NOTE 10 – 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.

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 Stockholders' Equity and $3,580,000 to the warrant derivative. During 2012, the Company began using a binomial lattice model to value its warrant derivative liability. Based on the value estimated using the lattice model, a reclassification was recorded as of January 1, 2012 to increase Stockholder's Equity by $780,000 and decrease the warrant derivative liability by the same amount representing the decrease in fair value of the warrant at date of issuance. This adjustment was not considered by management to be material to the 2011 financial statements. Primarily due to the increase in stock price and the call option embedded in the warrant, the warrant derivative liability decreased to $1,135,000 at September 30, 2012, resulting in other income of $1,440,000 for the nine months period then ended. The key assumptions underlying this model are disclosed in Note 3.

Outstanding Stock Warrants

No warrants were issued during the nine months ended September 30, 2012. A summary of the status and changes of the warrants are as follows:

				Weighted Average
	Shares			Exercise Price

Outstanding at December 31, 2011		6,422,930		$	1.77
Issued		-			-
Exercised		(90,000	)		0.35
Outstanding at September 30, 2012		6,332,930		$	1.79
Exercisable at September 30, 2012		6,332,930		$	1.79

A summary of the status of the warrants outstanding at September 30, 2012 is presented below:

		Warrants Outstanding and Exercisable
		Number		Weighted Average Remaining	Weighted Average
Exercise Price		Outstanding		Contractual Life	Exercise Price

$	0.75		139,340	3.08 years	$	0.75
$	0.78		213,402	3.42 years	$	0.78
$	0.80		124,481	3.33 years	$	0.80
$	1.00		340,000	2.08 – 3.08 years	$	1.00
$	1.15		461,340	8.58 years	$	1.15
$	2.00		5,054,367	3.92 – 4.25 years	$	2.00
			6,332,930		$	1.79

Compensation expense of $210,067 has been recognized for the vesting of warrants to consultants and other outside service providers in the accompanying statements of operations for the nine months ended September 30, 2012.

Outstanding Stock Options

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 to employees and directors 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 nine months ended September 30, 2012 and 2011 were as follows:

	2012			2011
Dividend Yield		0	%		0	%
Expected Life	1 – 10 years			5 – 10 years
Expected Volatility		89.06% - 90.48	%		81 – 105	%
Risk Free Interest Rate		0.74% - 1.74	%		2.02% - 3.75	%

A summary of the status and changes of the options granted under stock option plans and other agreements for the period ended September 30, 2012 is as follows:

				Weighted Average
	Shares			Exercise Price

Outstanding at December 31, 2011		11,598,411		$	0.83
Issued		855,000		$	1.24 – 1.75
Exercised		(75,000	)	$	0.67
Outstanding at September 30, 2012		12,378,411		$	0.88
Exercisable at September 30, 2012		9,445,534		$	0.78

During the nine months ended September 30, 2012, the Company issued 855,000 options to purchase the Company's common stock with exercise prices ranging from $1.24 to $1.75 and a weighted average grant date fair value of $1.27. The options that have been granted will vest as follows:

		Vesting Information
Shares		Frequency	Begin Date	End Date

	225,000	Monthly	March 1, 2012	February 1, 2013
	300,000	Monthly	May 1, 2012	May 1, 2015
	30,000	Monthly	May 1, 2012	May 1, 2013
	300,000	Once	December 31, 2013	December 31, 2013

A summary of the status of the options outstanding at September 30, 2012 is presented below:

		Options Outstanding					Options Exercisable
					Weighted				Weighted
		Number		Weighted Average Remaining	Average		Number		Average
Exercise Price		Outstanding		Contractual Life	Exercise Price		Exercisable		Exercise Price

$	0.70		7,358,277	2.08-6.67 years	$	0.70		7,358,277	$	0.70
$	0.83		3,205,134	3.42 years	$	0.83		1,555,985	$	0.83
$	1.00		60,000	2.50 years	$	1.00		60,000	$	1.00
$	1.24		100,000	4.33 years	$	1.24		24,999	$	1.24
$	1.45		125,000	4.42 years	$	1.45		72,917	$	1.45
$	1.55		330,000	4.67 – 9.67 years	$	1.55		31,678	$	1.55
$	1.75		300,000	9.67 years	$	1.75		16,678	$	1.75
$	1.90		900,000	8.92 years	$	1.90		325,000	$	1.90
			12,378,411		$	0.88		9,445,534	$	0.78

At September 30, 2012, the total compensation expense of $1,818,743 for unvested options is to be recognized over the next thirty three months on a weighted average basis.

Compensation expense of $1,543,685 has been recognized for vesting of options for the nine months ended September 30, 2012. The aggregate intrinsic value of the outstanding options at September 30, 2012 was $5,945,379 and the intrinsic value of the options exercised during the nine months ended September 30, 2012 was $53,050.