Stock Option Plans

At the discretion of the Compensation Committee, and with approval of the Board of Directors, the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Compensation Committee determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years. The Company, under its Second Amended and Restated 2007 Equity Incentive Plan, is authorized to issue stock options that total no more than 20% of the shares of common stock issued and outstanding, as determined on a fully diluted basis. Beginning in 2007, stock options were no longer issuable under the Company’s 2000 Non-Qualified Incentive Stock Plan. The remaining amount available for issuance under the Second Amended and Restated 2007 Equity Incentive Plan totaled 1,853,154 at March 31, 2012. The stock option awards generally vest ratably over a four-year period following grant date after a passage of time. However, some stock option awards are performance based and vest based on the achievement of certain criteria established by the Company.

The fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes based option valuation model. The table below outlines the weighted average assumptions for options granted to employees during the three months ended March 31, 2012.

Three Months Ended March 31, 2012	2012
Volatility		33.03	%
Expected dividends		0.00	%
Expected term	5.8 years
Risk-free rate		1.10	%

The Company calculated expected volatility from the volatility of publicly held companies in similar industries, as the historical volatility of the Company’s common stock does not cover the period equal to the expected life of the options. The dividend yield assumption is based on the Company’s history and expectation on future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The estimation process for the fair value of performance based stock options was the same as for service period based options.

1) Service Period Based Stock Options

The majority of options granted by the Company are comprised of service period based options granted to employees. These options vest ratably over a defined period following grant date after a passage of a service period.

The following table summarizes service period based stock option activity at March 31, 2012, and changes during the three months then ended:

				Weighted Average
						Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 31, 2011		13,895,872		$	1.53

Options Granted		3,525,000			0.84
Options Exercised		-			-
Options Forfeited		(1,059,932	)		1.64
Outstanding at March 31, 2012		16,360,940		$	1.38		7.11	$	87,902

Exercisable at March 31, 2012		6,848,739		$	1.47		6.23	$	66,303

The aggregate intrinsic values in the table above are before income taxes, based on the Company’s closing stock price of $0.67 on the last day of business for the period ended March 31, 2012.

2) Performance Based Stock Options

The Company also grants stock option awards that are performance based and vest based on the achievement of certain criteria established by the Company. If performance criteria are not met, the compensation expenses are not recognized and the expenses that have been recognized will be reversed.

The following table summarizes performance based stock options activity at March 31, 2012 and changes during the three months then ended:

				Weighted Average
						Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 31, 2011		1,200,000		$	1.64

Options Granted		-			-
Options Exercised		-			-
Options Forfeited		(1,000,000	)		1.65
Outstanding at March 31, 2012		200,000		$	1.59		8.97	$	-

Exercisable at March 31, 2012		27,083		$	1.59		8.84	$	-

On February 13, 2012, William Spengler, our former President, ceased serving in all positions held with the Company. 1,000,000 performance based stock options Mr. Spengler held were forfeited. Expense recognized related to these forfeited options was reversed during the three months ended March 31, 2012, as the performance criteria established by the Company were not met. The reversed expense amount the Company had recognized through December 31, 2011 was $528,300.

As of March 31, 2012, there was $2,456,841 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans for employee stock options. That cost is expected to be recognized over a weighted average period of 2.09 years as of March 31, 2012. The weighted average fair value of options granted during the three months ended March 31, 2012 and April 2, 2011 was $0.31 and $0.56, respectively. The realized tax benefit from stock options for the three months ended March 31, 2012 and April 2, 2011 was $0, based on the Company’s election of the “with and without” approach.

Restricted Stock

Restricted stock awards granted by the Company to employees generally have a vesting condition that is tied to the performance of the Company’s stock price.

The following table summarizes activity of restricted stock awards granted to employees at March 31, 2012 and changes during the three months then ended:

				Weighted Average
				Award-Date
	Shares			Fair Value
Unvested shares at December 31, 2011		1,000,000		$	1.27

Granted		1,750,000			0.77
Vested		-			-
Forfeited		(1,000,000	)		1.27
Unvested shares at March 31, 2012		1,750,000		$	0.77

Expected to Vest as of March 31, 2012		1,750,000		$	0.77

On February 7, 2012, the Company awarded 1,000,000 shares of restricted stock to our Chief Executive Officer and President, Jeffrey Himmel and on February 21, 2012, the Company awarded 750,000 shares of restricted stock to our Chief Operating Officer, Debra Heim. These restricted shares will fully vest on February 1, 2015, provided that a certain Market Condition is met.

The fair values of these restricted stock awards were estimated at the dates of award using the Hull-White based binomial valuation model. The table below outlines the weighted average assumptions of restricted stock awarded to employees during the three months ended March 31, 2012.

Three Month Ended March 31, 2012	2012
Expected Term		3.00
Expected Volatility		69.98	%
Expected Dividends		0.00	%
Risk Free Rate of Return		0.39	%

The Company calculated expected volatility from the volatility of publicly held companies in similar industries as well as the historical volatility of the Company’s common stock. Less weight was assigned to the volatility of the Company’s common stock as the historical volatility of Company’s common stock covers less than four years in a thinly traded market. The dividend yield assumption is based on the Company’s history and expectation on future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term. The Company used the vesting period of the restricted stock for estimating the expected term of the restricted stock.

On February 13, 2012, William Spengler, our former President, ceased serving in all positions he held with the Company. 1,000,000 restricted shares of our common stock held by Mr. Spengler were forfeited. Expense recognized related to these forfeited restricted stock award was reversed during the three months ended March 31, 2012, as the vesting conditions established by the Company, including continuous employment through November 15, 2013, were not met. The reversed expense amount the Company had recognized through December 31, 2011 was $476,411.

As of March 31, 2012, there was $1,287,326 of total unrecognized compensation expense related to restricted stock awards to employees under the plans. That cost is expected to be recognized over a period of 2.84 years as of March 31, 2012.

Stock Awards

From time to time, the Company awards shares of its common stock to executives as part of its overall compensation program. On February 7, 2012, the Company awarded 100,000 shares of common stock to Jeffrey Himmel, our Chief Executive Officer and President, pursuant to the Employment Agreement with Mr. Himmel. The fair value of these awarded shares was estimated at the date of award using the Company’s stock price. Since these shares are immediately vested, the award is deemed to be fully earned upon issuance and the full fair value, $94,000, was expensed on the date of award. On February 21, 2012, the Company awarded 75,000 shares of common stock to Debra Heim, our Chief Operating Officer, pursuant to the Employment Agreement with Ms. Heim. The fair value of these awarded shares was estimated at the date of award using the Company’s stock price. Since these shares are immediately vested, the award is deemed to be fully earned upon issuance and the full fair value, $60,000, was expensed on the date of award.

For employee share-based compensation, the Company recognized share-based compensation income of $296,135 in general and administrative expenses in the statement of operations for the three months ended March 31, 2012. The income amount is a result of certain expenses that were reversed due to William Spengler’s forfeiture of certain stock options and restricted stock. The Company recognized $659,047 in share-based compensation expense for the comparable period in 2011.