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<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Dais Analytic Corporation, a New York corporation,
(the “Company”) has developed and is commercializing applications using its nano-structure polymer technology. The
first commercial product is an energy recovery ventilator (“ERV”) (cores and systems) for use in commercial Heating,
Ventilating, and Air Conditioning (HVAC) applications. In addition to direct sales, the Company licenses its nano-structured polymer
technology to strategic partners in the aforementioned application and is in various stages of development with regard to other
applications employing its base technologies. The Company was incorporated in April 1993 with its corporate headquarters located
in Odessa, Florida.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The accompanying financial statements of the
Company are unaudited, but in the opinion of management, reflect all adjustments necessary to fairly state the Company’s
financial position, results of operations, stockholders’ deficit and cash flows as of and for the dates and periods presented.
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The unaudited financial statements and notes
are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been omitted although
the Company generally believes that the disclosures are adequate to ensure that the information presented is not misleading. The
accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the
Company for the fiscal year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 29, 2013. The results of operations for the three and six month periods ended June 30, 2013 are
not necessarily indicative of the results that may be expected for any future quarters or for the entire year ending December 31,
2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses since inception.
As of June 30, 2013, the Company has an accumulated deficit of $39,341,481, negative working capital of $209,359 and a stockholders’
deficit of $3,386,250. The Company used $340,564 and $211,745 of cash in operations during the six months ended June 30, 2013 and
2012, respectively, which was funded by proceeds from product sales and equity financings. There is no assurance that such equity
financing will be available in the future. In view of these matters, there is substantial doubt that the Company will continue
as a going concern. The Company is currently pursuing the following sources of short and long-term working capital:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 34px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">1.</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">We are currently holding preliminary discussions with parties who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize certain applications of our technology.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">2.</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">We are seeking growth capital from certain strategic and/or government (grant) related sources. In addition to said capital, these sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out, and channel penetration of our products.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company’s ability to continue as
a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital
requirements. However, there can be no assurance that the Company will be successful in its efforts to secure such cash flow. Any
failure by us to timely procure additional financing or investment adequate to pay our outstanding debt and fund our ongoing operations,
including planned product development initiatives and commercialization efforts, will have material adverse consequences on our
financial condition, results of operations and cash flows.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The financial statements of the Company do
not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications
of liabilities that might be necessary should the Company be unable to continue as a going concern.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In the opinion of management, all adjustments
necessary for a fair statement of (a) the results of operations for the three and six month periods ended June 30, 2013 and 2012,
(b) the financial position at June 30, 2013 and December 31, 2012, and (c) cash flows for the six month periods ended June 30,
2013 and 2012, have been made.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The significant accounting policies followed
are:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Use of estimates</u> </b>-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Cash and cash equivalents</u> - </b>Cash
and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The
Company has never experienced any losses related to these balances. All non-interest bearing cash balances were fully insured at
December 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program,
there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage reverted to $250,000 per
depositor at each financial institution. The Company's non-interest bearing cash balances were fully insured at June 30, 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Accounts receivable</u> -
</b>Accounts receivable consist primarily of receivables from the sale of our ERV products. The Company regularly reviews accounts
receivable for any bad debts based on an analysis of the Company’s collection experience, customer credit worthiness, and
current economic trends. Based on management’s review of accounts receivable, we have recorded an allowance for doubtful
accounts of $11,274 and $2,576 at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, three customers accounted for approximately 90% of
the balance of accounts receivable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Inventory</u> </b>- Inventory consists
primarily of raw materials and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined
based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other
factors.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Property and equipmen</u>t - </b>Property
and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives
of the assets ranging from 5 to 7 years. Gains and losses upon disposition are reflected in the statement of operations in the
period of disposition. Maintenance and repair expenditures are charged to expense as incurred. Property and equipment are evaluated
for impairment when events change or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Intangible assets</u> </b>- Identified intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Company’s existing intangible assets consist solely of patents. Patents are amortized over their estimated useful or
economic lives of 15 years. Patent amortization expense was approximately $5,300 and $7,400 for the three months ended June 30,
2013 and 2012, respectively. Patent amortization expense was approximately $11,300 and $11,800 for the six months ended June 30,
2013 and 2012, respectively. Total patent amortization expense for the next five years is estimated to be approximately $24,000
per year.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Long-lived assets</u> - </b>Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not
be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment.
When impairment indicators exist, the Company uses market quotes, if available or an estimate of the future undiscounted net cash
flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable.
There have been no significant impairments of long-lived assets during the three and six month periods ended June 30, 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Revenue recognition</u> </b>-
Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain
and collection is probable. During the six months ended June 30, 2013 and 2012, four customers accounted for approximately 90%
(73% of revenue is from a related party) and 61% of revenues, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In certain instances, our ConsERV product carries
a warranty for two years for all parts contained therein with the exception of the energy recovery ventilator core which, in such
circumstances, may carry a 10 year warranty. The warranty includes replacement of defective parts. The Company has recorded an
accrual of approximately $93,000 for future warranty expenses at June 30, 2013 and December 31, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Revenue derived from the sale of licenses is
deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated.
The Company recognized revenue of approximately $50,400 and $20,500 from license agreements for the three months ended June 30,
2013 and 2012, respectively. The Company recognized revenue of $100,800 and $41,000 from license agreements for the six months
ended June 30, 2013 and 2012, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company accounts for revenue arrangements
with multiple elements under the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 605-25, "Revenue Recognition—Multiple-Element Arrangements," In order to account for these agreements,
the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units
of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the licensee.
