STOCK OPTION PLAN AND WARRANTS

9 Months Ended

Sep. 30, 2011

STOCK OPTION PLAN AND WARRANTS [Abstract]

STOCK OPTION PLAN AND WARRANTS

The Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended in 2002 and 2004, which provides for the issuance of qualified options to all employees and non-qualified options to directors, consultants and other service providers.

A summary of the status of stock options as of September 30, 2011 and December 31, 2010 is as follows:

	9/30/2011		12/31/2010
		Weighted		Weighted
	Number	Average	Number	Average
	of	Exercise	of	Exercise
	Shares	Price	Shares	Price
Outstanding at beginning of year	3,484,833	$              1.26	1,405,062	$              0.66
Granted	2,058,702	$              1.05	3,767,500	$              1.21
Exercised	-	$                  -	-	$                  -
Expired and Cancelled	(138,333)	$              3.69	(1,687,729)	$              2.18
Outstanding at end of period	5,405,202	$              1.12	3,484,833	$              0.52
Exercisable at end of period	5,237,003	$              1.16	3,401,333	$              1.29

During the nine months ended September 30, 2011, the Company granted 2,058,702 options.  Stock based compensation for the three and nine months ended September 30, 2011 was $0 and $1,869,208, respectively.

During the nine months ended September 30, 2010, the Company granted 3,504,500 options which included 1,882,500 options that were re-issued from 2009 after 1,255,000 options were cancelled.  The total fair value of options vested during the second quarter of 2010 was $1,807,631 less the fair value of the cancelled options of $1,163,698 which was included in stock based compensation of $1,796,633. Of the 1,622,000 options granted during the nine months ended September 30, 2010, the total fair value of options vested during the period was $1,152,700.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model.  This model uses the assumptions listed in the table below.  Expected volatilities are based on the historical volatility of the Company’s stock.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

		9/30/2011
Weighted average fair value per option granted	$                       0.92
Risk-free interest rate		0.68%
Expected dividend yield		0.00%
Expected lives		2.5 - 2.875
Expected volatility		111-253%

As of September 30, 2011, the unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan was $177,678 which will be recognized in the fourth quarter of 2011.

As of September 30, 2011, the Company had reserved 20.0 million shares for issuance under the Plan.  As of September 30, 2011, the Company had 14,211,465 million options available for grant under the Plan. (20,000,000 less 5,405,202 options less 383,333 director shares =14,211,465).

Stock options outstanding at September 30, 2011 are as follows:

				Weighted
				Average		Weighted
Range of				Remaining		Average
Exercise		Options		Contractual		Exercise		Options
Prices		Outstanding		Life		Price		Exercisable
$0.01-$1.50	5,195,202		4.2		$       1.14		5,027,003
$1.51-$3.00	210,000		3.3		$       1.49		210,000
	5,405,202		4.1		$        1.14		5,237,003

Warrants

As of September 30, 2011, the Company has warrants outstanding to purchase 23,736,108, shares of the Company’s common stock, at prices ranging from $0.01 to $36.00 per share.  These warrants expire at various dates through September 2016.   There were 5,130,046 warrants issued in the nine month period ended September 30, 2011.  The fair value of the warrants granted during the three and nine months ended September 30, 2011 is included in the calculation of the derivative liability as the warrants associated with the convertible note payable also contain certain ratchet provisions.  The summary of the status of the warrants issued by the Company as of September 30, 2011 and December 31, 2010 are as follows:

		9 Months  Ended			Year  Ended
		9/30/2011			12/31/2010
		Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Outstanding at beginning of year	18,779,753		$1.59	9,682,380		$1.61
Granted	5,130,046		$1.66	9,900,437		$1.50
Exercised	(56,489)		$0.06	(108,172)		$0.16
Cashless	-			(344,892)		$0.19
Expired and Cancelled	(117,202)		$13.72	(350,000)		$1.10
	23,736,108			18,779,753
Outstanding, end of period	23,736,108		$1.55	18,779,753		$1.59
Unexercisable at end of period
Exercisable at end of period	23,736,108		$1.55	18,779,753		$1.59

During the first nine months of 2011, investors exercised 56,489 warrants and none on a cashless basis.  The 56,489 warrants were exercised for a total value of $3,353 of which $629 for cash is included in common stock payable at September 30, 2011.  During the first nine months of 2010, investors exercised 280,663 warrants, of these 207,586 warrants were on a cashless basis.