |  |                             | (1,275



40







Revenues



The following table
presents revenues for each of the periods indicated and the corresponding percent change.



|                                         |  | Nine months Ended June 30, |         |  | Percent |  
|---------------------------------------- |  | -------------------------- | ------- |  | ------- | -
|                                         |  | 2012                       |         |  | 2011    |  
|                                         |  |                            |         |  |         |  
|Neurometric Information Service Revenues |  | $                          | 90,000  |  |         | $
|Clinical Service Revenues                |  |                            | 499,100 |  |         |  
|Total Revenues                           |  | $                          | 589,100 |  |         | $



With respect
to our Neurometric Information Services business the number of paid PEER Reports delivered increased marginally from 205 for
the nine months ended June 30, 2011, to 229 for the nine months ended June 30, 2012, while the average revenue per report
remained approximately $395 for both periods. Additionally our Clinical Services operation ordered 57 PEER Reports
during the nine month period ended June 30, 2012.  The total numbers of free rEEG reports processed were 64 and 113 for
the nine months ended June 30, 2011 and 2012 respectively.  These free rEEG reports are used for training new
psychiatrists, database-enhancement and compassionate-use purposes.



Clinical Service revenues
increased by $43,100 for the nine months ended June 30, 2012 from the equivalent period in 2011. This was partly due to the additional
psychiatrist being fully credentialed with insurance payers for the 2012 period, and partly due to the increased advertising which
brought in additional patients resulting in increased revenue.



Cost of Revenues



The following tables
present cost of revenues for each of the periods indicated and the corresponding percent change.



|                                                  |  | Nine months Ended  June 30, |         |  | Percent |  
|------------------------------------------------- |  | --------------------------- | ------- |  | ------- | -
|                                                  |  | 2012                        |         |  | 2011    |  
|                                                  |  |                             |         |  |         |  
|Cost of Neurometric Information Services revenues |  | $                           | 110,700 |  |         | $



Cost of Neurometric
Information Services revenues consists of payroll, consulting, and other miscellaneous costs.  Consulting costs primarily
represent external costs associated with the processing and analysis of PEER Reports and range between $75 and $100 per rEEG Report.



|   |  |                            |  | Nine months Ended June 30, |        
|-- |  | -------------------------- |  | -------------------------- | -------
|   |  | Key Expense Categories     |  | 2012                       |        
|1) |  | Salaries and benefit costs |  | $                          | 79,800 
|2) |  | Consulting fees            |  |                            | 28,700 
|3) |  | Other miscellaneous costs  |  |                            | 2,200  
|   |  | Total Costs of Revenue     |  | $                          | 110,700



Comparing the
nine months ended June 30, 2012, with the corresponding period in 2011:



| | (1) | Salaries and benefit costs decreased due to reduced in vacation expense;
| | --- | ------------------------------------------------------------------------

| | (2) | Consulting fees increased due to the additional training costs for EEG testing and PEER Reports
at two new customer groups;
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (3) | Other miscellaneous costs were reduced as there was no need for travel in the 2012 period;
| | --- | ------------------------------------------------------------------------------------------



41







Research



The following tables
present research expenses for each of the periods indicated and the corresponding percent change.



|                                          |  | Nine months Ended  June 30, |         |  | Percent |  
|----------------------------------------- |  | --------------------------- | ------- |  | ------- | -
|                                          |  | 2012                        |         |  | 2011    |  
|                                          |  |                             |         |  |         |  
|Neurometric Information Services Research |  | $                           | 203,400 |  |         | $



Research expenses consist
of payroll costs (including stock-based compensation costs), consulting fees, and other miscellaneous costs.



|   |  |                            |  | Nine months Ended June 30, |        
|-- |  | -------------------------- |  | -------------------------- | -------
|   |  | Key Expense Categories     |  | 2012                       |        
|1) |  | Salaries and benefit costs |  | $                          | 175,000
|2) |  | Consulting fees            |  |                            | 9,100  
|3) |  | Other miscellaneous costs  |  |                            | 19,300 
|   |  | Total Research             |  | $                          | 203,400



