Effective <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:sm... />February 9, 2006, the Company entered into “Reset Agreements” with certain warrant holders and received waivers from the warrant holders with regard to certain terms of certain warrants held by the warrant holders. Under the terms of the Reset Agreements, the Company and the warrant holders agreed to amend the terms of (i) each of the warrants of the Company held by the warrant holders such that the exercise price of the warrants is no longer subject to downward resets based on the trading price of the common stock of the Company, and (ii) each of the debentures of the Company held by the warrant holders such that the conversion price of the debentures is fixed at its current level. No additional expense was required for the modification of the exercise price of the warrants since the new fixed price of the warrants was equal to the original exercise price at date of issuance or was equal to the then reset price in effect for which the Company had previously recognized an expense for the modification (see Note 5). Under the terms of the Reset Agreements, the Company and the warrant holders also agreed to amend all of the agreements entered into between the Company and the warrant holders that limit the ability of the warrant holders to be the beneficial owner of more than 4.99% of the common stock of the Company to be amended to provide that the warrant holders may not, through the exercise of warrants, the conversion of debentures, or otherwise, be the beneficial owner of more than 9.99% of the common stock of the Company.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:of... />

Under the terms of the waiver agreements, the warrant holders agreed to amend their rights under the terms of certain warrants held by each of them to receive a payment in the event of a payment of a dividend by the Company. Prior to entering into the waiver agreements, if at any time after the issuance date of the subject warrants, the Company made any distributions to holders of its common stock, the warrant holders would be entitled to receive a payment equal to the amount of such distribution which would have been payable to them had they owned the shares of common stock issuable upon exercise of the subject warrants as of the record date for the distribution. Under the terms of the waiver agreement, if the market price of the Company's common stock on the record date for a distribution is greater than or equal to $0.15 per share, the payment to the warrant holders would be reduced to the amount which would be payable to the warrant holders had they engaged in a cashless exercise of the subject warrants as of the record date for the distribution. In consideration for entering into the agreements, the Company issued warrants for the right to acquire 7,000,000 shares of the Company's common stock to one warrant holder and recognized a loss on debt extinguishment of $445,427 (see Note 8).

On July 31, 2006, the Company received proceeds of $5,500 from the issuance of 50,000 shares of common stock in connection with the exercise of 50,000 stock options.

From June 1, 2006 through September 7, 2006, the Company received proceeds of $84,500 from the issuance of 395,000 shares of common stock in connection with the exercise of warrants. In addition, certain warrants holders received 2,891,322 shares of common stock in connection with the cashless exercise of warrants.

In connection with a previous debt agreement, the Company entered into an Antidilution Agreement (the “Antidilution Agreement”) with Swartz Private Equity, LLC (“Swartz”) wherein the Company was obligated to issue to Swartz warrants equal to 11% of the common stock issued between January 28, 2002 and March 11, 2002, 20% of the common stock issued between March 12, 2002 and April 1, 2003, and after April 1, 2003, 30% of the common stock issued to any parties other than Swartz. During the year ended May 31, 2005, the Company issued warrants to Swartz to purchase 7,330,548 shares of the Company's common stock in connection with the Antidilution Agreement. There were no warrants issued during the year ended May 31, 2006 in connection with the Antidilution agreement. On October 10, 2006, the Company entered into an Approval Rights Agreement and Termination of Antidilution Agreement and Addendum to Warrants (the “Termination Agreement”) with Swartz to terminate the Antidilution Agreement. In consideration for entering into the Termination Agreement, the Company agrees to obtain Swartz's written approval at least 30 days prior to entering into (i) any acquisition of any business entity or asset of any kind where the aggregate number of shares of common stock and derivative securities (on a fully diluted basis) issued as consideration for the acquisition equals or exceeds 10% of the number of shares of common stock of the Company outstanding at the time of the acquisition (on a fully diluted basis) or (ii) any acquisition (regardless of size) by the Company of any business entity or asset of any kind that is not unanimously approved by the Company's board of directors.

The following table presents outstanding warrants at May 31, 2006 and 2005: