Stock Option Plan. On May 9, 2007, we adopted a stock option plan and reserved 900,000 shares for the issuance of stock options or for awards of restricted stock. On December 2, 2008, our Board of Directors authorized the addition of 200,000 shares of our common stock to the 2007 Plan. On February 7, 2011, our shareholders voted to add 4,400,000 shares of our common stock to the stock option plan. All prior grants of options were included under this plan. The plan provides for incentive stock options, nonqualified stock options, rights to restricted stock and stock appreciation rights. Eligible recipients are employees, directors, and consultants. Only employees are eligible for incentive stock options.

The vesting terms are set by the Board of Directors. All options expire 10 years after issuance.

We did not grant any non-statutory options outside the plan during the year ended September 30, 2011.

	Weighted Average Exercise Price Per Share	Number of Options	Weighted Average (Remaining) Contractual Term	Aggregate Fair Value
Outstanding as of September 30, 2009	$5.65	1,026,224	9.2	$4,569,065
Granted	$.30	60,000	9.9	$16,055
Exercised	$ -	-	-	-
Forfeited	$ -	-	-	-
Outstanding as of September 30, 2010	$5.25	1,086,224	7.9	$4,585,120
Exercisable	$6.05	796,328	6.8	$4,336,532
Granted	$.20	4,860,000	9.5	952,855
Exercised	$-	-	-	-
Forfeited	$4.32	595,044	-	1,388,212
Outstanding as of September 30, 2011	$.79	5,351,180	9.3	4,149,763
Exercisable	$1.40	2,588,180	9.0	3,656,002

The options are subject to various vesting periods between June 26, 2007 and April 22, 2014. The options expire on various dates between March 1, 2017 and April 22, 2021. Additionally, the options had no intrinsic value as of September 30, 2011 and September 30, 2010. Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.

In calculating the compensation related to employee/consultants and directors stock option grants, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model and the following assumptions for 2011 and 2010:

For options issued prior to June 2010, the expected volatility was derived utilizing the price history of another publicly traded nanotechnology company. This company was selected due to the fact that it is widely traded and is in the same equity sector as us. Beginning with options granted after June 2010, we began to use our stock to calculate the expected volatility. We made this change because we believe that the options granted in September 2010 will be exercised within three years, thus our trading history should be used.

The risk free interest rate figures shown above contain the range of such figures used in the Black-Scholes calculation. The specific rate used was dependent upon the date of the option grant.

Based upon the above assumptions and the weighted average $0.79 exercise price, the options outstanding at September 30, 2011 had a total unrecognized compensation cost of $395,093 which will be recognized over the remaining weighted average vesting period of 2.4 years. Option costs of $730,243 were recorded as an expense for the year ended September 30, 2011, all of which was recorded as compensation expense.