NOTE 13 – STOCK OPTION PLAN AND WARRANTS

EXERCISING OPTIONS AND WARRANTS

During 2012, 490,424 stock warrants were exercised for cash and the Company issued 198,663 shares of common stock on the cashless exercise of warrants. Also during 2012, 14,600 stock options were exercised for cash while the Company issued 131,161 shares of common stock on the cashless exercise of stock options. In 2011, 56,489 stock warrants were exercised and no options were exercised. During 2011, the company did not issue shares of common stock on the cashless exercise of warrants or options.

A summary of the status of the warrants issued by the Company as of December 31, 2012 and 2011 are as follows:

	Year Ended					Year Ended
	12/31/2012					12/31/2011
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Outstanding at beginning of year		23,736,108		$	1.55		18,779,753		$	1.59
Granted		650,000		$	0.83		5,130,046		$	1.66
Exercised		(490,424	)	$	0.62		(56,489	)	$	0.06
Cashless Exercises		(335,541	)	$	0.91		-
Expired and Cancelled		(183,893	)	$	14.73		(117,202	)	$	13.72
		23,376,250					23,736,108

Outstanding, end of period		23,376,250		$	1.46		23,736,108		$	1.55


Exercisable at end of period		23,376,250		$	1.46		23,736,108		$	1.55

As of December 31, 2012 and 2011, the Company had warrants outstanding to purchase 23,736,250 and 23,736,108 shares of the Company's common stock, respectively, at prices ranging from $0.01 to $1.50 per share. These warrants expire at various dates through February 2017. There were 650,000 and 5,130,046 warrants issued in 2012 and 2011, respectively. The fair value of the warrants granted in 2011 are included in the derivative liability calculation as the warrant agreements contain reset provisions to the exercise price. The fair value of the warrants issued in 2012 did not have any reset provisions and were valued at $273,641 using the Black Scholes model. A portion of these warrants equal to 100,000, were valued at $40,508 and were attached to debt. These warrants were recorded as a debt discount upon issuance and were fully amortized upon conversion of the related notes in 2012. The other portion of warrants equal to 550,000, were valued at $233,133 using the Black Scholes model on the grant date. These warrants were issued for investor relations services. The fair value is being amortized straight line over the related requisite service period which resulted in $172,000 of expense during the year ended December 31, 2012.

STOCK OPTION PLAN

The Company's Incentive Compensation Plan (the "Plan") provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.

A summary of the status of stock options issued by the Company as of December 31, 2012 and 2011 are as follows:

	12/31/2012					12/31/2011
				Weighted					Weighted
	Number			Average		Number			Average
	of			Exercise		of			Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of year		5,645,202		$	1.10		3,484,833		$	1.26
Granted		2,354,275		$	0.80		2,298,702		$	1.02
Exercised		(230,600	)	$	1.09		-		$	-
Expired and Cancelled		(40,000	)	$	0.86		(138,333	)	$	3.69
Outstanding at end of period		7,728,877		$	1.01		5,645,202		$	1.10

Exercisable at end of period		7,582,022		$	1.03		5,317,003		$	1.13

At December 31, 2012, the aggregate intrinsic value of all outstanding options was $5,534,876 of which 7,582,022 outstanding options are currently exercisable at a weighted average exercise price of $1.03 and a weighted average remaining contractual term of 3.6 years.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. This model uses the assumptions listed in the table below. Expected volatilities are based on the historical volatility of the Company's stock. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	2012			2011
Weighted average fair value per option granted	$	0.38		$	0.97
Risk-free interest rate		0.34 - 0.42	%		0.6 - 0.9	%
Expected dividend yield		0.00	%		0.00	%
Expected lives		2.695			2.875 - 5
Expected volatility		97.72 - 103	%		101 - 245	%

During 2012, the Company granted 2,324,275 options to employees/advisors and recognized a total of $961,599 in stock compensation expense. During 2011, the Company granted 2,058,702 options to employees or advisors and recognized a total of $2,069,498 in stock based compensation related to the options granted above. The options granted to employees are 25% vested at the date of grant and 25% every 90, 180 and 270 days subsequent to the grant date. The expiration date of the options granted in both 2012 and 2011 is five years from the grant date.

During 2011, the board of directors initiated an Advisory Committee to consult and advise the Company on matters relating to the marketing and development of the Company's products. The Company granted 30,000 options to each of the eight Advisory Committee members. Total options granted were 240,000 and vest one third at the grant date, one third on the first anniversary of the grant date and one third on the second anniversary of the grant date. During 2012, the Company added one more member to the Advisory Committee and extended this person the same 30,000 option grant as was provided to the members in 2011. The vesting period is the same. The Company recognized an expense relating to these options of $414,227 and $44,318 during 2012 and 2011, respectively. The options granted in both 2012 and 2011 will expire in five years from the grant date.

As of December 31, 2012, the Company had reserved 10,271,123 shares of Common Stock to be issued upon the exercise of qualified options issued under the Plan. As of December 31, 2011 the Company had 14,073,132 shares available for grant under the Plan.

Stock options outstanding at December 31, 2012 are as follows:

			Weighted
			Average		Weighted
			Remaining		Average
	Options		Contractual		Exercise		Options
Range of Exercise Prices	Outstanding		Life		Price		Exercisable
$0.01-$1.50		7,383877		3.2	$	1.13		7,237,022
$1.51-$3.00		210,000		2.4	$	1.49		210,000
$3.00-$5.00		135,000		5.3	$	3.11		135,000
		7,728,877		3.6		1.02		7,582,022

Stock options outstanding at December 31, 2011 are as follows:

			Weighted
			Average		Weighted
			Remaining		Average
	Options		Contractual		Exercise		Options
Range of Exercise Prices	Outstanding		Life		Price		Exercisable
$0.01-$1.50		5,435,202		3.9	$	1.18		5,107,003
$1.51-$3.00		210,000		2.0	$	1.49		210,000
		5,645,202		4.0		1.13		5,317,003