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. 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 Stockholders' Equity and $3,580,000 to the Warrant derivative. As of December 31, 2011, the Warrant derivative was valued at $3,355,000 using a Black-Scholes model. See Note 3 for restatement of the Warrant derivative at March 31, 2012 to $1,585,000 as a result of utilizing a binomial lattice model. The key assumptions underlying this model are disclosed in Note 4.

Outstanding Stock Warrants

No warrants were issued during the three months ended March 31, 2012.

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

	Shares		Weighted Average Exercise Price

Outstanding at December 31, 2011		6,423,777	$	1.77
Issued		-0-		-0-
Exercised		-0-		-0-
Forfeited		-0-		-0-
Expired		-0-
Outstanding at March 31, 2012		6,423,777	$	1.77
Exercisable at March 31, 2012		6,405,657	$	1.77

A summary of the status of the warrants outstanding at March 31, 2012 is presented below:

	Warrants Outstanding					Warrants Exercisable
	Number		Weighted Average	Weighted Average		Number		Weighted Average
Exercise Price	Outstanding		Remaining Contractual Life	Exercise Price		Exercisable		Exercise Price
$ 0.35		90,000	2.00 years	$	0.35		90,000	$	0.35
$ 0.78		213,402	3.83 years	$	0.78		213,402	$	0.78
$ 0.80		264,668	3.62 years	$	0.80		264,668	$	0.80
$ 1.00		340,000	2.50 years	$	1.00		340,000	$	1.00
$ 1.15		461,340	9.08 years	$	1.15		461,340	$	1.15
$ 2.00		5,054,367	4.72 years	$	2.00		5,036,247	$	2.00
		6,423,777		$	1.77		6,405,657	$	1.77

At March 31, 2012, the total compensation of $20,979 for unvested shares is to be recognized over the next 3 months on a weighted average basis. Compensation expense of $188,907 has been recognized for the vesting of warrants to non-related parties in the accompanying statements of operations for the three months ended March 31, 2012.

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 three months ended March 31, 2012 and 2011 were as follows:

	2012			2011

Dividend Yield		0	%		0	%
Expected Life	5 years			5 - 10 years
Expected Volatility		89	%		81 - 105	%
Risk Free Interest Rate		.72% - 1.06	%		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 March 31, 2012 is as follows:

	Shares		Weighted Average Exercise Price

Outstanding at December 31, 2011		11,598,411	$	0.83
Issued		225,000		1.45
Exercised		-0-		-0-
Forfeited		-0-		-0-
Expired		-0-		-0-
Outstanding at March 31, 2012		11,823,411	$	0.84
Exercisable at March 31, 2012		8,444,452

During the three months ended March 31, 2012, the Company issued 225,000 options to purchase the Company's common stock with an average exercise price of 1.35. The options that have been granted will vest either monthly or quarterly as follows:

A summary of the status of the options outstanding at March 31, 2012 is presented below:

	Options Outstanding					Options Exercisable
	Number		Weighted Average	Weighted Average		Number		Weighted Average
Exercise Price	Outstanding		Remaining Contractual Life	Exercise Price		Exercisable		Exercise Price
$ 0.65 - $ 0.71		75,000	2.25 years	$	0.69		75,000	$	0.69
$ 0.70		7,358,277	7. 50 years	$	0.70		7,358,277	$	0.70
$ 0.83		3,205,134	4.00 years	$	0.83		757,425	$	0.83
$ 1.00		60,000	4.25 years	$	1.00		60,000	$	1.00
$ 1.24		100,000	5.00 years	$	1.24		8,333	$	1.24
$ 1.45		125,000	5.00 years	$	1.45		10,417	$	1.45
$ 1.90		900,000	9.50 years	$	1.90		175,000	$	1.90
		11,823,411		$	0.74		8,444,452	$	0.99

At March 31, 2012, the total compensation of $2,161,146 for unvested shares is to be recognized over the next three years on a weighted average basis.

Compensation expense of $452,205 has been recognized for vesting of options for the three months ended March 31, 2012. The intrinsic value of the outstanding options at March 31, 2012 was $7,940,093.

Vesting Information

Begin Date

March 1, 2012

February 1, 2013