AMGI American Mold Guard (MM)

AMERICAN MOLD GUARD, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2007 AND 2006

Note 1. Organization and Management’s Plans

Organization and Business

The principal business of American Mold Guard, Inc. (the “Company”) is providing structural decontamination and protective coating products and services, including building diagnostic assessment and inspections, indoor air quality testing, complete mold decontamination, a series of preventive maintenance programs and water intrusion emergency response service. Our products and services are available in new construction and occupied phases of multi-family, single family and commercial buildings. In December 2007, the Company announced that it had expanded its service offerings to provide a comprehensive approach to indoor environmental issues throughout the life cycle of a building. The expanded service offering, named “Trinity”, is an all-inclusive three-in-one service platform involving inspection, correction and protection to manage water related problems that can cause mold contamination. With this added capability, the Company can provide multi-family and commercial developers, owners and property managers with a single, full-service company to handle their indoor environmental issues. Through its wholly-owned subsidiary, AMG Scientific, LLC, the Company is striving to develop products and services related to infection control surface treatment to health care facilities and other institutions. The Company has sales representatives located in several states who sell its structural decontamination and protective coating services throughout the country. The Company also has service centers in three states – California, Florida and Texas and it has serviced projects throughout the country with its mobile crews. The Company’s wholly-owned subsidiary, Trust One Termite, Inc. (“Trust One”), which had provided termite control services, suspended operations in August 2007 due to the housing market slowdown.

Wholly Owned Subsidiary

On October 1, 2003, the Company created a wholly-owned subsidiary for the purpose of conducting planned franchising activities. The wholly-owned subsidiary is named “American Mold Guard Franchise, Inc.” The Company has never conducted any franchising activity and no financial transactions have occurred through American Mold Guard Franchise, Inc. American Mold Guard Franchise, Inc. has been dormant since its establishment in 2003.

Management’s Plans

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company’s significant operating losses, accumulated deficit and the uncertainty as to whether the Company will be able to obtain additional financing, raise substantial doubt about the Company’s ability to continue as a going concern. The Company incurred a net loss of $5.7 million for the year ended December 31, 2007. As of December 31, 2007, the Company had working capital of $1.3 million, an accumulated deficit of $23.7 million and stockholders’ equity of $1.7 million. On July 19, 2007 the Company entered into a Security Agreement (the “Security Agreement”) with Calliope Capital Corporation, a Delaware corporation (“Calliope”). Pursuant to the Security Agreement, the Company issued to Calliope a secured convertible note in the aggregate principal amount of $2,000,000 and obtained a maximum $2,000,000 revolving credit facility, access to which has been restricted.

In September of 2007, the Company closed its Gulf region restoration operation centers, consolidated the offices of Chief Executive Officer, President and Chief Operating Officer under one person, eliminated various discretionary services and reorganized its sales and operations organization in an effort to improve the sales and operations effectiveness of the Company. These actions reduced selling, general and administrative expenses by approximately $800,000 in the fourth quarter of 2007 as compared to the previous quarter. Recently, the Company announced its strategy of actively acquiring and developing intellectual property aimed at developing proprietary products and services in the areas of mold and bacteria decontamination, disinfectants and various antimicrobial products. The Company is also seeing sales growth driven by the adoption of its Trinity process. As the Company grows sales, it plans to increase its margins and control costs in an effort to reach profitability. Management plans to raise additional capital in the first half of 2008 to fund ongoing business operations.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company and its wholly-

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owned subsidiaries, AMG Scientific, LLC since its date of inception (October 12, 2006) and Trust One. All significant inter-company accounts and transactions are eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of highly liquid investments with an original maturity of less than three months when purchased.

Restricted Cash

As of December 31, 2007, the Company had one certificate of deposit totaling $76,399, including interest, which serves as collateral for the Company’s business travel credit cards.

Inventories

Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market and consist primarily of raw materials.

Property and Equipment

Property and equipment are recorded at cost. The Company provides for depreciation over estimated useful lives ranging from three to five years, using the straight-line method. Leasehold improvements and capitalized leased equipment are amortized over the life of the related non-cancelable lease. Repair and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in the related period’s statement of operations.

Impairment of Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model, based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, whether or not such assets are deemed to be a business. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations. Management did not note any indicators of impairment during the years ended December 31, 2007 and 2006.

