5. STOCKHOLDERS’ DEFICIT

9 Months Ended

Sep. 30, 2012

Equity [Abstract]

5. STOCKHOLDERS DEFICIT

Preferred Stock

The Board of Directors is authorized, without further stockholder approval, subject to the approval of the Noteholders, to issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption, and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series. There were no shares of preferred stock outstanding at September 30, 2012 or December 31, 2011.

Common Stock

The Company is authorized to issue 45,000,000 shares of common stock, $0.001 par value per share. As of September 30, 2012 and December 31, 2011, it had 18,352,542 shares of common stock outstanding and is obligated to issue 1,475,000 shares to the lead plaintiff’s counsel as per the Stipulation described in Note 4 above.  Holders of common stock are entitled to one vote for each share held.

Equity Compensation Plans

The Company adopted its 2004 Equity Compensation Plan (the “2004 Plan”) as of March 31, 2004. The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of the Company as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2004 Plan is 5,000,000 shares, subject to adjustment in the event of a stock split, stock dividend, recapitalization, or similar capital change.

Stock Options – The exercise price for incentive stock options granted under the 2004 Plan is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of ten years, except for option grants to 10% stockholders, which are subject to a maximum term of four years. Non-statutory stock options have a term determined by either the Board of Directors or the Compensation Committee. Options granted under the 2004 Plan are not transferable, except by will and the laws of descent and distribution.

The following is a summary of the stock option activity for the nine months ended September 30, 2012:

	Shares Outstanding			Weighted Average Exercise Price
BALANCE, December 31, 2011		301,900		$	2.25
Granted		167,500			1.46
Exercised		-			-
Canceled		(8,500	)		1.10
BALANCE, September 30, 2012		460,900		$	2.00

The following table summarizes information about stock options outstanding at September 30, 2012:

Exercise Price		Number of  Options  Outstanding		Average  Remaining  Contractual  Life (Years)		Weighted  Average  Exercise  Price		Currently Exercisable Number of  Shares		Weighted  Average  Exercise  Price
$	0.90		8,400		9.2	$	.90		2,100	$	.90
$	1.10		50,000		8.3	$	1.10		25,000	$	1.10
$	1.14		132,500		8.8	$	1.14		87,500	$	1.14
$	1.35		20,000		9.2	$	1.35		20,000	$	1.35
$	1.39		5,000		9.8	$	1.39		1,250	$	1.39
$	1.45		75,000		10.0	$	1.45		-	$	1.45
$	1.49		5,000		9.9	$	1.49		-	$	1.49
$	1.50		75,000		9.8		1.50		-	$	1.50
$	2.50		5,000		3.8	$	2.50		5,000	$	2.50
$	3.25		15,000		6.3	$	3.25		15,000	$	3.25
$	3.50		25,000		1.8	$	3.50		25,000	$	3.50
$	5.00		25,000		2.8	$	5.00		25,000	$	5.00
$	8.55		20,000		3.1	$	8.55		20,000	$	8.55
Totals			460,900		6.7	$	2.00		225,850	$	2.67

At September 30, 2012, there remains $172,677 of future unrecognized expense yet to be recorded related to all options outstanding.