STOCK OPTIONS AND WARRANTS

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

STOCK OPTIONS AND WARRANTS

NOTE 10 – STOCK OPTIONS AND WARRANTS

During 1999, the Board of Directors (“Board”) of the Company adopted, with the approval of the stockholders, a Stock Option Plan. In 2000, the Board superseded that plan and created a new Stock Option Plan, pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock. On December 17, 2003, the Board, with approval of the stockholders, superseded this plan and created the 2003 Stock Option Plan (the “Plan”). Under the Plan the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of December 31, 2011, there are 3,100,000 options that have been issued and exercised, 13,625,996 options that have been issued and are unexercised, and 1,274,004 options that are available to be issued under the Plan.

The Plan is administered by a committee of the Board of Directors (“Stock Option Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plans of the company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.

The Company issued non-statutory stock options pursuant to contractual agreements to non-employees. Options granted under the agreements are expensed when the related service or product is provided.

During the year ended December 31, 2008, options to purchase 1,450,000 shares of the Company’s common stock at exercise prices ranging from $.07 to $.28 per share expired. During 2008 additional options to purchase 7,700,000 shares of the Company’s common stock at exercise prices ranging from $.03 to $.20 per share were returned to the Company. In addition, the Company issued options to purchase 9 million shares of the Company’s common stock with a terms of ten years and exercise prices of $.01 per share. The fair value of options issued was $48,472.

During the year ended December 31, 2009, options to purchase 850,000 shares of the Company’s common stock at exercise prices ranging from $.06 to $.15 per share expired.

During the year ended December 31, 2010, options to purchase 450,000 shares of the Company’s common stock at exercise prices ranging from $.08 to $.09 per share expired. During 2010 additional an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $.01 per share was returned to the Company.

On May 9, 2011, an option holder agreed to return an option to purchase 3,056,662 shares of the Company’s common stock at an exercise price of $.03 and an option to purchase 2.8 million shares of the Company’s common stock at an exercise price of $.01, to the Company. On the same day, the Company agreed to issue to the option holder an option to purchase 5,000,996 shares of the Company’s common stock at an exercise price of $.00125, with a term of ten years. The fair value ofoptions issued was $37,186.

On May 9, 2011, a board member agreed to return an option to purchase 250,000 shares of the Company’s common stock at an exercise price of $.03 and an option to purchase 750,000 shares of the Company’s common stock at an exercise price of $.01, to the Company. On the same day, the Company agreed to issue to the board member an option to purchase 900,000 shares of the Company’s common stock at an exercise price of $.00125, with a term of ten years. The fair value of options issued was $6,712.

On May 9, 2011, the President of the Company agreed to return an option to purchase 2.5 million shares of the Company’s common stock at exercise prices of $.03 and an option to purchase 3.6 million shares of the Company’s common stock at an exercise price of $.01, to the Company. On the same day, the Company agreed to issue to the President of the Company an option to purchase 5,490,000 shares of the Company’s common stock at an exercise price of $.00125, with a term of ten years. The fair value of options issued was $40,946.

On May 9, 2011, the Company issued an option to purchase 750,000 shares of the Company’s common stock at an exercise price of $.00125, with a term of ten years, to a consultant in conjunction with his efforts to acquire the 17,795,903 treasury shares. The fair value of options issued was $5,594.

All of the options issued on May 9, 2011 were valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 150%, risk-free interest rate of 3.7% and expected option life of ten years.

The following tables summarize non-employee stock option/warrant activity of the Company since December 31, 2007:

			Weighted Average
	Option/Warrant	Exercise	Exercise
	Shares	Price	Price
Outstanding, December 31, 2007	12,856,662	$.01 to $.28	$                 0.06
Granted	4,450,000	$             0.01	-
Exercised	-	-	-
Expired/Returned	(5,600,000)	$.03 - $.28	$                (0.03)
Outstanding, December 31, 2008	11,706,662	$.01 to $.20	$                 0.03
Granted	8,000,000	$             0.01	-
Exercised	-	-	-
Expired	(850,000)	$.06 - $.15	-
Outstanding, December 31, 2009	18,856,662	$.01 to $.20	$                 0.02
Granted	1,000,000	$             0.01	-
Exercised	-	-	-
Expired	(200,000)	$             0.08	-
Outstanding, December 31, 2010	19,656,662	$.01 to $.20	$                 0.02
Granted	7,235,996	$        0.00125	-
Exercised	(1,000,000)	$0.01	-
Expired/Returned	(10,506,662)	$.01 - $.03	$                (0.01)
Outstanding, December 31, 2011	15,385,996	$.0125 to $.20	$                 0.01
Exercisable, December 31, 2011	15,385,996	$.0125 to $.20	$                 0.01
Weighted Average Remaining Life,
Exercisable, December 31, 2011 (years)	6.4

A summary of incentive stock option transactions for employees since December 31, 2007 is as follows:

			Weighted Average
	Option	Exercise	Exercise
	Shares	Price	Price
Outstanding, December 31, 2007	6,550,000	$.03 to $.28	$                 0.12
Granted	4,550,000	$           0.01	-
Exercised	-	-	-
Expired	(3,550,000)	$.03 - $.20	$                (0.05)
Outstanding, December 31, 2008	7,550,000	$.01 to $.28	$                 0.07
Granted	-	-	-
Exercised	-	-	-
Expired	-	-	-
Outstanding, December 31, 2009	7,550,000	$.01 to $.28	$                 0.07
Granted	-	-	-
Exercised	-	-	-
Expired	(450,000)	$.01 - $.09	-
Outstanding, December 31, 2010	7,100,000	$.01 to $.28	$                 0.07
Granted	6,390,000	$0.00125	$0.00125
Exercised	-	-	-
Expired/Returned	(7,100,000)	$.01 - $.03	$                (0.07)
Outstanding, December 31, 2011	6,390,000	$0.00125	$           0.00125
Exercisable, December 31, 2011	6,390,000	$0.00125	$           0.00125
Weighted Average Remaining Life,
Exercisable, December 31, 2011 (years)	9.3