Allowance for Doubtful Accounts

The Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the applicable portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management, however, believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain safety and liquidity.

The Company’s trade receivables are derived from customer revenues from antimicrobial treatment services for mold prevention. The Company makes periodic evaluations of its customer’s credit worthiness and the risk with respect to trade receivables is mitigated by the diversification of its customer base. Collateral is not required for trade receivables. The Company maintains an allowance for estimated uncollectible accounts receivable and such losses have historically been within management’s expectation.

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For the years ended 2007 and 2006, one customer accounted for 17.9% and 18.5% of revenues, respectively. At December 31, 2007, two customers accounted for 11.1% and 10.3% of total receivables, respectively. Given the significant amount of revenues derived from this customer, the loss of this customer or the non-collection of related receivables could have a material adverse effect on the Company’s financial condition and results of operations.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for the expected tax consequences in future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amount at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

In July 2006, FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The Company was subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state tax returns in California, Florida and Louisiana as “major” tax jurisdictions, as defined. The periods subject to examination for the Company’s federal return are the 2004 through 2006 tax years. The periods subject to examination for the Company’s state returns in California and Florida are years 2003 through 2006 and in Louisiana are years 2004 through 2006. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48, and, as such, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income taxes.

Revenue Recognition

Revenue is based on contracts for agreed upon fees entered into with customers for the services to be completed and is recognized when the service is completed, the amount of the service and contract value is determinable, and collection is reasonably assured. The resulting accounts receivable are reported at their principal amounts and adjusted for an estimated allowance for uncollectible amounts, if appropriate.

Service Warranties

The Company provides a general warranty on its mold prevention services that extends for the entire “statute of repose,” the period during which, under the various state laws, builders have continuing liability for construction defects. In general, the period of continuing liability is between 5 and 15 years depending upon the state in which the service has been provided. The warranty covers both property damage and personal injury arising from mold contamination on any surface treated by the Company. The personal injury portion of the warranty is supported by a $3.0 million pollution liability mold giveback provision under the Company’s general liability policy. The Company estimates its exposure to warranty claims based upon historical warranty claim costs and expectations of future trends. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available. However, the Company does not have, at this time, sufficient experience to determine if a reserve is required and/or if the coverage under the general liability policy is sufficient should claims be filed against the Company. To date, the Company has not been required to perform under the terms of its warranty provisions. As a result, the accompanying consolidated financial statements do not include any accruals or provisions associated with future warranty expenditures.

Stock-based Compensation

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25, for periods beginning in fiscal 2006. In March 2006, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

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The Company adopted SFAS 123(R) using the modified prospective application transition method, which required the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year.

Upon adoption of SFAS No. 123(R), the Company has continued to use the Black-Scholes model which was previously used for the Company’s pro forma information required under SFAS No. 123. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Share-based compensation expense, included in selling, general and administrative expenses, recognized under SFAS 123(R) for the years ended December 31, 2007 and 2006, $123,190 and $125,351, respectively. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant-date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations.

Share-based compensation expense recognized during the current period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company’s consolidated statements of operations for the years ended December 31, 2007 and 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Share-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2007 and 2006 is based on awards ultimately expected to vest and it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate forfeitures.

Risk Management

The Company is not exposed to significant credit concentration risk, interest rate or hedging risks. The Company’s functional currency is the US dollar. The Company is not exposed to foreign exchange risk and the Company is not a party to any derivative transactions.

Fair Value of Financial Instruments

The carrying values of cash, accounts receivable, other current assets, accounts payable and accrued liabilities, accrued salary and wages, accrued interest payable and short term debt approximate their fair values because of the short maturity of these instruments. Long-term debt also approximates fair value due to management’s ability to borrow at approximately the same rate in the current market.

Per Share Information

The Company presents basic earnings (loss) per share (“EPS”) and diluted EPS on the face of the statements of operations. Basic EPS is computed as net income (loss) divided by the weighted average number of shares of the Company’s common stock, no par value, outstanding for the period. Diluted EPS reflects the potential dilution that could occur from shares of common stock issuable through stock options, warrants, and other convertible securities which are exercisable during or after the reporting period. In the event of a net loss, such incremental shares are not included in EPS since their effects are anti-dilutive. Securities that could potentially dilute basic EPS in the future, that were not included in the calculation of diluted EPS because to do so would have been anti-dilutive, aggregate 6,352,410 and 6,437,441 as of December 31, 2007 and 2006, respectively.

The accompanying consolidated financial statements give retroactive effect to a reverse stock split pursuant to which each share of common stock outstanding before the reverse stock split was converted and exchanged for 0.340124209 new shares of common stock. The reverse stock split was effective as of April 7, 2006.

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Advertising

All advertising costs are expensed as incurred. Advertising expenses were $6,505 and $69,210 for the years ended December 31, 2007 and 2006, respectively.

Recent Accounting Pronouncements

FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” to permit fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 155 is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS 155 did not have a material impact on the Company’s consolidated financial statements.

The Emerging Issues Task Force (“EITF”) reached a tentative consensus on Issue No. 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”). EITF 06-3 addresses income statement classification and disclosure requirements of externally-imposed taxes on revenue-producing transactions. EITF 06-3 is effective for periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have a material impact on the consolidated financial statements.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements , ” which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 was to be effective for financial statements issued for fiscal years beginning after November 15, 2007. However, FASB Staff Position No. 157-2, which was issued on February 12, 2008, deferred the effective date to fiscal years beginning after November 15, 2008. Management is currently evaluating the potential impact this standard may have on the Company’s financial position and results of operations, but management does not believe the impact of the adoption will be material.

In December 2006, the FASB approved EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”), which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies”. EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, and the maximum potential amount of consideration and the current carrying amount of the liability, if any. The guidance in EITF 00-19-2 amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, to include scope exceptions for registration payment arrangements.

EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the issuance date of this EITF, or for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years, for registration payment arrangements entered into prior to the issuance date of this EITF. The adoption of this pronouncement has not had a material impact on the Company’s financial position, results of operations and cash flows in fiscal year 2007.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The Company is currently assessing the impact of SFAS 159. The Company does expect a significant impact of the adoption of SFAS 159.

In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” This Statement replaces SFAS 141, “Business Combinations.” This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The statement is to be applied prospectively for fiscal

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years beginning on or after December 15, 2008; therefore the Company expects to adopt SFAS 141R for any business combination entered into beginning in fiscal 2009.

In December 2007, the FASB issued SFAS 160, “Non-controlling Interests in Consolidated Financial Statements.” This Statement amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company does not expect that SFAS 160 will have any impact on its consolidated financial statements.

Note 3. Property and Equipment

Property and equipment consisted of the following as of:

Note 4. Lease Line of Credit

In the second quarter of 2006, the Company opened a secured lease line of credit with Bank of America having a 48 month term with a $1.00 buy-out for related leased assets at the end of the term (the “Line of Credit”). During the year ended December 31, 2006, the Company borrowed an aggregate of $650,908 against the Line of Credit. For the year ended December 31, 2006, the Company paid $43,815 towards the Line of Credit.

In June 2007, the Company made the decision to pay off the Line of Credit in full. During the quarter ended June 30, 2007 the Company paid $572,370 to pay off the Line of Credit.

Note 5. Convertible Notes Payable, net of discount and Revolving Credit Facility

On July 19, 2007 the Company entered into a Security Agreement (the “Security Agreement”) with Calliope Capital Corporation, a Delaware corporation (“Calliope”). Pursuant to the Security Agreement, the Company issued to Calliope a Secured Convertible Note in the aggregate principal amount of $2,000,000 and obtained a maximum $2,000,000 revolving credit facility. The term of the Secured Convertible Note is for three years at an interest rate per annum equal to the “prime rate” as published in the Wall Street Journal from time to time plus two percent (2.0%), subject to a floor of 9.0% and a ceiling of 11.0%

The Secured Convertible Note and any and all Revolving Loans are secured by all of the assets of the Company as more fully set forth in the Security Agreement. Calliope has the right, but not the obligation, at any time to convert all or any portion of the outstanding principal amount and accrued interest on the Secured Convertible Note into fully paid and non-assessable shares of common stock of the Company at a fixed conversion price equal to $1.85 per share. Amortizing payments were due pursuant to the Secured Convertible Note commencing on October 1, 2007, and the first business day of each month thereafter in an amount equal to $60,606. The principal balance as of December 31, 2007 was $1,818,182.

Pursuant to the terms of the Revolving Credit Facility, Calliope may make revolving loans (the “Revolving Loans”) to the Company from time to time during the term of the Revolving Credit Facility in an aggregate amount not to exceed the lesser of (i) $2,000,000 minus $250,000 until the Company achieves operating profitability for any two consecutive fiscal quarters or (ii) an amount equal to ninety percent (90%) of eligible Company commercial account receivables plus seventy percent (70%) of eligible Company consumer account receivables minus $250,000. Any Revolving Loans made to the Company will be evidenced by one or more “Revolving Loan Notes”, and will bear interest at a rate per annum equal to the “prime rate” published in the Wall Street Journal from time to time plus two percent (2%). As of the date of this filing, the Company has not yet received any Revolving Loans under the Revolving Credit Facility and Calliope has restricted the Company from accessing the Revolving Credit Facility until the Company’s financial position improves.

The Company has provided Calliope a first lien on all assets of the Company. The Company will have the option of redeeming any outstanding principal of the Secured Convertible Note by paying to Calliope 130% of such outstanding principal, together with accrued but unpaid interest under the Secured Convertible Note. Calliope earned a commitment fee in the amount of $140,000 at the time of closing. Calliope also received a warrant to purchase up to 1,137,010 shares of the

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Company’s common stock at a purchase price of $1.93 per share. In addition, the Company paid due diligence, accounting and legal fees to Calliope of $70,965. The Company also paid cash of $125,000 and issued a warrant valued at $44,860 (see Note 7) to Equity Source Partners LLC for financial advisory fees and non-accountable expenses incurred in connection with the debt financing transaction with Calliope.

Aggregate financing costs of $380,825 paid in connection with the financing described above have been capitalized as such in the accompanying condensed consolidated balance sheet and are amortized over the estimated life of the respective notes. Amortization of $58,391 for the year ended December 31, 2007, is included in interest expense in the accompanying consolidated statement of operations.

The Company determined that the Secured Convertible Note satisfied the definition of a conventional convertible instrument under the guidance provided in EITF 00-19 and EITF 05-02, as the conversion option’s value may only be realized by the holder by exercising the option and receiving a fixed number of shares. As such, the embedded conversion option in the Secured Convertible Note qualifies for equity classification under EITF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. The Company also determined that the warrant issued to Calliope qualify for equity classification under the provisions of SFAS 133 and EITF 00-19. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the Secured Convertible Note and common stock purchase warrant based on their relative estimated fair values. As a result, the Company allocated $1,056,392 to the Secured Convertible Note and $943,608 to the common stock purchase warrant, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the Secured Convertible Note contained a beneficial conversion feature based on the effective conversion price after allocating proceeds of the Secured Convertible Note to the common stock purchase warrant, valued at $727,392. The amounts recorded for the common stock purchase warrant and beneficial conversion feature are recorded as debt discounts and are amortized as interest expense over the term of the Secured Convertible Note. Interest charges associated with the amortization of the debt discount, totaled $389,926 for the year ended December 31, 2007.

The April 2005 Warrants are fully vested and entitle the holder thereof to purchase up to 170,062 shares of common stock at any time until April 15, 2008 at a purchase price of $5.88 per share. In connection with the issuance of the April 2005 Warrants, the Company recorded $147,368 of debt discount, which it charged against the face value of the $600,000 convertible notes issued in April 2005 and has been amortized over the life of such convertible note which were paid in May 2006.

In June 2006, Warrants were issued in conjunction with payment for services to be received by the Company over a twelve month period. The Warrants entitle the holder thereof to purchase up to 15,000 shares of common stock at any time until June 2009 at a purchase price of $5.00 per share. In connection with the issuance of the June 2006 Warrants, the Company recorded a prepaid asset which will be amortized to expense as the related services are received. The Company estimated the fair value of such warrants to be $23,029 using the Black-Scholes valuation model.

In August 2006, the Company issued 13,000 warrants in conjunction with payment for services to be received by the Company over a six month period commencing March 2006. The warrants entitle the holder thereof to purchase up to 13,000 shares of common stock at any time until August 2009 at a purchase price of $5.00 per share. The Company estimated the fair value of such warrants to be $15,514 using the Black-Scholes valuation model.