The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria
are applied to each of the separate units.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Employee stock based compensation</u> </b>-
The Company recognizes all share-based awards to employees, including grants of employee stock options, as compensation expense
in the financial statements based on their fair values. That expense will be recognized over the period during which an employee
is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The value of each award is estimated at the
grant date using the Black-Scholes option model with the following assumptions for awards granted during the six months ended June
30, 2013. There were no awards granted during the six months ended June 30, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Six Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2013</b></p></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 86%"><font style="font-size: 10pt">Dividend rate</font></td>
<td style="width: 1%"> </td>
<td style="width: 4%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0</font></td>
<td style="width: 1%"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Risk free interest rate</font></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" style="text-align: right"><font style="font-size: 10pt">2.03% – 2.20</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expected term</font></td>
<td> </td>
<td colspan="2" style="text-align: right"><font style="font-size: 10pt">10 years</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Expected volatility</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">177</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The basis for the above assumptions are as
follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within
the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was
calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding;
and expected volatility was calculated by review of the Company’s and a peer Company’s historical activity.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Non-employee stock-based compensation</u> - </b>The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows
the provisions of ASC 505-50, <i>Equity-Based Payments to Non-Employees</i>. Stock based compensation related to
non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever
is more readily determinable. The measurement date for the fair value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement. During the six months ended June 30, 2013 the Company issued
168,000 options valued at $19,105 for consulting services rendered. During the six months ended June 30, 2012, the Company did
not issue any non-employee stock based compensation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The fair value of stock options issued to consultants
during the six months ended June 30, 2013 was calculated using the Black-Scholes model with the following assumptions: Expected
life in years: 2 years; Estimated volatility 165%; Risk-free interest rate: 0.26%; Dividend yield: 0%.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Research and development expenses and grant
proceeds</u> </b>- Expenditures for research, development and engineering of products are expensed as incurred. For the three
and six months ended June 30, 2013, the Company incurred research and development costs of approximately $206,800 and $326,700
respectively. For the three and six months ended June 30, 2012, the Company incurred research and development costs of approximately
$143,400 and $302,200, respectively. The Company accounts for proceeds received from government grants for research as a reduction
in research and development costs. For the three and six months ended June 30, 2012, the Company recorded approximately $0 and
$67,200, respectively, in grant proceeds against research and development expenses on the statement of operations. For the three
and six months ended June 30, 2013, the Company did not receive any grant proceeds.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Government grants</u> </b>-
Grants are recognized when there is reasonable assurance that the grant will be received and that any conditions associated with
the grant will be met. When grants are received related to property and equipment, the Company reduces the basis of the assets
resulting in lower depreciation expense over the life of the associated asset. Grants received related to expenses are reflected
as a reduction of the associated expense in the period in which the expense is incurred.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Financial instruments</u> </b>-
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions
about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels
of the fair value hierarchy are described below:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; text-align: center"><font style="font-size: 10pt">• </font></td>
<td style="width: 92%; text-align: justify"><font style="font-size: 10pt">Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.</font></td></tr>
</table>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; text-align: center"><font style="font-size: 10pt">•</font></td>
<td style="width: 92%; text-align: justify"><font style="font-size: 10pt">Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.</font></td></tr>
</table>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; text-align: center"><font style="font-size: 10pt">• </font></td>
<td style="width: 92%; text-align: justify"><font style="font-size: 10pt">Level 3 - Inputs that are both significant to the fair value measurement and unobservable.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of June 30, 2013. The Company uses the market
approach to measure fair value for its Level 1 financial assets and liabilities, which include cash equivalents of $300 at June
30, 2013. The market approach uses prices and other relevant information generated by market transactions involving identical or
comparable assets and liabilities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The respective carrying value of certain on-balance
sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments
include cash, accounts receivable, accounts payable, accrued compensation and accrued expenses.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Income taxes</u> </b>- Income
taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis
of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company identifies and evaluates uncertain
tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not
probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized
tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for
uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination
by the Internal Revenue Service include the years ended December 31, 2009 through 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Earnings (loss) per share
</u></b>- Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted
average common shares outstanding for the period. Diluted income (loss) per share is computed giving effect to all potentially
dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock
options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all
potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. For each of the three
and six months ended June 30, 2013, the Company had 36,881,319 potentially dilutive common shares that were not included in the
computation of income (loss) per share. For the three and six months ended June 30, 2012, the Company had 53,864,169 and 55,463,847
potentially dilutive common shares that were not included in the computation of income (loss) per share.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following sets forth the computation of
basic and diluted net (loss) earnings per common share for the three and six months ended June 30, 2013 and 2012:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Three Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p></td>
<td> </td>
<td> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Six Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p></td>
<td> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2013</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2012</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2013</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2012</b></font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Numerator:</font></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Net (loss) income</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1,083,506</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">299,497</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1,389,654</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">281,114</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Denominator:</font></td>
<td colspan="4"> </td>
<td colspan="4"> </td>
<td colspan="4"> </td>
<td colspan="4"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Weighted average basic shares outstanding</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,767,097</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,774,817</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,595,757</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,774,817</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Stock options</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">626,734</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">972,944</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Weighted average fully diluted shares outstanding</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,767,097</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">38,401,551</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,595,757</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">38,747,761</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Net (loss) income per common share - basic</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Net (loss) income per common share - diluted</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Derivative financial instruments</u> </b>-
The Company does not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible
promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required
under ASC 815 “<i>Derivative and Hedging” </i>(ASC 815) to be accounted for separately from the host contract,
and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at
each reporting date, with corresponding changes in fair value recorded in current period operating results.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Freestanding warrants issued by the Company
in connection with the issuance or sale of debt and equity instruments may be considered to be derivative instruments and are evaluated
and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions
is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Recent accounting pronouncements</u> </b>-
Recent accounting pronouncements issued by FASB, the AICPA and the SEC did not or are not believed by management to have a material
impact on the Company’s present or future financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">Accrued expenses, other consist of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2013</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>December 31,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2012</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Accrued expenses, other</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">67,373</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">29,946</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Accrued registration rights penalty</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">-</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,000</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Accrued warranty costs</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">93,043</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">92,829</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Contractual obligation</font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">13,200</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">13,200</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">173,616</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">140,975</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Timothy N. Tangredi, our Chief Executive Officer
and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC (“Aegis”). Mr. Tangredi
currently owns 52% of Aegis’ outstanding equity and spends approximately one to two days per month on Aegis business for
which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and
sell products containing our polymer technologies in biomedical and health care applications. As a result of a $150,000 payment
made by Aegis, the first license is considered fully paid and as such no additional license revenue will be forthcoming. Pursuant
to the second license Aegis made an initial one-time payment of $50,000 and is to make royalty payments of 1.5% of the net sales
price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in
medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis
has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us. All obligations for
such payments will end on the earlier of June 2, 2015 or upon the aggregate of all sums paid to us by Aegis under the agreement
reaching $1 million. The term of each respective license runs for the duration of the patented technology.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company rents a building that is owned
by two stockholders of the Company, one of which is the Chief Executive Officer. Rent expense for this building is currently $4,066
per month. The Company recognized rent expense of approximately $12,200 and $11,400 during the three months ended June 30, 2013
and 2012, respectively. The Company recognized rent expense of approximately $24,400 and $22,800 during the six months ended June
30, 2013 and 2012, respectively. At June 30, 2013 and December 31, 2012, $97,835 and $82,195, respectively, were included in accounts
payable for amounts owed for rent.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company also has accrued compensation due
to the Chief Executive Officer and other employees for deferred salaries earned and unpaid as of June 30, 2013 and December 31,
2012 of $1,559,349 and $1,494,739, respectively. The Company determined that total accrued compensation should be classified as
a long term liability, as the Company does not believe it will be repaid within the next year.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The above terms and amounts are not necessarily
indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent
parties.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><b><i><u>Options</u></i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In June 2000 and November 2009, our Board of
Directors adopted, and our shareholders approved, the 2000 Plan and 2009 Plan, respectively (together the “Plans”).
The Plans provide for the granting of options to qualified employees of the Company, independent contractors, consultants, directors
and other individuals. The Company’s Board of Directors approved and made available 11,093,886 and 15,000,000 shares of common
stock to be issued pursuant to the 2000 Plan and the 2009 Plan. The Plans permit grants of options to purchase common shares authorized
and approved by the Company’s Board of Directors.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The average fair value of options granted at
market value during six months ended June 30, 2013 was $0.15 per option. There were no options awarded during the six months ended
June 30, 2012. There were no options exercised during the six months ended June 30, 2013 and 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following summarizes the information relating
to outstanding stock options activity with employees during 2013 and 2012:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Common</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Shares</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise Price</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Term</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>(in years)</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Aggregate</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Intrinsic</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Value</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 50%"><font style="font-size: 10pt">Outstanding at December 31, 2012</font></td>
<td style="width: 1%"> </td>
<td style="width: 3%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">18,647,332</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 2%"><font style="font-size: 10pt">$</font></td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">0.29</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">6.06</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">26,345</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Awarded</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,168,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.17</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expired/Forfeited</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(703,333</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.11</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Outstanding at June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">23,111,999</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">0.26</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">6.68</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">477,116</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Exercisable at June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">21,801,997</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">0.27</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">6.40</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">376,145</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Stock compensation expense was approximately
$727,700 and $752,500 for the three and six months ended June 30, 2013, respectively, and $41,600 and $83,200 for the three and
six months ended June 30, 2012, respectively. The total fair value of shares vested during the six months ended June 30, 2013 and
2012 was approximately $640,200 and $194,300, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">As of June 30, 2013, there was approximately
$248,400 of unrecognized employee stock-based compensation expense related to non vested stock options, of which $63,100, $84,600,
$74,700 and $26,000 is expected to be recognized for the remainder of the fiscal year ending December 31, 2013, and for the fiscal
years ending 2014, 2015 and 2016, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following table represents our non vested
share-based payment activity with employees for the six months ended June 30, 2013:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; background-color: white">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Number of Options</b></font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Weighted Average Grant Date Fair Value</b></font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Nonvested options - December 31, 2012 </font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">1,235,555</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.16</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Granted</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,168,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.15</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Vested</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,301,333</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.15</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Forfeited </font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(360,970</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">) </font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Nonvested options – June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">1,741,252</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">0.11</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><i>Warrants</i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">At June 30, 2013, the Company had outstanding
warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and
consulting agreements. Information relating to these warrants is summarized as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif"><b>Warrants</b></font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Number Outstanding</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif"><b>Weighted Average Remaining Life (Years)</b></font></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise Price</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Expiration</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Year</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="width: 52%; font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Financing</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">7,000,000</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">3.49</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.34</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2016 – 2017</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Ehrenberg</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">250,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">.10</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.30</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2013</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Consulting Agreement</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">825,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1.27</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.30</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Note Conversions</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2,302,538</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">.92</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.39</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Stock Purchases</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">6,218,840</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">3.73</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.33</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2017</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Services</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">400,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1.56</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.50</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">16,996,378</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On August 21, 2009, we entered into an Exclusive
Distribution Agreement with Genertec, under which we are to supply and Genertec is to distribute, on an exclusive basis, three
of our nanotechnology-based membrane products and related products in Greater China, including mainland China, Hong Kong, Macau
and Taiwan. The agreement provides that during the initial five year term of the agreement, Genertec will order and purchase these
products in the aggregate amount of $200 million. A minimum quantity of said products is to be purchased by Genertec during each
contract year of the initial term.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In April of 2010, the Company entered into
a technical and sales agreement with CAST Systems Control Technology Co., Ltd. (“CAST”) and Genertec with a value of
up to approximately $48 million over a twelve month period. Under the terms of the Agreement, the Company will supply to CAST,
through Genertec, key system components of its nanotechnology clean water process.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">During 2011, Genertec expressed a desire to
limit its participation in this endeavor as they find NanoAir and NanoClear to have engineering requirements they are not best
suited to undertake. During the six months ended June 30, 2012, we terminated the Genertec and CAST agreements and recognized $150,000
nonrefundable deposit received from Genertec as revenue.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On October 17, 2012, Dais Analytic Corporation
(the “Company”) entered into a Securities Purchase Agreement (the “SPA”) with an investor, Green Valley
International Investment Management Company Limited (the “Investor”) pursuant to which the Company will offer up to
$7.0 million of the Company’s common stock, $0.01 par value per share (the “Common Stock”), and warrants (the
“Warrants”) to purchase up to 17,500,000 shares of Common Stock (such offer being the “Offering”). Pursuant
to the terms and conditions of the SPA, Company agreed to issue the Common Stock and Warrants in three tranches. The Warrants
are exercisable for 60 months beginning on the date of their issuance. The warrants have an exercise price of $0.30, and are subject
to standard anti-dilution adjustments for stock splits and other subdivisions. Pursuant to terms of the Offering, officers of
the Company and the Investor have signed lock-up agreements restricting the sale of Common Stock. The Investor does not have any
registration rights with respect to the Common Stock or Warrants. No underwriter or placement agent was used in the sale of the
Common Stock or Warrants.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On December 28, 2012, Dais Analytic Corporation
(the “Company”) amended the SPA, dated October 17, 2012, with Green Valley International Investment Management Company
Limited (the “Investor”) pursuant to which the Investor will purchase up to $7.0 million of the Company’s common
stock, $0.01 par value per share (the “Common Stock”), and warrants (the “Warrants”) to purchase up to
17,500,000 shares of Common Stock</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In 2012, the Company sold and issued, in connection
with the SPA, 17,500,000 shares of its common stock to the Investor for $1,750,000. In addition, as part of the purchase it issued
the Investor a warrant to purchase 4,375,000 shares of the Company’s common stock with an exercise period of five years from
the date of issue at an exercise price of $.30 per share.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">During 2013, in connection with the SPA, the
Company sold and issued 492,280 shares to the Investor for $49,228 in cash, of which $19,255 was received in 2012.  In
addition, under the terms of this agreement, the Investor also received a warrant to purchase 123,070 shares of the Company’s
common stock with an exercise period of five years from the date of issue at an exercise price of $0.30 per share. The SPA expired,
per its terms and conditions, on January 31, 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">During 2013, the Company received $149,915
from an investor under another SPA entered into on May 31, 2013, towards the purchase of common stock at $0.10 per share. Subsequent
to June 30, 2013, the Company issued 1,499,150 in settlement of the common stock payable. With the issuance of the common stock,
the Company issued warrants to purchase 374,788 shares of the Company’s common stock at $0.50 per share. The warrants are
exercisable for 60 months. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions.
The proceeds from the sale of the securities shall be used for working capital purposes and to investigate and establish a China
PRC company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company entered into a licensing agreement
during the year ended December 31, 2003 and received an initial fee of $770,000. This fee is deferred and recognized on a straight-line
basis over the life of the license agreement of 10 years. In addition, the Company received royalties of $100,000 in each of the
first three years of the agreement. The Company recognized revenue of approximately $19,250 for this agreement during each of the
three months ended June 30, 2013 and 2012. The Company recognized revenue of approximately $38,500 for this agreement during each
of the six months ended June 30, 2013 and 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company entered into a licensing agreement
with a biomedical entity during the year ended December 31, 2005 and received an initial license fee of $50,000. This fee is deferred
and recognized on a straight-line basis over the life of the license agreement of 7 years. The Company recognized revenue of approximately
$1,250 for this agreement during each of the three months ended June 30, 2013 and 2012. The Company recognized revenue of approximately
$2,500 for this agreement during each of the six months ended June 30, 2013 and 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On October 30, 2012, the Company and MG Energy
LLC, a Delaware limited liability company (“MG Energy”) , a company in which a shareholder of the Company holds a position,
entered into a License and Supply Agreement (the “Agreement”), effective October 26, 2012, pursuant to which the Company
licensed certain intellectual property and improvements thereto to MG Energy, for use in the manufacture and sale of energy recovery
ventilators (“ERV”) and certain other HVAC systems for installation in commercial, residential or industrial buildings
in North America and South America in exchange for the cancellation of $2,034,521 of debt due to MG Energy. MG Energy also agreed
to purchase its requirements of certain ConsERV products from the Company for MG Energy’s use, pursuant to the terms and
conditions of the Agreement. MG Energy will also pay royalties, as defined, to the Company on the net sales of each product or
system sold. The term of the Agreement will expire upon the last to expire of the underlying patent rights for the licensed technology.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company has identified all of the deliverables
under the Agreement and has determined significant deliverables to be the license for the intellectual property and the supply
services. In determining the units of accounting, the Company evaluated whether the license has stand alone value to MG Energy
based upon consideration of the relevant facts and circumstances of the Agreement. The Company determined that the license does
not have stand alone value to the licensee and, therefore, should be combined with the supply agreement as one unit of accounting.
The initial payment for the license agreement will be treated as an advance payment and recognized over the performance period
of the supply agreement. Royalties will be recognized as revenue when earned. The Company recognized revenue of $29,920 in license
fees and $316,791 in product sales relating to this Agreement during the three months ended June 30, 2013. The Company recognized
revenue of $59,839 in license fees and $792,078 in product sales relating to this Agreement during the six months ended June 30,
2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company has accounted for certain
warrants in accordance with ASC 815-10, Derivatives and Hedging (ASC 815-10). ASC 815-10 provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to
any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10,
including any freestanding financial instrument that is potentially settled in an entity’s own stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Due to certain adjustments that may be made
to the exercise price of the warrants issued in December 2007, January 2008 and August 2008 if the Company issues or sells shares
of its common stock at a price which is less than the then current warrant exercise price, these warrants have been classified
as a liability as opposed to equity in accordance with the Derivatives and Hedging Topic of the FASB ASC 815-10-15 as it was determined
that these warrants were not indexed to the Company’s stock<i>. </i>As a result, the fair market value of these warrants
was remeasured on January 1, 2009 and marked to market at each subsequent financial reporting period. The change in fair value
of the warrants is recorded in the statement of operations and is estimated using the Black-Scholes option-pricing model with the
following assumptions:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Three </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Months Ended</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30, 2012</b></p></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Six</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Months Ended</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30, 2012</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Exercise price</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.25</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.25</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Market value of stock at end of period</font></td>
<td style="text-align: right"> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.10</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.10</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expected dividend rate</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Expected volatility</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">183% - 191 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">183% - 191 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Risk-free interest rate</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0.16 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0.16 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">All warrants issued by the Company other than the above noted warrants
are classified as equity. For the three months ended June 30, 2013 and 2012, the Company recognized a change in the fair value
of the warrant liability of $0 and $911,922, respectively. For the six months ended June 30, 2013 and 2012, the Company recognized
a change in the fair value of the warrant liability of $0 and $1,499,852, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On March 22, 2011, the Company entered into
a 10% note and warrant purchase agreement, secured convertible promissory note and patent security agreement (“financing
agreements”) with an investor. In connection with the financing agreements, the Company issued a stock purchase warrant to
the investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016.
The warrant was fair valued on the date of issuance, which amounted to $1,204,787. The warrant value was recorded as a debt discount
based on the relative fair value of the warrant to the total proceeds received, which amounted to $435,240. The warrant was fair
valued using the Black-Scholes-Merton valuation model. In addition, the debt contained a beneficial conversion feature, which was
valued at the date of issuance at $1,762,163; however, since this amount is in excess of the net value of the debt less the warrant
discount, the beneficial conversion feature will be limited to $1,064,760 and recorded as a discount on the loan. The total debt
discount of $1,500,000 is being amortized using the effective interest method over the 12-month term of the Secured Note. For the
six months ended June 30, 2012 the Company recognized $358,555 as amortization of this debt discount. The debt discount was fully
amortized as of December 31, 2012.</p>
209359
340564
211745
2576
11274
11300
11800
5300
7400
326700
302200
206800
143400
300
24400
22800
12200
11400
82195
97835
1494739
1559349
752500
83200
727700
41600
150000
38500
38500
2500
2500
59839
792078
19250
19250
1250
1250
29920
316791
358555
0
1499852
0
911922
17500000
4375000
492280
123070
17500000
49228
19255
P5Y
P5Y
29946
67373
5000
92829
93043
13200
13200
18647332
23111999
-703333
0.29
0.26
P6Y22D
P6Y8M5D
26345
477116
1235555
1741252
5168000
-360970
-4301333
0.16
0.11
0.15
0.15
16996378
7000000
250000
825000
2302538
6218840
400000
P3Y5M27D
P1M6D
P1Y3M7D
P11M1D
P3Y8M23D
P1Y6M22D
0.34
0.30
0.39
0.33
0.50
2013
2015
2016
2017
2014
2015
2014
2015
2014
2017
0.25
0.30
0.30
0.25
0.10
0.10
0.000
0.000
294150
262740
94170
96090
5 to 7 years
P15Y
24000
24000
24000
24000
24000
0.90
0.61
93000
93000
100800
41000
50400
20500
67200
0
95557
84123
1145380
638289
45945
53126
292443
254013
512842
236980
2280
2280
107230
129419
109510
131699
1350447
854111
900015
847648
189094
149518
140975
173616
10000
559946
524514
3379366
3392713
1894627
1833364
1484739
1559349
-1656822
-2114138
-37951827
-39341481
35723001
36519756
19255
149915
552749
557672
1350447
854111
1272112
1272112
316264
496399
177185
140053
832147
1192099
351184
508962
1148411
1688498
528369
649015
100839
41000
50419
20500
1047572
1647498
477950
628515
-1394716
-700933
-1088506
-530916
1710980
1197332
1265691
670969
1384238
962338
1058907
527573
326742
234994
206784
143396
-5062
-982047
-5000
-830413
-62
-65
-20
-159315
-81529
358555
-1499852
-911922
-5000
-5000
-0.02
0.01
-0.02
0.01
-0.02
0.01
-0.02
0.01
55595751
37774817
55767097
37774817
55595751
38747761
55767097
38401551
0
67240
0
0
55274817
55767097
492280
179888
4923
130660
44305
752450
752450
358555
23224
-1499852
752450
83168
28549
17042
10163
8698
-18223
-7181
-84238
38430
67043
73648
267164
353535
-340564
-211745
-100839
-257459
64610
41834
-2791
338701
-39304
-4905
5811
33493
4905
50000
179888
179888
50000
-199980
-166650
343
105000
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In April 2013, the U.S. Department of Defense,
Navy and the U.S. Department of Energy Advanced Research Projects Agency-Energy (ARPA-E) approved a grant of up to $800,000 to
Company for the funding of a project to produce and trial a chilling system, that is operated by directly manipulating water vapor
using Company’s selectively permeable membrane made of a nano-structure solid polymer. The grant requires the Company to
contribute $200,000 of the proposed total project cost of $1,000,000. The Company will receive the grant amount in phases upon
the meeting of certain milestones. The grant will advance our Nano Air technologies toward commercialization.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On June 11, 2013, effective as of March 11,
2013, the Company entered into an Employment Agreement with Ms. Joyce Conner-Boyd in connection with her appointment as Chief Operating
Officer (the Executive). The term of the Agreement shall initially be for one year until March 11, 2014 but shall be automatically
renewed on each anniversary of the effective date for an additional year unless either the Company or the Executive delivers a
written termination at least 60 days before any anniversary.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Executive shall receive a salary of $120,000
per annum. After the completion of an offering of the Company’s common stock greater than $2 million to an investor who,
at the time of the investment, does not own or control shares in the Company, the Executive’s salary shall be increased to
$160,000 per annum.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Agreement provided that within ninety days
of the effective date, the Company shall grant the Executive, pursuant to the terms and conditions of Company’s 2009 Incentive
Compensation Plan (the "2009 Plan"), an option to purchase up to 1,250,000 shares of Company’s common stock. Such
option was granted on June 11, 2013 at $0.16 per share, the fair market value of Company’s common stock on the date of the
option grant, as determined in accordance with the terms of the 2009 Plan. An option to purchase 312,500 shares of the Company’s
common stock shall vest on the effective date with the remaining options to purchase 937,500 shares of the Company’s common
stock vesting ratably over a three year period on the first, second and third anniversary of the effective date provided the Executive
is employed by Company on each vesting date.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">If the Executive’s employment is terminated
(i) by the Company, without Cause (as defined in the Agreement) or terminated for other similar reasons described in the Agreement,
or (ii) by the Executive for Good Reason (as defined in the Agreement), the Executive will be entitled to receive 50% of the Executive’s
then-current annual base salary, in equal payments over six months, and immediate vesting of the Executive’s stock options
pursuant to the terms and conditions of the 2009 Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">On July 15, 2013, the Company issued, pursuant
to a Stock Purchase Agreement with one private investor (the “Investor”), 2,350,000 restricted shares of the Company’s
common stock at a purchase price of $0.10 per share for a total of $235,000. With the issuance of the common stock, the Company
issued warrants to purchase 587,500 shares of the Company’s common stock at $0.50 per share. The Warrants are exercisable
for 60 months. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions. The proceeds
from the sale of the securities shall be used for working capital purposes.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">During 2013, the Company received $149,915
from an investor under another SPA entered into on May 31, 2013, towards the purchase of common stock at $0.10 per share. Subsequent
to June 30, 2013, the Company issued 1,499,150 in settlement of the common stock payable. With the issuance of the common stock,
the Company issued warrants to purchase 374,788 shares of the Company’s common stock at $0.50 per share. The warrants are
exercisable for 60 months. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions.
The proceeds from the sale of the securities shall be used for working capital purposes.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Cash and cash equivalents are maintained at
financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses
related to these balances. All non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal
program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance
for eligible accounts. Beginning 2013, insurance coverage reverted to $250,000 per depositor at each financial institution. The
Company's non-interest bearing cash balances were fully insured at June 30, 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Accounts receivable consist primarily of receivables
from the sale of our ERV products. The Company regularly reviews accounts receivable for any bad debts based on an analysis of
the Company’s collection experience, customer credit worthiness, and current economic trends. Based on management’s
review of accounts receivable, we have recorded an allowance for doubtful accounts of $11,274 and $2,576 at June 30, 2013 and December
31, 2012, respectively. At June 30, 2013, three customers accounted for approximately 90% of the
balance of accounts receivable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Inventory consists primarily of raw materials
and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net
realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Property and equipment are recorded at cost.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from 5 to 7 years.
Gains and losses upon disposition are reflected in the statement of operations in the period of disposition. Maintenance and repair
expenditures are charged to expense as incurred. Property and equipment are evaluated for impairment when events change or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Identified intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company’s existing intangible
assets consist solely of patents. Patents are amortized over their estimated useful or economic lives of 15 years. Patent amortization
expense was approximately $5,300 and $7,400 for the three months ended June 30, 2013 and 2012, respectively. Patent amortization
expense was approximately $11,300 and $11,800 for the six months ended June 30, 2013 and 2012, respectively. Total patent amortization
expense for the next five years is estimated to be approximately $24,000 per year.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically
evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the
Company uses market quotes, if available or an estimate of the future undiscounted net cash flows of the related asset or asset
group over the remaining life in measuring whether or not the asset values are recoverable. There have been no significant impairments
of long-lived assets during the three and six month periods ended June 30, 2013.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Generally, the Company recognizes revenue for
its products upon shipment to customers, provided no significant obligations remain and collection is probable. During the six
months ended June 30, 2013 and 2012, four customers accounted for approximately 90% (73% of revenue is from a related party) and
61% of revenues, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">In certain instances, our ConsERV product carries
a warranty for two years for all parts contained therein with the exception of the energy recovery ventilator core which, in such
circumstances, may carry a 10 year warranty. The warranty includes replacement of defective parts. The Company has recorded an
accrual of approximately $93,000 for future warranty expenses at June 30, 2013 and December 31, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Revenue derived from the sale of licenses is
deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated.