Comparing the nine months ended June 30,
2012 with the corresponding period in 2011;



| | (1) | Salaries and benefit costs decreased primarily due to the reduction of research staff that occurred in the 2011 period and
the concomitant accrual of their severance pay. Additionally, as stock option grants became fully vested, they ceased to be expensed
resulting in reduced stock option costs;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consulting costs remained substantially constant for the two periods;
| | --- | ---------------------------------------------------------------------

| | (3) | Other miscellaneous costs were reduced as there was no need for travel in the 2012 period.
                                                                Furthermore, in 2011 period we had the expense of the publication of our study in the Journal of Psychiatric Research;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Product Development



The following tables
present product development expenses for each of the periods indicated and the corresponding percent change.



|                                                     |  | Nine months Ended  June 30, |         |  | Percent |  
|---------------------------------------------------- |  | --------------------------- | ------- |  | ------- | -
|                                                     |  | 2012                        |         |  | 2011    |  
|                                                     |  |                             |         |  |         |  
|Neurometric Information Services Product Development |  | $                           | 476,200 |  |         | $



Product development
expenses consist of payroll costs (including stock-based compensation costs), consulting fees, system development costs and other
miscellaneous costs.



|   |  |                            |  | Nine months Ended June 30, |        
|-- |  | -------------------------- |  | -------------------------- | -------
|   |  | Key Expense Categories     |  | 2012                       |        
|1) |  | Salaries and benefit costs |  | $                          | 179,800
|2) |  | Consulting fees            |  |                            | 134,100
|3) |  | System development costs   |  |                            | 148,000
|4) |  | Other miscellaneous costs  |  |                            | 14,300 
|   |  | Total Product Development  |  | $                          | 476,200



Comparing the nine
months ended June 30, 2012 with the corresponding period in 2011:



| | (1) | Salaries and benefits decreased in the 2012 quarter due to a reclassification of vacation pay as
the product development cost center was separated from the research cost center;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consulting fees increased in the current period as we utilized the services of a consultant specializing
in FDA filings and in designing study protocols and a second consultant to work on documenting and testing aspects of the PEER
Online system upgrades under development;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | System development and maintenance cost increased in the current period to fund programming
                                                                of a                                                                 major system upgrade in order to use the Neuroguide
                                                                platform and on upgrading the Physician Portal;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Other miscellaneous costs decreased in the current period largely due to a reduced travel schedule.
| | --- | ---------------------------------------------------------------------------------------------------



42







Sales and marketing



The following tables
present sales and marketing expenses for each of the periods indicated and the corresponding percent change.



|                                 |  | Nine months Ended  June 30, |         |  | Percent |  
|-------------------------------- |  | --------------------------- | ------- |  | ------- | -
|                                 |  | 2012                        |         |  | 2011    |  
|Sales and Marketing              |  |                             |         |  |         |  
|Neurometric Information Services |  | $                           | 813,600 |  |         | $
|Clinical Services                |  |                             | 57,500  |  |         |  
|Total Sales and Marketing        |  | $                           | 871,100 |  |         | $



Sales and marketing
expenses associated with our Neurometric Information Services business consist primarily of payroll and benefit costs, including
stock-based compensation; advertising and marketing; consulting fees and conference and travel expenses.



|   |  |                                 |  | Nine months Ended June 30, |        
|-- |  | ------------------------------- |  | -------------------------- | -------
|   |  | Key Expense Categories          |  | 2012                       |        
|1) |  | Salaries and benefit costs      |  | $                          | 542,000
|2) |  | Consulting fees                 |  |                            | 116,000
|3) |  | Advertising and marketing costs |  |                            | 93,100 
|4) |  | Conferences and travel costs    |  |                            | 49,400 
|5) |  | Other miscellaneous costs       |  |                            | 13,100 
|   |  | Total Sales and marketing       |  | $                          | 813,600



Comparing the nine
months ended June 30, 2012, with the same period in 2011:



| | (1) | Salaries and benefits increased with the addition of our VP of Customer Relations who was hired
in February 2011;
| | --- | -----------------------------------------------------------------------------------------------------------------

| | (2) | Consulting fees decreased primarily due to a shift away from consultants with greater reliance
being placed on an advertising agency;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Advertising and marketing expenses remained about the same for the two periods;
| | --- | -------------------------------------------------------------------------------

| | (4) | Conference and travel decreased from the 2011 period. In 2011 we incurred substantial travel
                                                                and relocation costs associated with our project with Walter Reed National Military Medical Center;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Miscellaneous expenditures decreased slightly from the prior period;
| | --- | --------------------------------------------------------------------



For Clinical Services,
Sales and Marketing expenses decreased by $8,000 for the nine months ended June 30, 2012, as compared to the prior year’s
period; Clinical Services had a minimal decrease in advertising over both periods.



