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 consolidated balance sheet and are marked to market each reporting period 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 2011, the Company recognized $225,000 of other income resulting from the decrease in the fair value of the warrant liability at December 31, 2011. 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 fair value of the warrant using the binomial model at date of issuance. This adjustment was not considered by management to be material to the 2011 consolidated financial statements. Primarily due to the increase in stock price and the call option embedded in the warrant, the fair value of the warrant derivative liability decreased to $1,945,000 at December 31, 2012, resulting in other income of $630,000 for the year ended December 31, 2012. The key assumptions underlying this model are disclosed in Note 6.

Outstanding Stock Warrants

No warrants were issued during 2012.

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, including 5,000,000 warrants issued on December 22, 2011 described above.

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. The warrants had a fair market value of $268,957 at December 31, 2010. 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.

A summary of the status of the warrants outstanding at December 31, 2012 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
$	0.75		139,340	2.77 years	$	0.75		139,340	$	0.75
$	0.78		213,402	3.13 years	$	0.78		213,402	$	0.78
$	0.80		124,481	3.04 years	$	0.80		124,481	$	0.80
$	1.00		212,000	1.77–2.79 years	$	1.00		212,000	$	1.00
$	1.15		461,340	8.36 years	$	1.15		461,340	$	1.15
$	2.00		5,054,367	3.63-3.97 years	$	2.00		5,054,367	$	2.00
			6,204,930					6,204,930

The intrinsic value of the outstanding warrants at December 31, 2012 was $592,903.

Compensation expense of $210,067, $415,143 and $180,000 has been recognized for the vesting of warrants to non-related parties in the accompanying consolidated statements of operations for the years ended December 31, 2012, 2011, and 2010, respectively.

Excluding the 5,000,000 warrants with the down round provisions discussed above, 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.

A summary of the status and changes of the warrants issued during the years ended December 31, 2012 and 2011 are as follows:

	December 31, 2012						December 31, 2011
				Weighted						Weighted
				Average						Average
	Shares			Exercise Price			Shares			Exercise Price

Outstanding at beginning of period		6,423,777		$	1.77			580,187		$	0.78
Issued		- 0 -			- 0 -			5,853,590		$	1.86
Exercised		(218,000	)	$	(.35-1.00	)		(10,000	)	$	(.35	)
Forfeited		(847	)	$	1.77			- 0 -			- 0 -
Expired		- 0 -			- 0 -			- 0 -			- 0 -
Outstanding at end of period		6,204,930		$	1.81			6,423,777		$	1.77

Exercisable at end of period		6,204,930		$	1.81			6,276,730		$	1.79

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 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.

Excluding the warrants with the down round provisions discussed above, the significant assumptions relating to the valuation of the Company's stock warrants and options granted for the years ended December 31, 2012 and 2011 were as follows:

	2012			2011

Dividend Yield		0	%		0	%
Expected Life	5 – 10 years			5 – 10 years
Expected Volatility		84.81% – 90.48	%		81% - 105	%
Risk Free Interest Rate		0.72% - 1.74	%		2.02 – 3.75	%

On November 20, 2012, the shareholders of the Company approved the adoption of the Applied Minerals, Inc. 2012 Long-Term Incentive Plan ("LTIP") and the Short-Term Incentive Plan ("STIP") and the performance criteria used in setting performance goals for awards intended to be performance based. Under LTIP 8,900,00 shares are authorized for issuance. The STIP does not refer to a particular number of shares under the LTIP, but would use the shares authorized in the LTIP for issuance under the STIP. The CEO, the CFO, named executive officers, and directors, among others are eligible to participate in the LTIP and STIP.

A summary of the status and changes of the options granted under stock option plans and other agreements for the period ended December 31, 2012 is as follows:

	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		11,598,411		$	0.83
Granted		3,932,059		$	1.64
Exercised		(75,000	)	$	0.67
Outstanding at December 31, 2012		15,455,470		$	1.04

Exercisable at December 31, 2012		11,245,429

During the year ended December 31, 2012, the Company granted 3,932,059 options to purchase the Company's common stock with an weighted average exercise price of $1.64. Of the 3,932,059 options granted, the options will vest immediately, monthly or annual as follows:

		Vesting Information
Shares		Frequency	Begin Date	End Date
	72,406	Immediately	November 20, 2012	November 20, 2012
	225,000	Monthly	February 1, 2012	February 1,2013
	300,000	Monthly	May 29, 2012	May 28, 2015
	30,000	Quarterly	June 30, 2012	June 29, 2013
	3,004,653	Monthly	January 1, 2013	December 31, 2013
	300,000	Monthly	May 10, 2012	December 31, 2013

Compensation expense of $2,314,154, $2,181,394 and $334,669 has been recognized for the vested options for the years ended December 31, 2012, 2011 and 2010, respectively.

At December 31, 2012, unrecognized compensation of $5,699,224 for unvested options is to be recognized over the next thirty months on a weighted average basis.

At December 31, 2012, vested options of 11,245,429 and non-vested options of 4,210,041 had an aggregate intrinsic value of $8,530,248.

A summary of the status of the options outstanding at December 31, 2012 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
$	0.70		7,358,277	1.83-6.42 years	$	0.70		7,358,277	$	0.70
$	0.83		3,205,134	3.13 years	$	0.83		2,963,080	$	0.83
$	1.00		60,000	2.19 years	$	1.00		60,000	$	1.00
$	1.24		100,000	5.16 years	$	1.24		83,333	$	1.24
$	1.45		125,000	5.16 years	$	1.45		104,167	$	1.45
$	1.55		330,000	4.46-9.47 years	$	1.55		84,166	$	1.55
$	1.66		3,077,059	10.03 years	$	1.66		72,406	$	1.66
$	1.75		300,000	9.49 years	$	1.75		120,000	$	1.75
$	1.90		900,000	8.71 years	$	1.90		400,000	$	1.90
			15,455,470					11,245,429