The Company recognized revenue of approximately $50,400 and $20,500 from license agreements for the three months ended June 30,
2013 and 2012, respectively. The Company recognized revenue of $100,800 and $41,000 from license agreements for the six months
ended June 30, 2013 and 2012, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company accounts for revenue arrangements
with multiple elements under the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 605-25, "Revenue Recognition—Multiple-Element Arrangements," In order to account for these agreements,
the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units
of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the licensee.
The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria
are applied to each of the separate units.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company recognizes all share-based awards
to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair
values. That expense will be recognized over the period during which an employee is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The value of each award is estimated at the
grant date using the Black-Scholes option model with the following assumptions for awards granted during the six months ended June
30, 2013. There were no awards granted during the six months ended June 30, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Six Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2013</b></p></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 89%"><font style="font-size: 10pt">Dividend rate</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0</font></td>
<td style="width: 1%"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Risk free interest rate</font></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" style="text-align: right"><font style="font-size: 10pt">2.03% – 2.20</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expected term</font></td>
<td> </td>
<td colspan="2" style="text-align: right"><font style="font-size: 10pt">10 years</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Expected volatility</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">177</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The basis for the above assumptions are as
follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within
the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was
calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding;
and expected volatility was calculated by review of the Company’s and a peer Company’s historical activity.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company’s accounting policy for equity
instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50, <i>Equity-Based Payments to Non-Employees</i>.
Stock based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the
fair value of the services, whichever is more readily determinable. The measurement date for the fair value of the equity instruments
issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached
or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. During the six months
ended June 30, 2013 the Company issued 168,000 options valued at $19,105 for consulting services rendered. During the six months
ended June 30, 2012, the Company did not issue any non-employee stock based compensation.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The fair value of stock options issued to consultants
during the six months ended June 30, 2013 was calculated using the Black-Scholes model with the following assumptions: Expected
life in years: 2 years; Estimated volatility 165%; Risk-free interest rate: 0.26%; Dividend yield: 0%.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Expenditures for research, development and
engineering of products are expensed as incurred. For the three and six months ended June 30, 2013, the Company incurred research
and development costs of approximately $206,800 and $326,700 respectively. For the three and six months ended June 30, 2012, the
Company incurred research and development costs of approximately $143,400 and $302,200, respectively. The Company accounts for
proceeds received from government grants for research as a reduction in research and development costs. For the three and six months
ended June 30, 2012, the Company recorded approximately $0 and $67,200, respectively, in grant proceeds against research and development
expenses on the statement of operations. For the three and six months ended June 30, 2013, the Company did not receive any grant
proceeds.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Grants are recognized when there is reasonable
assurance that the grant will be received and that any conditions associated with the grant will be met. When grants are received
related to property and equipment, the Company reduces the basis of the assets resulting in lower depreciation expense over the
life of the associated asset. Grants received related to expenses are reflected as a reduction of the associated expense in the
period in which the expense is incurred.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained
from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed
based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three
broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described
below:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; font: 10pt Times New Roman, Times, Serif; text-align: center"><font style="font-size: 10pt">• </font></td>
<td style="width: 92%; font: 10pt Times New Roman, Times, Serif; text-align: justify"><font style="font-size: 10pt">Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.</font></td></tr>
</table>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; font: 10pt Times New Roman, Times, Serif; text-align: center"><font style="font-size: 10pt">•</font></td>
<td style="width: 92%; font: 10pt Times New Roman, Times, Serif; text-align: justify"><font style="font-size: 10pt">Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.</font></td></tr>
</table>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 8%; font: 10pt Times New Roman, Times, Serif; text-align: center"><font style="font-size: 10pt">• </font></td>
<td style="width: 92%; font: 10pt Times New Roman, Times, Serif; text-align: justify"><font style="font-size: 10pt">Level 3 - Inputs that are both significant to the fair value measurement and unobservable.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of June 30, 2013. The Company uses the market
approach to measure fair value for its Level 1 financial assets and liabilities, which include cash equivalents of $300 at June
30, 2013. The market approach uses prices and other relevant information generated by market transactions involving identical or
comparable assets and liabilities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The respective carrying value of certain on-balance
sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments
include cash, accounts receivable, accounts payable, accrued compensation and accrued expenses.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Income taxes are accounted for under the asset
and liability method. Deferred income tax assets and liabilities are computed on the basis of differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based upon enacted
tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be realized.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company identifies and evaluates uncertain
tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not
probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized
tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for
uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination
by the Internal Revenue Service include the years ended December 31, 2009 through 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Basic income (loss) per share is computed by
dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding for the period.
Diluted income (loss) per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common
shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable
to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive
and thus are excluded from the calculation. For each of the three and six months ended June 30, 2013, the Company had 36,881,319
potentially dilutive common shares that were not included in the computation of income (loss) per share. For the three and six
months ended June 30, 2012, the Company had 53,864,169 and 55,463,847 potentially dilutive common shares that were not included
in the computation of income (loss) per share.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following sets forth the computation of
basic and diluted net (loss) earnings per common share for the three and six months ended June 30, 2013 and 2012:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Three Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p></td>
<td> </td>
<td> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Six Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p></td>
<td> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2013</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2012</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2013</b></font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; border-bottom: black 1.5pt solid"> </td>
<td style="width: 9%; border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>2012</b></font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Numerator:</font></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Net (loss) income</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1,083,506</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">299,497</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(1,389,654</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">281,114</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Denominator:</font></td>
<td colspan="4"> </td>
<td colspan="4"> </td>
<td colspan="4"> </td>
<td colspan="4"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Weighted average basic shares outstanding</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,767,097</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,774,817</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,595,757</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">37,774,817</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Stock options</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">626,734</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">972,944</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Weighted average fully diluted shares outstanding</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,767,097</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">38,401,551</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">55,595,757</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">38,747,761</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Net (loss) income per common share - basic</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Net (loss) income per common share - diluted</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">(0.02</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.01</font></td>
<td> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The Company does not use derivative instruments
to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed
to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “<i>Derivative and
Hedging” </i>(ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair
value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding
changes in fair value recorded in current period operating results.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Freestanding warrants issued by the Company
in connection with the issuance or sale of debt and equity instruments may be considered to be derivative instruments and are evaluated
and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions
is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">Recent accounting pronouncements issued by
FASB, the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The value of each award is estimated at the
grant date using the Black-Scholes option model with the following assumptions for awards granted during the six months ended June
30, 2013. There were no awards granted during the six months ended June 30, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Six Months</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Ended June 30,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2013</b></p></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 89%"><font style="font-size: 10pt">Dividend rate</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0</font></td>
<td style="width: 1%"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Risk free interest rate</font></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" style="text-align: right"><font style="font-size: 10pt">2.03% – 2.20</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expected term</font></td>
<td> </td>
<td colspan="2" style="text-align: right"><font style="font-size: 10pt">10 years</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Expected volatility</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">177</font></td>
<td><font style="font-size: 10pt">%</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0">Accrued expenses, other consist of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2013</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>December 31,</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>2012</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Accrued expenses, other</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">67,373</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">29,946</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Accrued registration rights penalty</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">-</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,000</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Accrued warranty costs</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">93,043</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">92,829</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Contractual obligation</font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">13,200</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">13,200</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">173,616</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">140,975</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following summarizes the information relating
to outstanding stock options activity with employees during 2013 and 2012:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Common</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Shares</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise Price</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Contractual</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Term</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>(in years)</b></p></td>
<td nowrap="nowrap" style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Aggregate</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Intrinsic</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Value</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 52%"><font style="font-size: 10pt">Outstanding at December 31, 2012</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">18,647,332</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">0.29</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">6.06</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 9%; text-align: right"><font style="font-size: 10pt">26,345</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Awarded</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,168,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.17</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expired/Forfeited</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(703,333</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.11</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Outstanding at June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">23,111,999</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">0.26</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">6.68</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">477,116</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Exercisable at June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">21,801,997</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">0.27</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">6.40</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">376,145</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The following table represents our non vested
share-based payment activity with employees for the six months ended June 30, 2013:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%; background-color: white">
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Number of Options</b></font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Weighted Average Grant Date Fair Value</b></font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Nonvested options - December 31, 2012 </font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">1,235,555</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.16</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Granted</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">5,168,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.15</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Vested</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(4,301,333</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.15</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td><font style="font-size: 10pt">Forfeited </font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">(360,970</font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">) </font></td>
<td> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Nonvested options – June 30, 2013</font></td>
<td> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">1,741,252</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">0.11</font></td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">At June 30, 2013, the Company had outstanding
warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and
consulting agreements. Information relating to these warrants is summarized as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif"><b>Warrants</b></font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Remaining</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Number Outstanding</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif"><b>Weighted Average Remaining Life (Years)</b></font></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Weighted</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Average</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Exercise Price</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Expiration</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Year</b></p></td>
<td nowrap="nowrap" style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="width: 52%; font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Financing</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">7,000,000</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">3.49</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%; font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.34</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 9%; font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2016 – 2017</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Ehrenberg</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">250,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">.10</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.30</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2013</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Consulting Agreement</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">825,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1.27</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.30</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Note Conversions</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2,302,538</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">.92</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.39</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Stock Purchases</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">6,218,840</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">3.73</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.33</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2014 – 2017</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">Warrants-Services</font></td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">400,000</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">1.56</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.50</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">2015</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEDFF">
<td> </td>
<td> </td>
<td> </td>
<td style="font: 10pt/115% Calibri, Helvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">16,996,378</font></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap"> </td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify">The change in fair value of the warrants is
recorded in the statement of operations and is estimated using the Black-Scholes option-pricing model with the following assumptions:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Three </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Months Ended</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30, 2012</b></p></td>
<td nowrap="nowrap"> </td>
<td> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>For the Six</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>Months Ended</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"><b>June 30, 2012</b></p></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="text-align: right"> </td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td colspan="2" style="text-align: right"> </td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 78%"><font style="font-size: 10pt">Exercise price</font></td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.25</font></td>
<td nowrap="nowrap" style="width: 1%"> </td>
<td style="width: 1%; text-align: right"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 8%; text-align: right"><font style="font-size: 10pt">0.25</font></td>
<td nowrap="nowrap" style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Market value of stock at end of period</font></td>
<td style="text-align: right"> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.10</font></td>
<td nowrap="nowrap"> </td>
<td style="text-align: right"> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">0.10</font></td>
<td nowrap="nowrap"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Expected dividend rate</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font-size: 10pt">Expected volatility</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">183% - 191 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">183% - 191 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Risk-free interest rate</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0.16 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td>
<td style="text-align: right"> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">0.16 </font></td>
<td nowrap="nowrap"><font style="font-size: 10pt">%</font></td></tr>
</table>
.9
168000
19105
36881319
55463847
36881319
53864169
.00
0.00
0.0203
0.022
P2Y
P10Y
.0165
1.77
0.0026
55595757
38747761
55767097
38401551
55595757
37774817
55767097
37774817
972944
626734
5168000
21801997
0.27
0.11
0.17
P6Y4M24D
376145
640200
194300
248400
63100
0.0016
0.0016
1.83
1.91
1.83
1.91