General and administrative



The following tables
present general and administrative expenses for each of the periods indicated and the corresponding percent change.



|                                 |  | Nine months Ended June 30, |           |  | Percent |  
|-------------------------------- |  | -------------------------- | --------- |  | ------- | -
|                                 |  | 2012                       |           |  | 2011    |  
|General and administrative       |  |                            |           |  |         |  
|Neurometric Information Services |  | $                          | 2,257,300 |  |         | $
|Clinical Services                |  |                            | 771,100   |  |         |  
|Total General and administrative |  | $                          | 3,028,400 |  |         | $



General and Administrative
expenses for our Neurometric Information Services business are largely comprised of payroll and benefit costs, including stock
based compensation, legal, other professional and consulting fees, patent costs, marketing and investor relations expenses, conference
and travel and miscellaneous costs, dues and subscriptions, and general administrative and occupancy costs;



|   |  |                                        |  | Nine months Ended June 30, |          
|-- |  | -------------------------------------- |  | -------------------------- | ---------
|   |  | Key Expense Categories                 |  | 2012                       |          
|1) |  | Salaries and benefit costs             |  | $                          | 1,216,100
|2) |  | Legal fees                             |  |                            | 405,300  
|3) |  | Other professional and consulting fees |  |                            | 244,700  
|4) |  | Patent costs                           |  |                            | 92,400   
|5) |  | Marketing and investor relations costs |  |                            | 15,600   
|6) |  | Conference and travel costs            |  |                            | 63,800   
|7) |  | Dues & subscriptions fees              |  |                            | 44,500   
|8) |  | General admin and occupancy costs      |  |                            | 174,900  
|   |  | Total General and administrative costs |  | $                          | 2,257,300



43







With respect to our
Neurometric Information Services business, in the nine months ended June 30, 2012, compared to the same period in 2011 we
had the following changes:



| | (1) | Salaries and benefit expenses decreased due to two factors: a decrease in stock-based
                                                                 compensation as certain stock-option grants became fully vested, which was partly offset by an increase in salary and benefit
                                                                 cost                                                                  with
                                                                 the                                                                                                              addition of
                                                                 our accountant in March 2011;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Legal fees showed a net increase; this was partly due to a reduction in general and SEC counsel
expenditures as certain expenses were being capitalized as offering costs associated with our attempted registered offerings. This
reduction was more than offset by an increase in expenditure on the Brandt litigation. Furthermore, we also engaged a firm to assist
with our lobbying efforts with congressional leadership;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Professional and consulting fees decreased, which was partly due to the mix of consulting services
used in the respective periods. In the 2011 period we utilized public relations services and a consultant who advised us on health
insurance payers. Neither of these engagements were continued in the nine months ended June 30, 2012;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Patent costs decreased largely because of timing of patent applications and maintenance costs in
the two respective periods;
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | (5) | Marketing and investor relations costs remained consistent;
| | --- | -----------------------------------------------------------

| | (6) | Conference and travel costs decreased from 2011, due to a reduction in travel;
| | --- | ------------------------------------------------------------------------------

| | (7) | Dues and subscription costs decreased from 2011, due to a reduction in subscriptions in the
                                                                 current year;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | General administrative and occupancy costs had minimal change in the two respective
                                                                 periods;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



For
Clinical Services, general and administrative expenses include all costs associated with operating of the Neuro-Therapy
Clinic which include: payroll costs, medical supplies, occupancy costs and other general and administrative
support costs.  These costs decreased in the nine months ending June 30, 2012, from the 2011 period, which was due
to a general reduction in expenditures across the board.



Other expense



The following table
presents other expense for each of the periods indicated and the corresponding percent change.



|                                              |  | Nine months Ended  June 30, |            |   | Percent |  
|--------------------------------------------- |  | --------------------------- | ---------- | - | ------- | -
|                                              |  | 2012                        |            |   | 2011    |  
|                                              |  |                             |            |   |         |  
|Neurometric Information Services expense, net |  | $                           | (3,407,600 | ) |         | $
|Clinical Services expense                     |  |                             | -          |   |         |  
|Total other expense                           |  | $                           | (3,407,600 | ) |         | $

* not meaningful



For the nine months
ended June 30, 2012 and 2011 net other non-operating expense for Neurometric Information Services were as follows:



| | · | For the nine months ended June 30, 2012,
we incurred non-cash interest charges totaling $3,385,000 of which $481,000 was accrued interest on our promissory notes at 9%
per annum; the remaining balance was comprised of $2,897,200 of warrant discount amortization and warrant and note conversion derivative
liability charges and $6,800 of actual net interest paid in cash for the nine-month period.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We incurred finance fees totaling $151,500
in association with our private placement of convertible notes.  Of these finance fees $94,700 was paid in cash and $56,800
was the fair value of warrants that were issued to the placement agent.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Offerings cost of $789,100 was expensed
as they related to our Canadian and domestic fund raising efforts.
| | - | ----------------------------------------------------------------------------------------------------------



| | · | Under ASC 815, all derivative instruments
are required to be measured subsequently at fair value and the change in fair value of non-hedging derivative instrument are to
be recognized in current earnings. Revaluation of our derivative liabilities for the promissory note conversion feature and associated
warrants for the nine-month period ended June 30, 2012, resulted in a non-cash gain of $918,000. For the same period in 2011 we
had a non-cash gain of $4,753,100 on the valuation of derivative liabilities. The Company experiences large changes in the valuation
of derivative liabilities from quarter to quarter as a result of the volatility in its stock price.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44







Net Loss



The following table
presents net loss for each of the periods indicated and the corresponding percent change.



|                                          |  | Nine months Ended June 30, |            |   | Percent |  
|----------------------------------------- |  | -------------------------- | ---------- | - | ------- | -
|                                          |  | 2012                       |            |   | 2011    |  
|                                          |  |                            |            |   |         |  
|Neurometric Information Services net loss |  | $                          | (7,157,600 | ) |         | $
|Clinical Services loss                    |  |                            | (352,700   | ) |         |  
|Total Net Loss                            |  | $                          | (7,510,300 | ) |         | $



The net loss for
our Neurometric Information Services business of approximately $7.2 million for the nine months ended June 30, 2012 compared
to the $5.7 million loss in the same period in the prior year is primarily due to the non-cash charges in our non-operating
expenses described above, including particularly the non-cash gain resulting from the revaluation of our derivative liabilities.



For our Clinical Services
the net loss of $352,700 in the nine months ended June 30, 2012, is a decrease of $94,100 over the same period in the prior year.
The reduced loss is due to a combination of increased revenues and reduced expenditures across the board.



The
Company’s operating loss of $4.1 million for the nine months ended June 30, 2012, is a reduction of $399,800 for the
same period in the prior year, however this improvement is masked  by the net loss line due to multiple non-cash charges
associated with interest expenses and changes in valuation of our derivative liabilities which stem from our promissory note
financings.



Liquidity and Capital Resources



Since
our inception, we have incurred significant losses and, as of June 30, 2012, our liabilities exceeded our assets
by $17.9 million.  We are unable to pay our obligations
as they become due and we are in substantial arrears on paying every one of our creditors.  If we are not able to raise
additional funds immediately, and reach accommodations with our creditors, we will likely be required to cease our
operations. As of June 30, 2012, we had an accumulated deficit
of approximately $49.7 million; for June 30, 2011 our accumulated deficit was approximately $39.5 million. We have not
yet achieved profitability and, assuming we are able to continue our operations, anticipate that we will continue to incur net losses for the foreseeable future. We expect
that our research and development, sales and marketing and general and administrative expenses will continue to grow and, as
a result, we will need to generate significant product revenues to achieve profitability. We may never
achieve profitability.



As of June 30, 2012,
we had approximately $20,400 in cash and cash equivalents and a working capital deficiency of approximately $17.9 million compared
to approximately $910,700 in cash and cash equivalents and a working capital deficiency of approximately $9.1 million at June 30,
2011. The working capital deficiency as of June 30, 2012 includes the $7.6 million of convertible promissory notes outstanding
of which $3.0 million are senior secured notes, $4.5 million are subordinated secured notes and $90,000 are unsecured. Additionally
it includes a non-cash derivative liability of $6.5 million.



Operating Capital and Capital Expenditure
Requirements



We are unable to
pay our obligations as they become due and we are in arrears on paying every one of our creditors.  If we are not able
to raise additional funds immediately and reach some accommodations with our creditors, we will likely be required
to cease our operations. We will also need substantial additional funds before we can increase demand for our PEER Online
services.  In addition, we will have to repay the currently outstanding notes plus interest starting on October 1,
2012.



