NOTE 5 - PRIVATE PLACEMENT OFFERING:

On September 7, 2007, the Company completed a private placement, pursuant to which 13,334 units (the "Units") were sold at a per Unit cash purchase price of $150, for a total subscribed amount of $2,000,100. Each Unit consists of: (1) one share of Series A 10% convertible preferred stock, par value $1.00, stated value $100 (the "Preferred Stock"); (2) 500 shares of the Company's common stock, par value $0.10 (the "Common Stock"); and (3) 500 warrants (the "Warrants") exercisable into Common Stock on a one-for-one basis. The proceeds of $2,000,100 were allocated to the instruments as follows:

Warrant liabilities	$	141,027
Redeemable and Convertible Preferred Stock		1,388,367
Common Stock		470,706
Total allocated gross proceeds:	$	2,000,100

Warrants

As of December 31, 2011, warrants to purchase 6,909,000 shares were outstanding, having exercise prices at $0.15 and expiration date at September 6, 2012.

	2011			2010
	Number of warrants		Weighted average exercise price	Number of warrants		Weighted average exercise price
Balance at January 1	6,909,000	$	0.15	6,909,000	$	0.15
Issued during the period	-	$	-	-	$	-
Exercised during the period	-	$	-	-	$	-
Expired during the period	-	$	-	-	$	-
Balance at December 31	6,909,000	$	0.15	6,909,000	$	0.15

At December 31, 2011 and 2010, the average remaining contractual life of the outstanding warrants was 0.69 year and 1.69 years, respectively.

The warrants, which were issued to investors in the September 7, 2007, private placement offering, contained a provision for net cash settlement in the event that there is a fundamental transaction or results in a Change of Control, then at the request of the Holder delivered before the 30th day after such Fundamental Transaction, the Company (or any such successor or surviving entity) was required to purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black-Scholes value (calculated in accordance with Bloomberg, L.P. using a 180 day historical volatility) of the remaining unexercised portion of this Warrant. Due to this contingent redemption provision, the warrants required liability classification in accordance with ASC Topic 480, "Distinguishing Liabilities from Equity," ("ASC 480") and were recorded at fair value. In addition, these warrants were not indexed to the Company's stock, and therefore also required liability classification under ASC 815, "Derivatives and Hedging," (ASC 815).

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for warrants are determined using the Binomial Lattice valuation technique. The Binomial Lattice valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Binomial Lattice valuation model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.

Significant assumptions are determined as follows:

Trading market values—Published trading market values;

Exercise price—Stated exercise price;

Term—Remaining term of the warrant;

Volatility—Historical volatility of peer companies experienced over a period consistent with the remaining contractual terms of the Warrants;

Risk-free rate—Yields on zero coupon U.S. Securities with terms consistent with the remaining terms of the warrants.

Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is approximately ranging from 0.75% 1.00%. For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.

The warrants issued were not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they were also subject to down-round anti-dilution protection. Accordingly, if the Company sold common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants would adjust to that lower amount. The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provide for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Company's (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.

The following table summarizes the fair value of the warrants as of the balance sheet date:

Fair values		December 31, 2011		December 31, 2010		At transaction date
September 7, 2007 financing	$	70,991	$	87,240	$	141,027

At December 31, 2011 and 2010, the number of shares indexed to the warrants as was 6,909,000 and 6,909,000, respectively

The following are the assumptions for the valuation of the fair value of the warrant liability:

	December 31, 2011	December 31, 2010	At transaction date
Warrants outstanding	6,909,000	6,909,000	6,909,000
Exercise price	$0.15	$0.15	$0.15
Equivalent interest rate	0.03%	0.24%	4.01%
Expected life (years)	0.69	1.69	5
Risk-free interest rate	0.12%	0.93%	4.14%
Expected volatility	77%	62%	53.94%

Effective June 30, 2012, the Company entered into amendments to its Warrant Agreement. The amendment to remove the put and the down round protection feature allows for the Warrants to be treated as equity beginning with the quarter ended June 30, 2012. As a result, the fair value of the warrants of $70,991 as of December 31, 2011 was reclassified from a long-term liability to a current liability. The fair value of the warrants of $87,240 as of December 31, 2010 was recorded under long-term liabilities.

Series A 10% Convertible Preferred Stock

The principal terms of the Series A 10% Convertible Preferred Stock were as follows:

Voting rights – The Series A 10% Convertible Preferred Stock has voting rights (one vote per share) equal to those of the Company's common stock.

Dividend rights – The Series A 10% Convertible Preferred Stock carries a fixed cumulative dividend, as and when declared by our Board of Directors, of 10% per annum, accrued daily, compounded annually and payable in cash upon a liquidation event for up to five years, as well as the right to receive any dividends paid to holders of common stock.

Conversion rights – The holders of the Series A 10% Convertible Preferred Stock have the right to convert any or all of their Series A 10% Convertible Preferred Stock, at the option of the holder, at any time, into common stock on a one for one thousand basis.

Redemption rights –The shares of the Series A 10% Convertible Preferred Stock may be redeemed by the Company, in whole or in part, at the option of the Company, upon written notice by the Company to the holders of Series A 10% Convertible Preferred Stock at any time in the event that the Preferred Stock of one or more holders has not been previously converted. The Company shall redeem each share of Preferred Stock of such holders within thirty (30) days of the Company's delivery of notice to such holders and such holders shall surrender the certificate(s) representing such shares of Preferred Stock.

Liquidation entitlement – In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A 10% Convertible Preferred Stock shall be entitled to receive, in preference to the holders of common stock, an amount equal to $100 per share of Series A 10% Convertible Preferred Stock plus all accrued and unpaid dividends.

At any time on or after August 2, 2011, the Holders of 66 2/3% or more of the Preferred Stock then outstanding could have requested liquidation of their Preferred Stock. In the event that, at the time of such requested liquidation, the Company's cash funds (in excess of a $50,000 reserve fund) then available to effect such requested liquidation were inadequate for such purpose, then such requested liquidation shall take place (on a ratable basis) only to the extent such excess cash funds were available for such purpose.

Other provisions – There will be proportional adjustments for stock splits, stock dividends, recapitalizations and the like.

The Company has classified the Series A 10% Convertible Preferred Stock as temporary equity because it is redeemable upon the occurrence of an event that is not solely within the control of the issuer.