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In November 2006, the Company issued 20,000 warrants in conjunction with payment for services received by the Company over a three month period commencing October 2006. The warrants entitle the holder thereof to purchase up to 20,000 shares of Common stock at any time until November 2009 at a purchase price of $3.00 per share. The Company estimated the fair value of such warrants to be $20,652 using the Black-Scholes valuation model.

In April 2007, the Company issued 40,000 warrants in conjunction with payment for services received by the Company commencing April 2007. The warrants entitle the holder thereof to purchase up to 40,000 shares of common stock at any time until April 2010 at a purchase price of $2.16 per share. The Company estimated the fair value of such warrants to be $36,608 using the Black-Scholes valuation model.

In July 2007, the Company issued 1,137,010 warrants in conjunction with the issuance of the Secured Convertible Note and Revolving Credit Facility discussed in Note 5. The warrants entitle the holder thereof to purchase up to 1,137,010 shares of common stock at any time until July 2012 at a purchase price of $1.93 per share. See Note 5 for the valuation of such warrants.

In July 2007, the Company issued 54,054 warrants payment for services received by the Company in conjunction with securing the issuance of the Secured Convertible Note and Revolving Credit Facility. The warrants entitle the holders thereof to purchase up to 54,054 shares of common stock at any time until July 2012 at a purchase price of $1.93 per share. The Company estimated the fair value of such warrants to be $44,860 using the Black-Scholes valuation model.

In May 2006, there were 2,930,770 Class A warrants issued and outstanding of which 2,700,000 were included in units sold by the Company during its initial public offering completed in May 2006 (the “IPO”) and 230,770 were included in units that were issued on April 26, 2006 to the holders of certain unsecured notes (the “Unsecured Notes”). The Class A warrants issued are exercisable beginning May 26, 2006 and expire on April 26, 2011. Each Class A warrant entitles the holder to purchase one share of common stock at an exercise price of $9.75 per share. The exercise price may be adjusted upon the occurrence of certain events.

In May 2006, there were 2,930,770 Class B warrants issued and outstanding of which 2,700,000 were included in the units sold in the IPO and 230,770 were included in the units that were issued to the holders of the Unsecured Notes. The Class B warrants are identical to the Class A warrants except that the Class B warrants have an exercise price of $13.00 per share and the Class B warrants may only be redeemable after gross revenues for any previous 12 month period, as confirmed by independent audit, equals or exceeds $20 million.

In connection with the April 26, 2006 issuance of shares of common stock, Class A Warrants and Class B Warrants to holders of the Unsecured Notes, the Company agreed to : (i) file, on or before May 26, 2007, a registration statement to register for resale the shares of common stock, Class A Warrants and Class B Warrants issued to the holders of the Unsecured Notes and (ii) have such registration statement declared effective by the Securities and Exchange Commission on or before July 29, 2007. If the Company failed to meet these requirements, the Company would be obligated to pay monthly liquidated damages in cash to the holders of the Unsecured Notes in an amount equal to one percent (1%) of the holders’ original outstanding principal amount of the Unsecured Notes purchased, per month. The Company filed the requisite registration statement on July 5, 2007, and the registration statement was declared effective by the Securities and Exchange Commission on August 7, 2007, and, accordingly, the Company accrued a liability of $19,500 which was charged to interest expense in the current quarter. Such amount remains unpaid at December 31, 2007.

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Note 7. Stockholder’s Equity (Deficiency)

Equity Incentive Plan

The shareholders of the Company approved the Equity Incentive Plan (the “Plan”) on April 28, 2003, which reserved for issuance a total of 340,124 shares of common stock for incentive compensation grants of shares of common stock, stock options and restricted stock awards to the Company’s full-time key employees, consultants and directors. The Plan was amended in December 2005 to increase the number of shares reserved under the Plan to 425,155 shares of common stock. On June 1, 2007, at the Company’s annual stockholders meeting, stockholders approved an amendment to the Plan to increase the number of shares of common stock reserved for issuance under the plan to 1,500,000. Stock options granted under the Plan generally vest one-third after 12 months while the remainder vests ratably in quarterly installments over the next two years. All unexercised options expire after five years from the date of grant.

A summary of option activity under the Plan for the years ended December 31, 2007 and 2006 is as follows: