Note 2 – Restatements

Current Report on Form 8-K, Dated May 14, 2011

On May 14, 2011, we filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report our determination that our consolidated financial statements for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on March 6, 2012 (the “2011 Form 10-K”), and the interim unaudited condensed consolidated financial statements included in our September 30, 2011 Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011 (the “September 30, 2011 Form 10-Q”) should not be relied upon because we failed (i) to initially record and subsequently fair value our derivative warrant liabilities in connection with the issuances of our 10% Convertible Preferred Stock (the “Preferred Stock”) on March 22, 2011, April 1, 2011, April 13, 2011 and April 21, 2011 and (ii) to recalculate the fair value of the beneficial conversion feature embedded in the Preferred Stock upon determination that the conversion price of the Preferred Stock was required to be reset. We determined that the historical consolidated financial statements for the year ended December 31, 2011 included in our 2011 Form 10-K and the interim unaudited condensed consolidated financial statements for the period ended September 30, 2011, included in our September 30, 2011 10-Q required restatement (i) to record the change in fair value of our derivative warrant liability and (ii) to recalculate the fair value of the beneficial conversion feature and the amortization thereon in our Consolidated Statement of Stockholder Deficit.

On May 21, 2012, we filed our Form 10-K/A for the year ended December 31, 2011 and Form 10-Q/A for the period ended September 30, 2011 restating our financial statements and other disclosures where necessary, to properly account for these issues.

Current Report on Form 8-K Dated August 15, 2012

On August 15, 2012, we filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report our determination that our consolidated financial statements for the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011, the year ended December 31, 2011, and the interim period ended March 31, 2012, should not be relied upon because in connection with the terms of the amendment of our 10% convertible debentures (the “Debentures”) on January 14, 2011 we failed (i) to initially record and subsequently fair value our derivative liabilities for the bonus warrants and (ii) to properly account for the loss on extinguishment of the Debentures upon amendment. We determined that the historical consolidated financial statements for the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011, for the year ended December 31, 2011 and for the interim period ended March 31, 2012 require restatement (i) to record the initial fair value upon amendment and the subsequent change in fair value of our derivative bonus warrant liability and (ii) to properly account for the loss on extinguishment of the Debentures upon amendment.

Our 10% convertible debentures (the “Debentures”) were issued under purchase agreements during the fiscal year ended September 30, 2009, together with warrants, for aggregate proceeds of $600,000. The total of the fair value of the warrants, as determined using the Black-Scholes pricing model, and the value of the beneficial conversion features contained in the debentures, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, exceeded the proceeds received. Accordingly, we recorded a discount on the debentures equal to the principal amount of the debentures. This recorded discount on these debentures was amortized to interest expense on the interest method through their originally scheduled maturity dates in February and March 2011.

Effective January 14, 2011, the holders of our Debentures, agreed to extend the maturity dates to June 30, 2012 and to the elimination of the prohibition of paying dividends or distributions on any of our equity securities. We agreed to amend the interest rate to 15% if paid in cash and to 18% (from 12%) if paid with shares of our common stock at the rate of one share of common stock for each $0.60 (from $0.90) of interest. We also agreed to reduce the conversion price, as defined, to $0.60, from $0.90 and to amend the volume weighted average trading price at which we could force conversion to $2.50 from $2.00. In addition, for each calendar month after February or March 2011 that these debentures remained outstanding, we agreed to issue a bonus warrant exercisable for three years for a number of shares of our common stock equal to the 5% of the outstanding principal, divided by $0.90. These bonus warrants are exercisable at $0.90 per share.

Even though these modifications to our Debentures resulted in less than a ten percent difference in the present value of cash flows between the original terms and the modified terms, the fair value of the conversion options was substantially greater than ten percent. We have therefore, accounted for the modification of these Debentures as an extinguishment of the original debt and the establishment of new debt. The difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt was $1.4 million and was recognized as a loss in our statement of operations during the three months ended March 31, 2011, the period of amendment.

In addition, since it was probable that we would issue the bonus warrants which were part of the reacquisition costs of the new debt, at each month-end through the amended maturity date, we calculated the fair value of the bonus warrants using the Black-Scholes pricing model and recorded a derivative liability of approximately $797,000 on the date of amendment and recognized the amount as a loss in our statement of operations during the three months ended March 31, 2011, the period of amendment. The bonus warrant derivative liability does not qualify as a fair value or cash flow hedge under ASC 815, accordingly, changes in the fair value of the derivative liability are immediately recognized in earnings and classified as a gain or loss on the derivative liability in the accompanying statements of operations. (See Note 7.)

This Quarterly Report on Form 10-Q for the three and six months ended June 30, 2012 incorporates corrections made in response to the accounting errors described above by restating our consolidated balance sheet as of December 31, 2011 and our consolidated financial statements presented herein for the comparative periods of June 30, 2011. We anticipate filing our Form 10-Q/A for the interim periods ended September 30, 2011 and March 31, 2012 and our Form 10-K/A #2 for the year ended December 31, 2011, as soon as is practical.

