NOTE 9 – OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

Derivative Instruments - Warrants

The Company issued 5,000,000 Warrants in connection with the December 22, 2011 Private Placement of 10,000,000 shares of common stock. The strike price of these warrants is $2.00 per share. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. These Warrants were issued with a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of the Company's common stock or securities exercisable, convertible or exchangeable for the Company's common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants were recorded as a liability in the balance sheet until they are exercised or expire or otherwise extinguished. Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

The proceeds from the Private Placement were allocated between the Common Shares and the Warrants issued in connection with the Private Placement based upon their estimated fair values as of the closing date at December 22, 2011, resulting in the aggregate amount of $6,420,000 to the Common Shares and $3,580,000 to the Warrants. The Company recognized a gain of $225,000 with the fair market valuation at December 31, 2011. The fair market value of the Derivative Warrants at December 31, 2011 was $3,355,000

Outstanding Stock Warrants

The warrants issued during the year ended December 31, 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.

During the year ended December 31, 2011, the Company granted 5,853,590 warrants to purchase the Company's common stock with an average exercise price of $1.77. Of the 5,853,590 warrants granted, 5,653,193 are vested at December 31, 2011, and the remaining 200,397 warrants will vest over 7 months, or through August 1, 2012. The intrinsic value of the outstanding warrants at December 31, 2011 was $424,216.

During the year ended December 31, 2010, the Company issued stock warrants to two non-employee, unrelated consultants. The warrants allow the warrant holders to purchase, in aggregate, 320,187 shares of common stock at a price between $0.80 and $1.00 per share. The five-year warrants expire between October 2014 and December 2015. 180,000 warrants vested upon grant, and 140,187 vested during the fourth quarter of 2010. For the year ended December 31, 2010, $180,000 of compensation expense related to warrants was recognized. The warrants have a fair market value of $268,957. The number of warrants granted may be adjusted if the Company grants subsequent warrants at a price that is less than the value of the market price of the common stock on the original grant date. The number of warrants available for exercise is adjusted to compensate for the disparity in warrant strike price. The warrants may be exercised in cash at full strike price, or may be exercised using a cashless option whereby the warrant holder would receive shares of the Company's common stock using the total of market price less strike price multiplied by the total number of warrants available then dividing that resultant by the current market price.

Outstanding Stock Warrants (Continued)

During the year ended December 31, 2009, the Company issued stock warrants to two non-employee, unrelated party consultants. Such warrants were granted based upon the value of the services performed by the consultants, a measurement that is more reliably measurable. The number of warrants issued to each recipient was determined by taking the total value of the services provided the Company by the recipient and dividing it by an individual warrant value calculated using the Black-Scholes Option Pricing Model, which utilized a strike price equal to the market price of the Company's common stock and other required inputs described below. The warrants allow the warrant holders to purchase, in aggregate, 260,000 shares of common stock at a price between $0.35 and $1.00 per share. The five-year warrants expire in April 2014 and October 2014. The April 2009 warrant vests in equal increments over twelve months, and the October 2009 warrant vested upon issuance. For the year ended December 31, 2009, $126,950 of compensation expense related to the issuance of the warrants was recognized. The warrants have a fair market value of $143,000.

A summary of the status of the warrants outstanding at December 31, 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	2.25 years	$	0.35		90,000	$	0.35
$	0.78		213,402	4.08 years	$	0.78		213,402	$	0.78
$	0.80		264,668	3.87 years	$	0.80		264,668	$	0.80
$	1.00		340,000	2.75 years	$	1.00		340,000	$	1.00
$	1.15		461,340	9.33 years	$	1.15		346,005	$	1.15
$	2.00		5,054,367	4.97 years	$	2.00		5,022,655	$	2.00
			6,423,777					6,276,730

At December 31, 2011, the total compensation of $221,127 for unvested shares is to be recognized over the next 7 months on a weighted average basis. Compensation expense of $415,143 has been recognized for the vesting of warrants to non-related parties in the accompanying statements of operations for the year ended December 31, 2011. Warrants were issued with a down-round provision valued at $3,355,000 at December 31, 2011. (See Note 6)

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 year ended December 31, 2011 were as follows:

Outstanding Stock Warrants (Continued)

	2011

Dividend Yield	0%
Expected Life	5 – 10 years
Expected Volatility	77% - 100%
Risk Free Interest Rate	.90% - 2.96%

A summary of the status and changes of the warrants issued during the years ended December 31, 2011, 2010 and 2009 are as follows:

	December 31, 2011						December 31, 2010				December 31, 2009
				Weighted					Weighted				Weighted
				Average					Average				Average
	Shares			Exercise Price			Shares		Exercise Price		Shares		Exercise Price

Outstanding at beginning of period		580,187		$	0.78			260,000	$	0.75		- 0 -	$	- 0 -
Issued		5,853,590			1.86			320,187		0.80		260,000		0.75
Exercised		(10,000	)	$	(.35	)		- 0 -		- 0 -		- 0 -		- 0 -
Forfeited		- 0 -			- 0 -			- 0 -		- 0 -		- 0 -		- 0 -
Expired		- 0 -			- 0 -			- 0 -		- 0 -		- 0 -		- 0 -
Outstanding at end of period		6,423,777		$	1.77			580,187	$	0.78		260,000	$	0.75
Exercisable at end of period		6,276,730		$	1.79			580,187	$	0.78		235,000	$	0.75

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.

The significant assumptions relating to the valuation of the Company's options for the year ended December 31, 2011, 2010 and 2009 were as follows:

	2011	2010	2009

Dividend Yield	0%	0%	0%
Expected Life	5 – 10 years	5 years	1 - 5 years
Expected Volatility	81% - 105%	120%	100%
Risk Free Interest Rate	2.02 – 3.75%	0.4%	1.68%

Outstanding Stock Options (continued)

A summary of the status and changes of the options granted under stock option plans and other agreements for the period ended December 31, 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		(100,000	)	$	0.90
Forfeited		- 0 -			- 0 -
Expired		- 0 -			- 0 -
Outstanding at December 31, 2011		11,598,411		$	- 0 -
Exercisable at December 31, 2011		7,951,420

During the year ended December 31, 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 December 31, 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	2.50 years	$	0.69		75,000	$	0.69
$	0.70		7,358,277	7.75 years	$	0.70		7,358,275	$	0.70
$	0.83		3,205,134	4.25 years	$	0.83		358,145	$	0.83
$	1.00		60,000	4.50 years	$	1.00		60,000	$	1.00
$	1.90		900,000	9.75 years	$	1.90		100,000	$	1.90
			11,598,411					7,951,420

At December 31, 2011, the total compensation of $2,490,828 for unvested shares is to be recognized over the next thirty-three months on a weighted average basis.

At December 31, 2011, vested options of 7,951,420 and non-vested options of 3,646,991 had an aggregate intrinsic value of $5,986,629.