NOTE 1A: RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Restatement relating to classification and valuation of derivative liabilities for the years ended December 31, 2010 and 2009

Management has restated the consolidated financial statements as of and for the years ended December 31, 2010 and 2009 relating to the Company’s accounting for share purchase warrants issued as part of private placement transactions, consulting service agreements and debt settlement transactions since the latter half of 2009. Previously, the fair value of the share purchase warrants was determined using the Black-Scholes valuation model, or an alternate methodology, at the time of issuance and classified within shareholders’ equity. Following discussions with our auditors, the Company has reviewed the terms and conditions underlying its outstanding share purchase warrants and determined that the accounting for the warrants should be reviewed. Specifically, the Company had issued warrants to purchase our common stock that may require the Company, or a successor, to purchase unexercised warrants for a cash amount equal to their fair value following the announcement of specified events defined as “Fundamental Transactions” (e.g., merger, sale of all or substantially all assets, tender offer, going private or share exchange). The cash settlement provisions require the use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a delisting. As a consequence of these provisions, management now believes that these share purchase warrants should be classified as a liability on our balance sheets and measured at fair value with the changes in fair value reported in results of operations at each reporting period.

In coming to this conclusion, management evaluated the application of ASC 480-10 Distinguishing liabilities from equity, ASC 815-40 Contracts in an Entity’s Own Equity and ASC 718-10 Compensation – Stock Compensation to the issued and outstanding warrants to purchase common stock that were issued with the private placements, consulting and debt settlement transactions. In summary, the guidance requires the share purchase warrant or equity instrument to be classified as a liability, not equity, whenever the Company could be required to settle the equity instrument by transferring cash or other assets. The Fundamental Transaction clause creates a situation where the warrants may be contingently puttable back to the Company for cash settlement. As a result, the Company has restated its accounting for the share purchase warrants and recorded the fair value of the warrants under “Derivative liability- warrants” on its balance sheet with changes in the fair value over time reflected in the statements of operations as “Changes in fair value of derivative liabilities”.

The net loss for the year ended December 31, 2010 decreased by $1,558,028 due to recognition of the derivative liabilities.

The impact of the restatement on the consolidated statement of operations as of and for the year ended December 31, 2010 is shown in the following table:

As reported				Adjustment			As restated
Balance sheet data — December 31, 2010
Derivative liability - warrants	$	1,225,125		$	594,387		$	1,819,512
Additional paid-in capital		40,214,935			(2,402,877	)		37,812,058
Deficit accumulated during the development stage		(43,501,765	)		1,808,490			(41,693,275	)
Total stockholders’ deficiency	$	(3,272,489	)	$	(594,387	)	$	(3,866,876	)

	As reported			Adjustment			As restated
Consolidated Statement of Operations data
For the year ended December 31, 2010

Consultant compensation - stock-based	$	1,200,736		$	(142,359	)	$	1,058,377
Professional fees		742,338			432,000			1,174,338
NET LOSS BEFORE OTHER ITEMS		(5,182,589	)		(289,642	)		(5,472,231	)
Changes in fair value of derivative liabilities		1,655,011			1,751,419			3,406,430
Loss on debt financing		(1,615,425	)		96,250			(1,519,175	)
NET LOSS	$	(5,090,651	)	$	1,558,028		$	(3,532,623	)
Loss per share – Basic and diluted	$	0.13		$	(0.04	)	$	0.09

As reported				Adjustment			As restated
Consolidated Statement of Cash Flows data
For the year ended December 31, 2010

NET LOSS	$	(5,090,651	)	$	1,558,028		$	(3,532,623	)
Non-cash loss on debt financing		1,615,425			(96,250	)		1,519,175
Changes in fair value of derivative liabilities		(1,655,011	)		(1,751,419	)		(3,406,430	)
Stock-based compensation		2,288,651			(142,358	)		2,146,293
Accounts payable and accrued liabilities		729,587			431,999			1,161,586
NET CASH USED IN OPERATING ACTIVITIES	$	(925,041	)	$	-		$	(925,041	)

The impact of the restatement on the consolidated statement of operations as of and for the year ended December 31, 2009 is shown in the following table:

As reported				Adjustment			As restated
Balance sheet data — December 31, 2009
Derivative liability - warrants	$	-		$	1,153,663		$	1,153,663
Additional paid-in capital		37,289,357			(1,404,125	)		35,885,232
Deficit accumulated during the development stage		(38,411,114	)		250,462			(38,160,652	)
Total stockholders’ deficiency	$	(629,388	)	$	(1,153,663	)	$	(1,783,051	)

As reported				Adjustment			As restated
Consolidated Statement of Operations data
For the year ended December 31, 2009
Changes in fair value of derivative liabilities	$	-		$	(411,813	)	$	(411,813	)
Loss on debt financing		-			161,351			161,351
NET LOSS	$	(17,599,008	)	$	250,462		$	(17,348,546	)