The following tables show the effects of the restatement on our consolidated balance sheet as of December 31, 2011 and consolidated statements of operations and cash flows for the three and six months ended June 30, 2011:

Effect on Consolidated Balance Sheet
December 31, 2011

	As Previously
	Reported on
	Form 10-K/A			Adjusments			Restated

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,175,462					$	1,175,462
Accrued liabilities		359,715						359,715
Convertible revolving credit facility, net of discounts		160,794						160,794
Derivative liability - conversion option		113,271						113,271
Derivative liability - warrants		1,875,463						1,875,463

Derivative liability - bonus warrants		-			797,185	(e)		70,343
					(492,111	) (f)
					(234,731	) (g)

Convertible debt		566,785			600,000	(a)		772,500
					(394,285	) (b)

Total current liabilities		4,251,490			276,058			4,527,548

Convertible debt, net of discount		-						-
Fair value of 10% convertible preferred stock warrants		487,555						487,555
Total liabilities		4,739,045			276,058			5,015,103

Commitments and contingencies

10% Convertible preferred stock, no par value; authorized 880,000 shares; 752,273 issued and outstanding at December 31, 2011, net of discount		5,520,256						5,520,256
Redeemable common stock, no par value; 250,000 shares issued and outstanding at December 31, 2011		242,500						242,500

Stockholders' deficit:
Common stock, no par value; authorized, 100,000,000 shares; 25,007,261 and 23,305,704 shares issued and outstanding at December 31, 2011 and 2010, respectively		23,660,071			1,350,000	(d)		24,410,071
					(600,000	) (a)
					(234,731	) (h)
					234,731	(g)

Accumulated deficit		(28,619,876	)		(1,350,000	) (d)		(29,645,934	)
					394,285	(b)
					(797,185	) (e)
					492,111	(f)
					234,731	(h)

Total stockholders' deficit		(4,959,805	)		(276,058	)		(5,235,863	)
Total liabilities and stockholders' deficit	$	5,541,996		$	-		$	5,541,996

(a) - to reverse the improper recording of debt discount.

(b) - to reverse the improper recording of and amortization of debt discount.

(d) - to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(e) - to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(f) - to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants for the six months ended June 30, 2011.

(g) - to record the fair value of bonus warrants at date of issuance.

(h) - to reverse incorrect recording of the fair value of bonus warrants at issuance.

Effect on Consolidated Statement of Operations

for the Three Months Ended June 30, 2011

	As Previously
	Reported			Adjustments			Restated

Loss from operations	$	(2,412,954	)	$	-		$	(2,412,954	)

Other expenses:
Interest expense		67,024			-			67,024
Amortization of debt discounts		465,909			(102,858	)(a)		249,002
					(114,049	)(b)

Change in fair value of derivative liabilities		-			(48,187	)(c)		(48,187	)
Total other expenses		532,933			(265,094	)		267,839

Loss before provision for income taxes		(2,945,887	)		265,094			(2,680,793	)
Provision for income taxes		-			-			-
Net loss		(2,945,887	)		265,094			(2,680,793	)
Accretion of preferred dividends and beneficial conversion feature		(203,697	)		-			(203,697	)
Net loss attributable to common shareholders	$	(3,149,584	)	$	265,094		$	(2,884,490	)

Weighted average common shares - basic and diluted		24,082,234			24,082,234			24,082,234
Basic and diluted net loss per share	$	(0.13	)	$	0.01		$	(0.12	)

(a) -

to reverse the improper amortization of debt discount.

(b) -

to reverse the impact of the improper recording of the fair value of the bonus warrants upon issuance.

to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants for the period.

for the Six Months Ended June 30, 2011

	As Previously
	Reported			Adjustments			Restated

Loss from operations	$	(4,108,625	)	$	-		$	(4,108,625	)

Other expenses:
Interest expense		97,104			-			97,104
Amortization of debt discounts		670,049			(188,572	)(a)		367,428
					(114,049	)(b)

Loss on debt extinguishment		-			1,350,000	(c)		1,350,000
Fair value of bonus warrants at debt extinguishment		-			797,185	(d)		797,185
Change in fair value of derivative liabilities		-			(359,561	)(e)		(359,561	)
Total other expenses		767,153			1,485,003			2,252,156

Loss before provision for income taxes		(4,875,778	)		(1,485,003	)		(6,360,781	)
Provision for income taxes		-			-			-
Net loss		(4,875,778	)		(1,485,003	)		(6,360,781	)
Accretion of preferred dividends and beneficial conversion feature		(207,556	)		-			(207,556	)
Net loss attributable to common shareholders	$	(5,083,334	)	$	(1,485,003	)	$	(6,568,337	)

Weighted average common shares - basic and diluted		23,773,725			23,773,725			23,773,725
Basic and diluted net loss per share	$	(0.21	)	$	(0.06	)	$	(0.28	)

(a) -

to reverse the improper amortization of debt discount.

(b) -

to reverse the impact of the improper recording of the fair value of the bonus warrants upon issuance.

to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(d) -

to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(e) -

to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants for the six months ended June 30, 2011.

Effect on Consolidated Statement of Cash Flows

for the Six Months Ended June 30, 2011

	As Previously
	Reported			Adjustments			Restated

Cash flow from operating activities:
Net loss	$	(4,875,778	)	$	(1,485,003	)	$	(6,360,781	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible debt discount		486,972			(188,572	)(a)		298,400
Loss on debt extinguishment		-			1,350,000	(c)		1,350,000
Fair value of bonus warrants at debt extinguishment		-			797,185	(d)		797,185
Fair value of bonus warrants at grant date		-			(114,049	)(b)		(114,049	)
Change in fair value of derivative liabilities - Bonus Warrants		-			(359,561	)(e)		(359,561	)

Net cash used in operating activities	$	(3,435,727	)	$	-		$	(3,435,727	)

(a) -

to reverse the improper amortization of debt discount.

(b) -

to reverse the impact of the improper recording of the fair value of the bonus warrants upon issuance.

to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(d) -

to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(e) -

to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants for the six months ended June 30, 2011.