Our continued operating
losses and limited capital raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial
additional funds in order to continue to conduct our business.  Until we can generate a sufficient amount of revenues
to finance our cash requirements, which we may never do, we have to finance future cash needs primarily through public or private
equity offerings, debt financings, borrowings or strategic collaborations.





We continue
to explore additional sources of capital; however, there is substantial doubt as to whether additional funding will be
available in amounts and on terms acceptable to us to permit us to continue operations. The Company has so far been
unsuccessful in consummating the public offering of securities it has been pursuing this year. Even if we were to raise
additional funds, any additional equity funding may result in significant dilution to existing stockholders, and, if we incur
additional debt financing, a substantial additional portion of our operating cash flow may be dedicated to the payment of
principal and interest on such indebtedness, thus limiting funds available for our business activities.  If adequate
funds are not available, it would force us to cease operations or would otherwise have a material adverse effect on our
business, financial condition and/or results of operations.



45







Assuming we are
able to continue our operations, we expect to continue to incur operating losses in the future and to make capital
expenditures to expand our research and development programs (including upgrading our PEER Online Database); to scale up our
paid clinical trial with the military and to initiate our commercial operations and marketing efforts. We expect that our
existing cash will be used to fund working capital and for capital expenditures and other general corporate purposes,
including the repayment of debt incurred as a result of our litigation with Brandt.



The amount of capital
we will need to conduct our operations and the time at which we will require such capital may vary significantly depending upon
a number of factors, such as:



| | · | the amount and timing of costs we incur
in connection with our research and product development activities, including enhancements to our PEER Online Database and costs
we incur to further validate the efficacy of our referenced EEG technology;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the amount and timing of costs we incur
in connection with the expansion of our commercial operations, including our selling and marketing efforts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | · | whether
we incur additional consulting and legal fees in our efforts to conducting a study under an FDA Investigational Device Exemption
(IDE) and in obtaining a 510(k) clearance from the FDA;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if we expand our business by acquiring
or investing in complimentary businesses.
| | - | --------------------------------------------------------------------------------



Sources of Liquidity



Since our inception,
substantially all of our operations have been financed from equity and debt financings.  Through June 30, 2012,
we had received proceeds of approximately $13.7 million from the sale of stock, $15.3 million from the issuance of convertible
promissory notes and $220,000 from the issuance of common stock to employees in connection with expenses paid by such employees
on behalf of the Company.



From June 3, 2010 through
to November 12, 2010, we raised $3.0 million through the sale of secured convertible notes (October Notes) and warrants. From January
20, 2011 through to April 25, 2011, we raised $2.5 million through the sale of subordinated secured convertible notes (January
Notes) and warrants. From October 11, 2011 through January 31, 2012, we raised $2.0 million through the sales of additional subordinated
secured convertible notes (2011 Bridge Notes). On February 29, 2012 we raised a further $90,000 in an unsecured convertible note.
Of such amounts, an aggregate of $3.9 million was purchased by members of our Board of Directors or their affiliate companies.
See Note 3 and Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements.



Cash Flows



Net cash
used in operating activities was $2.2 million for the nine months ended June 30, 2012 compared to $3.2 million for the nine
months ended June 30, 2011.  The decrease in cash used in operations of $1.0 million was primarily due to
increasing our accounts payable balances as a result of deferment of payments to our creditors and due to management
deferring their salaries as well as cost cutting/containment across the board.



Net cash used in investing
activities increased to $25,500 for the nine months ended June 30, 2012 as compared to $19,700 for the same period ended June 30,
2011.  Our 2012 investing activities were primarily related to the acquisition of intellectual property and some minor purchases
of computer equipment. In the 2011 period we acquired EEG equipment to be loaned out to customers.



Net cash
proceeds from financing activities for the nine months ended June 30, 2012 were approximately $2.2 million, net of offering
costs, raised through our sale of subordinated secured convertible notes and warrants (the 2011 Bridge Notes), a $90,000
unsecured convertible note and an additional $200,000 in promissory notes. For the nine months ended June 30, 2011 net cash
proceeds from financing activities were approximately $4.4 million from the sale of our Secured October Notes and
Subordinated Secured January Notes and an equipment lease which generated net proceeds of $15,900. These proceeds were
partly offset by the repayment of $24,700 on a promissory note issued to Daniel Hoffman, our Chief Medical Officer, in
connection with our acquisition of NTC.



