NOTE 9 – OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

Outstanding Stock Warrants

The warrants issued during the nine months ended September 30, 2011 may be exercised by the warrant holder either by payment of cash per warrant, or through a cashless exercise whereby the warrant holder may exercise the warrant without exchange of cash, at a predefined rate of conversion where the warrant holder would typically receive less than the total number of underlying common shares within the warrant if a cashless exercise occurs. The formula for the cashless exercise is [(A – B)*(X)] divided by A where A is the volume-weighted average price on the trading day immediately preceding the date of the exercise; B is the exercise price of the warrant; and X is the number of shares of common stock issuable upon the exercise of the warrant. 

The fair value of each of the Company's stock warrant awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The Company uses historical data to estimate forfeitures within its valuation model. The significant assumptions relating to the valuation of the Company's warrants for the nine months ended September 30, 2011 were as follows:

	2011

Dividend Yield	0%
Expected Life	5 – 10 years
Expected Volatility	81% - 100%
Risk Free Interest Rate	2.96%

A summary of the status and changes of the warrants are as follows:

	September 30, 2011
	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2010		580,187		$	0.84
Issued		853,590		$	1.06
Exercised		(10,000	)	$	( 0.35	)
Forfeited		- 0 -			- 0 -
Expired		- 0 -			- 0 -
Outstanding at September 30, 2011		1,423,777		$	0.98
Exercisable at September 30, 2011		1,041,101

During the nine months ended September 30, 2011, the Company granted 853,590 warrants to purchase the Company's common stock with an average exercise price of $1.06. Of the 853,590 warrants granted, 470,914 vested during the nine months ended September 30, 2011, and the remaining 382,676 warrants will vest over 10 months, or through August 1, 2012. The intrinsic value of the outstanding warrants at September 30, 2011 was $463,143.

A summary of the status of the warrants outstanding at September 30, 2011 is presented below:

		Warrants Outstanding					Warrants Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.35		90,000	3.50 years	$	0.35		90,000	$	0.35
$	0.78		213,402	4.33 years	$	0.78		106,701	$	0.78
$	0.80		264,668	4.25 years	$	0.80		264,668	$	0.80
$	1.00		340,000	4.00 years	$	1.00		340,000	$	1.00
$	1.15		461,340	9.50 years	$	1.15		230,670	$	1.15
$	2.00		54,367	9.50 years	$	1.15		9,062	$	2.00
			1,423,777					1,041,101

At September 30, 2011, the total compensation of $415,143 for unvested shares is to be recognized over the next 10 months on a weighted average basis. Compensation expense of $625,392 has been recognized for the vesting of warrants to non-related parties in the accompanying statements of operations for the nine months ended September 30, 2011.

Outstanding Stock Options

The Company is authorized to issue stock options under the existing stock option plan approved by stockholders.

The fair value of each of the Company's stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is based on an average of historical volatility of the Company's common stock. The risk-free interest rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The Company uses historical data to estimate forfeitures within its valuation model.

The expected term of awards granted is derived from historical experience under the Company's stock-based compensation plans and represents the period of time that awards granted are expected to be outstanding.

Outstanding Stock Options (continued)

The significant assumptions relating to the valuation of the Company's options for the nine months ended September 30, 2011 and 2010 were as follows:

	2011	2010

Dividend Yield	0%	0%
Expected Life	5 – 10 years	1.5 years
Expected Volatility	81% - 105%	120%
Risk Free Interest Rate	2.02 – 3.75%	0.4%

A summary of the status and changes of the options granted under stock option plans and other agreements for the period ended September 30, 2011 is as follows:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2010		7,593,277	$	0.70
Granted		4,105,134	$	1.06
Exercised		- 0 -		- 0 -
Forfeited		- 0 -		- 0 -
Expired		- 0 -		- 0 -
Outstanding at September 30, 2011		11,698,411	$	0.83
Exercisable at September 30, 2011		7,295,029

During the nine months ended September 30, 2011, the Company issued 4,105,134 options to purchase the Company's common stock with an average exercise price of $1.06. Of the 4,105,134 options granted, the options will vest either monthly or quarterly as follows:

	Vesting Information
Shares	Frequency	Begin Date	End Date

300,481	Quarterly	March 1, 2011	February 28, 2012
2,904,653	Monthly	January 1, 2012	December 31, 2012
900,000	Monthly	September 15, 2011	September 14, 2014

A summary of the status of the options outstanding at September 30, 2011 is presented below:

		Options Outstanding					Options Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.65-$0.71		75,000	2.75 years	$	0.69		75,000	$	0.69
$	0.70		7,358,277	8.00 years	$	0.70		6,809,669	$	0.70
$	0.83		3,205,134	4.50 years	$	0.83		225,360	$	0.83
$	0.90		100,000	4.00 years	$	0.90		100,000	$	0.90
$	1.00		60,000	4.75 years	$	1.00		45,000	$	1.00
$	1.90		900,000	10.00 years	$	1.90		25,000	$	1.90
			11,698,411					7,295,029

At September 30, 2011, the total compensation of $2,797,692 for unvested shares is to be recognized over the next three years on a weighted average basis.

Compensation expense of $379,419 and $52,342 has been recognized for vesting of options for the three months ended September 30, 2011 and 2010, respectively. Compensation expense of $878,460 and $149,235 has been recognized for vesting of options for the nine months ended September 30, 2011 and 2010, respectively. The intrinsic value of the outstanding options at September 30, 2011 was $6,026,629.