NOTE 8 - OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

Derivative Instruments - Warrants

The Company issued 5,000,000 warrants ("Samlyn warrants") in connection with the December 22, 2011 private placement of 10,000,000 shares of common stock. The strike price of these warrants was $2.00 per share at the date of grant. 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. As discussed in Note 7, during the first quarter of 2013, the Company issued 3,756,757 shares of its common stock for gross proceeds of $5,560,000, which triggered a down-round adjustment in the strike price of the Samlyn warrants of $0.03 from $2.00 to $1.97, as discussed above.

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. During the three months ended March 31, 2013 and 2012, the Company recorded other income of $495,000 and $990,000 respectively, as the liability during each of the quarters declined.

Outstanding Stock Warrants

No warrants were issued during the three months ended March 31, 2013. A summary of the status of the warrants outstanding and exercisable at March 31, 2013 is presented below:

	Warrants Outstanding and Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$ 0.75	139,340	2.54 years	$ 0.75
$ 0.78	213,402	2.88 years	$ 0.78
$ 0.80	124,481	2.79 years	$ 0.80
$ 1.00	212,000	2.38 years	$ 1.00
$ 1.15	461,340	8.11 years	$ 1.15
$ 1.97	5,000,000	3.72 years	$1.97
$ 2.00	54,367	3.38 years	$ 2.00
	6,204,930

No compensation expense has been recognized for the vesting of warrants to consultants and other outside service providers in the accompanying statements of operations and the three months ended March 31, 2013.

Outstanding Stock Options

The fair value of each of the Company's stock option awards is estimated on the date of grant using the 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 issued for the three months ended March 31, 2013 and 2012 were as follows:

	2013	2012
Dividend Yield	0%	0%
Expected Life	5 - 10 years	5 years
Expected Volatility	83%	89%
Risk Free Interest Rate	0.88%-1.66%	0.72%-1.06%

A summary of the status and changes of the options granted under stock option plans and other agreements for the period ended March 31, 2013 is as follows:

		Weighted
		Average
		Exercise
	Shares	Price

Outstanding at December 31, 2012	15,455,470	$ 1.04
Issued	45,867	1.58
Exercised	--	--
Outstanding at March 31, 2013	15,501,337	$1.04

During the three months ended March 31, 2013, the Company issued 45,867 options to purchase the Company's common stock with an exercise price of $1.58 and grant date fair value of $50,000. The granted options vest over a twelve-month period of time pursuant to the employee's employment agreement. A summary of the status of the options outstanding at March 31, 2013 is presented below:

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

$ 0.70	7,358,277	5.76 years	$ 0.70	7,358,277	$ 0.70
$ 0.83	3,205,134	7.48 years	$ 0.83	3,205,134	$ 0.83
$ 1.00	60,000	1.94 years	$ 1.00	60,000	$ 1.00
$ 1.24	100,000	3.90 years	$ 1.24	100,000	$ 1.24
$ 1.45	125,000	4.91 years	$ 1.45	125,000	$ 1.45
$1.55	330,000	8.14 years	$1.55	116,667	$1.55
$1.58	45,867	4.91 years	$1.58	7,644	$1.58
$1.66	3,077,059	9.78 years	$1.66	823,569	$1.66
$ 1.75	300,000	9.24 years	$ 1.75	165,000	$ 1.75
$ 1.90	900,000	8.46 years	$ 1.90	475,000	$ 1.90
	15,501,337		$ 1.04	12,436,291	$ 0.88

At March 31, 2013, the total compensation expense of $4,282,426 for unvested options is to be recognized over the next twenty five months on a weighted average basis.

Compensation expense of $1,284,842 has been recognized for vesting of options for the three months ended March 31, 2013. The aggregate intrinsic value of the outstanding options as of March 31, 2013 was $7,017,720.