Contractual Obligations and Commercial
Commitments



As of June 30, 2012,
our combined lease obligations are $84,300 as follows;



| | · | our remaining lease obligation on our Aliso Viejo office, which expires
on January 31, 2013, is $29,000 in total: being $12,400 and $16,600 for fiscal years 2012 and 2013 respectively, with an average
monthly rental of $3,600 over the entire lease period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46







| | · | our remaining lease obligation on our Greenwood Village, CO, clinic
office, which expires of April 30, 2013, is $55,300 in total: $16,500 and $38,800 for fiscal years 2012 and 2013 respectively,
with an average monthly rental of $5,100 over the entire lease period.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Derivative Liability



Current liabilities
at June 30, 2012 include $6.6 million of derivative liability. This amount includes:



| | · | $4.5 million, which represents the fair value liability associated
with the warrants issued in conjunction with the October, January, 2011 Bridge Notes and Unsecured convertible note.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | $2.1 million, which represent the fair value liability associated
with the conversion option of the October, January, 2011 Bridge Notes and Unsecured convertible note. (Please see Note 3 of the
Notes to Unaudited Condensed Consolidated Financial Statements).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The carrying value
of these derivative liabilities will be reassessed each quarter and any change in the carrying value will be booked to the other
expense line item in the income statement. For the nine months ended June 30, 2012 we booked a gain of $0.9 million in the carrying
value of these derivatives, compared to a gain of $4.5 million for the same period ended June 30, 2011.



Income Taxes



Since inception, we
have incurred operating losses and, accordingly, have not recorded a provision for federal income taxes for any periods presented.  As
of September 30, 2011, we had net operating loss carryforwards for federal income tax purposes of $24.7 million. If not utilized,
the federal net operating loss carryforwards will begin expiring in 2030. Utilization of net operating loss and credit carryforwards
may be subject to a substantial annual limitation due to restrictions contained in the Internal Revenue Code that are applicable
if we experience an “ownership change”. The annual limitation may result in the expiration of our net operating loss
and tax credit carryforwards before they can be used.



Off-Balance Sheet Arrangements



We have no off-balance
sheet arrangements or financing activities with special purpose entities.



47







Item 3. Quantitative and Qualitative
Disclosures about Market Risk.



Not applicable.



Item 4. Controls and Procedures.



Disclosure Controls and Procedures



Our management, including
our principal executive officer (PEO) and principal financial officer (PFO), conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15, as of June 30, 2012, the end
of the period covered by this report.  Based on this evaluation, our PEO and PFO concluded that our disclosure controls
and procedures were not effective as of June 30, 2012 for the reasons described below.



The following significant
deficiency was identified, which in combination with other deficiencies may constitute a material weakness (as defined below):



| | · | We
do not have a comprehensive and formalized accounting and procedures manual.
| | - | -------------------------------------------------------------------------------



A “material weakness”
is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis.



A “significant
deficiency” is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.



To the knowledge of
our management, including our PEO and PFO, none of the aforementioned significant deficiencies led to a misstatement of our results
of operations for the three months and nine months ended June 30, 2012, or statement of financial position as of June 30, 2012.



The Company is planning
to develop a comprehensive and formal accounting and procedures manual and has identified a resource to assist with the development
of such manual.



Changes in Internal Control Over Financial
Reporting



Other than as stated
above, there were no changes in our internal control over financial reporting or in other factors identified in connection with
the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended June 30,
2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



48







PART II
OTHER INFORMATION



Item 1. Legal Proceedings



Please see Note 8 of
our Notes to Unaudited Condensed Consolidated Financial Statements for a description of our litigation with Leonard Brandt.



Item 1A. Risk Factors



Investing in our securities
involves risks. In addition to the risk factor detailed below and the other information in this quarterly report on Form 10-Q,
stockholders and potential investors should carefully consider the risks and uncertainties discussed in the section "Item
1.A. Risk Factors" in our annual report on Form 10-K for the year ended September 30, 2011. If any of the risks and uncertainties
set forth herein and therein actually materialize, our business, financial condition and/or results of operations could be materially
adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of his or her
investment. The risks and uncertainties described in this quarterly report on Form 10-Q and our annual report on Form 10-K for
the year ended September 30, 2011 are not the only ones we face. Additional risks and uncertainties not presently known to us or
that we currently consider immaterial may also impair our business operations.



In addition, this quarterly
report on Form 10-Q contains forward-looking statements. Our actual results could differ materially from those anticipated in those
forward-looking statements as a result of various factors, including those set forth in “Item 1A. Risk Factors” of
our annual report on Form 10-K for the year ended September 30, 2011. Please see the introductory section to “Part I - Item
2. Management’s Discussion of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q
for further information on these forward-looking statements.



We are unable to pay our obligations as they become due and need additional
funds immediately in order to continue our operations. Our liabilities exceed our assets; we have a working capital
deficiency. Our secured convertible notes, which are payable during 2012, are secured by all of our assets.



We are unable to pay our
obligations as they become due and we are in arrears on paying every one of our creditors.  If we are not able to raise
additional funds immediately and reach some accommodations with our creditors, we will likely be required to cease
our operations. There is substantial doubt
as to whether additional funding will be available in amounts and on terms acceptable to us to permit us to continue
operations.  We have so far been unsuccessful in consummating the public offering of securities that we have been
pursuing this year.



As of June 30, 2012,
we had liabilities of $18.1 million and assets of only $0.1 million. We had a working capital deficiency of $17.9 million. Included
in our liabilities are $6.6 million in derivative liabilities (as determined under ASC 815) associated with our convertible notes
and associated warrants. Furthermore, as of June 30, 2012, we have outstanding senior and subordinated secured convertible notes
in an aggregate principal amount of $5.5 million, which are repayable on October 1, 2012, subordinated secured convertible
notes in an aggregate principal amount of $2.0 million, which are repayable beginning October 18, 2012, and unsecured convertible
notes in an aggregate principal amount of $90,000 million, which are repayable on February 28, 2013. The secured notes are secured
by substantially all of our assets, with the subordinated secured convertible notes enjoying a second-position security interest. We currently have no resources to repay such senior and subordinated secured and unsecured notes and we will be required either
to raise additional funds or to seek conversion of these notes to avoid a default.  If we default on our secured notes, their
holders may take possession of and sell our assets in order to satisfy our obligations to them under the notes, thereby leaving
no value for the holders of common stock.



In February 2012,
we issued the unsecured convertible notes mentioned above to an affiliate of our director Zachary McAdoo.  In April and May
2012, we received two short-term loans of $100,000 each from our director John Pappajohn.  These loans are evidenced by an
interest-free demand note.  Since the Company did not solicit the consent of holders of a majority in aggregate principal
amount outstanding of each of its series of senior and subordinated convertible notes in connection with the $90,000 unsecured
note and such loans, holders of the notes may notify the Company of its failure to comply with the covenant not to borrow indebtedness
in excess of $100,000 without obtaining the requisite consent, declare a default under the notes and seek all remedies available
thereunder.





49







Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds



On April 26, 2012 and May 25, 2012, we received two short-term, interest free loans of $100,000 each from
John Pappajohn for the purpose of funding offering costs and other sundry operating expenses.  These loans are evidenced by
two demand notes and repayment of these notes is scheduled to occur if and when we consummate the next financing.



The issuance of the
securities described above was not registered under the Securities Act.  No general solicitation or advertising was used
in connection with the issuance.  In making the issuance without registration under the Securities Act, the Company relied
upon the exemption from registration contained in Section 4(2) of the Securities Act and/or Regulation D thereunder.



Item 6. Exhibits



The following exhibits are filed as part
of this report or incorporated by reference herein:



|Exhibit
        Number |  | Exhibit Title                                                                                                                                                                         
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |  |                                                                                                                                                                                       
|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 and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.



50







SIGNATURES



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



|                      | CNS Response, Inc. |                              
|--------------------- | ------------------ | -----------------------------
|                      |                    |                              
|Date: August 14, 2012 |                    | /s/ George Carpenter         
|                      | By:                | George Carpenter             
|                      | Its:               | Chief Executive Officer      
|                      |                    | (Principal Executive Officer)
|                      |                    |                              
|                      |                    | /s/ Paul Buck                
|                      | By:                | Paul Buck                    
|                      | Its:               | Chief Financial Officer      
|                      |                    | (Principal Financial Officer)



51