NOTE 8 - STOCK OPTIONS AND WARRANTS

Stock options

On August 29, 2011, the Company issued 10,500,000 options to purchase shares of its common stock to a member of management and two directors of the Company. The options have a ten year term and are not exercisable until the earliest of the Company's achieving a market capitalization of at least $150 million or the date the Company's annual earnings before interest, taxes and depreciation is at least $7,500,000 in accordance with the stock option award agreements. The option grant date fair value was determined to be $2,291,253. The Company has determined that these performance criteria are not probable at February 29, 2012, therefore the Company has not recorded compensation expense related to these stock options during the nine months ended February 29, 2012. In the event there is a change of control, the stock options shall immediately vest.

Stock option activity is presented in the table below:

	Number of Shares		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at May 31, 2010		-	$	-		-	$	-
Granted		7,416,667	$	0.35		3.00	$	445,000
Outstanding at May 31, 2011		7,416,667	$	0.35		3.00	$	445,000
Granted		13,900,000	$	0.35		7.80	$	-
Forfeited		(250,000)		0.35		-		-
Outstanding at February 29, 2012		21,066,667	$	0.35		5.92	$	-
Exercisable at February 29, 2012		10,166,667	$	0.35		2.27	$	-

During the nine months ended February 29, 2012, the Company recorded stock option expense of $38,837. As of February 29, 2012, there was approximately $2,395,518 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized in accordance with the performance based criteria of the options.

The fair value of the options granted during the nine months ended February 29, 2012 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Market value of stock on grant date	$	0.21- $0.24
Risk-free interest rate	$	0.35%- 0.99	%
Dividend yield		0	%
Volatility factor		158%-171	%
Weighted average expected life	3-5 years
Expected forfeiture rate		0	%

Warrants

Warrant activity is presented in the table below:

	Number of Shares		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at May 31, 2011		-	$	-		-	$	-
Granted		2,950,000	$	0.16		1.75	$	-
Outstanding at February 29, 2012		2,950,000	$	0.16		1.75	$	91,300
Exercisable at February 29, 2012		2,950,000	$	0.16		1.75	$	91,300