3.	SALE OF PREFERRED SHARES AND WARRANTS

On May 11, 2011, we completed a registered public offering of 5,506 units at a price of $1,000 per unit. Each unit consisted of one 6% Series A convertible preferred share which is convertible into 500 common shares, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share.

The designation, rights, preferences and other terms and provisions of the Series A preferred shares are set forth in the Certificate of Designation. Until May 11, 2014, the Series A preferred shares have a stated dividend rate of 6% per annum, payable quarterly in cash or, subject to certain conditions, in common shares or a combination of cash and common shares, at our election. After May 11, 2014, the Series A preferred shares will participate in any dividends payable upon our common shares on an "as converted" basis. If the preferred shares are converted prior to May 11, 2014, we must also pay to the converting holder in cash, or subject to certain conditions, in common shares or a combination of cash and common shares, $180 per $1,000 of the stated value of the preferred shares less any dividends paid prior to conversion. Class A Warrants are exercisable immediately and expire in May 2016. Class B Warrants are exercisable immediately and expire in May 2012. The net proceeds from the sale of the units, after deducting the fees and expenses of the placement agent and other expenses were $4.6 million. We intend to use the proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes.

The Series A preferred shares are entitled to participate in any dividends declared and paid on our common shares on an as-converted basis, and the holders of the preferred shares are not entitled to vote together with common shareholders unless converted to common shares. The Series A preferred shares are considered to be an equity instrument. The warrants have been accounted for as equity and valued using the Black Scholes pricing model. The weighted-average assumptions used to compute the fair value of the warrants at the time of issuance were as follows:

	Warrant A			Warrant B

Risk-free interest rate		1.87	%		0.18	%
Dividend yield		0.00	%		0.00	%
Volatility of the Company's common stock		106.91	%		116.01	%
Expected life of the options (years)		5.0			1.0

Fair value per share	$	1.433		$	0.779

The Series A preferred shares were valued using the common shares available upon conversion of all preferred shares of 2,753,000 and the closing market price of our stock on May 11, 2011 of $1.86. Adding in the total possible dividend for the preferred shares of 18% over three years, or $991, the total fair value of the preferred shares was calculated as $6.112 million. We then allocated the total value of the offering of $5.506 million based on the fair values for the preferred shares and warrants described above.

We have also recognized a beneficial conversion feature related to the Series A preferred shares, to the extent that the conversion feature, based on the proceeds allocated to the Series A preferred shares, was in-the-money at the time they were issued. Such beneficial conversion feature amounted to approximately $1.446 million. Because the Series A preferred shares do not have a stated redemption date and may be converted by the holder at any time, the discount recognized by the allocation of proceeds to the beneficial conversion feature has been immediately charged through accumulated deficit as a deemed dividend to the holders of the Series A preferred shares in the amount of $3.277 million. This will be the only deemed distribution recorded for the Series A preferred shares included in this offering. Further, because the preferred dividends are payable on the day of closing on May 11, 2011, we recognized the full value, $991, as a liability included in accounts payable and charged immediately through accumulated deficit. There will be no other dividends recorded for the Series A preferred shares included in this offering.

As of June 30, 2011, 3,371 preferred shares have been converted into 1,997,193 common shares. No warrants have been exercised as of June 30, 2011. At June 30, 2011, 2,135 preferred shares and 2,753,000 warrants remained outstanding. Also at June 30, 2011, $384 of the $991 in preferred dividends remains accrued in accounts payable for future preferred dividends. The table below details the changes in shareholders’ equity due to this registered public offering. Amounts in the table are not in thousands.

												Accumulated
												other			Total
	Preferred			Common		Additional paid-			Accumulated			comprehensive			shareholders'
	shares			shares		in capital			deficit			income			equity

Balance at September 30, 2010	$	-		$	1,190,572	$	13,357,782		$	(3,981,220	)	$	99,542		$	10,666,676

Comprehensive Income:
Net income		-			-		-			1,211,290			-			1,211,290
Foreign Currency translation adjustments		-			-		-			-			(3,659	)		(3,659	)
Total Comprehensive Income																1,207,631

Stock based compensation expense		-			-		123,353			-			-			123,353

Issuance of preferred shares, net of issuance costs of $866,855		5,506,000			-		(866,855	)		-			-			4,639,145

Fair value attributed to warrants		(1,831,182	)		-		1,831,182			-			-			-

Preferred stock - beneficial conversion feature		(1,445,762	)		-		1,445,762			-			-			-

Preferred stock - deemed dividend		3,276,944			-		-			(3,276,944	)		-			-

Preferred stock dividend		-			-		-			(991,080	)		-			(991,080	)

Conversion of preferred shares to common shares		(3,371,000	)		499,298		3,478,482			-			-			606,780

Balance at June 30, 2011	$	2,135,000		$	1,689,870	$	19,369,706		$	(7,037,954	)	$	95,883		$	16,252,505